A Retrospective: Insuring the Future of the Environment (and Many Businesses)
While it may seem hard to believe today, prior to the 1970s, little was known about the potential effects industry and waste mismanagement could have on the environment. Science had not quite caught up to understand the ramifications of hazardous waste and what it could do to the natural environmental or what threats it posed to human health. It was a problem that many just chose to bury, literally. That was until Love Canal, one of the US’ biggest environmental disasters, brought everyone back to reality.
Love Canal began in the late 1800s when entrepreneur William T. Love planned to build a seven-mile long canal that would connect the upper and lower levels of the Niagara River and provide hydroelectric power. He envisioned a city growing up around the power plant that would attract industry but financial difficulties snuffed out his dream, leaving a one-mile long open trench. His commercial vision of the area did come true. It became a major center for the chemical, electrochemical, abrasive and graphite industries. Various industries and the City of Niagara Falls used Love’s open trench to dispose of waste materials thru the 1940s.Estimates put the amount of chemical waste dumped in the canal during its life at 20,000 metric tons.
The dump site was deeded to the Niagara Falls Board of Education in 1953 under a city order for Hooker Chemical to sell the land for $1. Hooker warned the city of the possible dangers of building on the site, but the city threatened Hooker with eminent domain proceedings. Subsequently the city built a school and a park atop the fill area and soon many homes surrounded the old dump site. Throughout the 1950s, complaints of eye and respiratory tract irritation were common. Some children even received chemical burns while playing at the school’s playground.
The Problem Bubbled Up
The extent of the Love Canal problem did not become obvious until the mid-1970s. Heavy precipitation caused the site to become saturated with water and the once buried chemicals began to ooze l from under the soil cap. The US Environmental Protection Agency (EPA) was called in to perform studies and found carcinogenic chemicals in basements and homes surrounding the school. In 1978, President Jimmy Carter declared the canal and surrounding homes a disaster area.
There was much litigation and dispute over who was responsible for the costs of cleanup and compensation to the victims of Love Canal. The cleanup costs for Love Canal have been staggering, exceeding $100 million. Eventually a settlement was reached between 1,345 residents of the Love Canal area. However, some 1,000 plaintiffs are involved in new, ongoing Love Canal litigation today.
And the cleanup of Love Canal continues to this day. Just recently, the New York Department of Environmental Conservation fenced off the historic landfill and NY State Senator Robert Ortt is calling for an environmental study and a cleanup plan.
The Need Grew
As a result of Love Canal and subsequent other hazardous waste site cases, insurers were hit with claims that they had not anticipated or priced for when clients’ insurance policies were first underwritten in the1960s and 1970s. In 1973, the insurance industry responded by incorporating a “pollution exclusion” clause into the Commercial General Liability policy. This clause intended to restrict coverage to events that were “sudden and accidental.” Unfortunately, the clause resulted in years of litigation and debate about whether a pollution release is sudden and accidental or gradual. By 1985, insurers adopted an “absolute pollution exclusion.”
The exclusion of pollution prompted a need for many businesses to fill in a gap of insurance protection. Legislation presented another reason. The 1970s gave rise to landmark environmental legislation to protect human health and the environment. The US Congress passed the Resource Conservation and Recovery Act (RCRA) to protect the quality of groundwater, surface water, air and land from contamination by solid waste, setting forth hazardous waste management standards from cradle-to-grave or in other words, from point of generation through transportation, treatment, storage and disposal. RCRA requires specific levels of financial responsibility for both sudden and nonsudden pollution events. These financial responsibility requirements apply to hazardous waste treatment, storage and disposal facilities (TSDFs). And this is where the environmental market kicked into gear.
This year, XL Catlin’s environmental team, is marking its 30 years in the industry."
US Market Emerges
The first US company to write a complete line of pollution and casualty coverage for environmentally sensitive businesses was Commerce & Industry Insurance Co. (C&I), a member of AIG companies. The second major insurer writing varied environmental insurance products was ECS Underwriting, an environmental specialty underwriting manager founded in 1979 to provide a market for hazardous waste transporters and the general environmental market. It first began as a MGA for the National Union Insurance Co, a member of AIG companies, and in 1987, it became underwriting manager for Reliance National Insurance. ECS was acquired by XL Capital, now XL Catlin, in 2000 to establish environmental insurance underwriting capabilities. This year, XL Catlin’s environmental team, is marking its 30 years in the industry.
By 1995, three primary insurers – AIG, Zurich-American and Reliance National (ECS) – accounted for approximately 75% of the environmental impairment market. Today’s environmental insurance market consists of at least 40 carriers although that number continues to fluxuate and approximately $600 million in capacity, according to some broker reports.
The Here and Now
In its early beginnings, pollution insurance often met a lot of skepticism. It began to fulfill a very specific need. Therefore, early on, many businesses saw no need for environmental insurance because they perceived little or no exposure to environmental liability. Unfortunately, when an environmental incident did occur, and not realizing what their GL policy really covered, businesses had little choice but to sue their insurance companies to obtain coverage. Some spent many years and a lot of money trying to get their insurance firms to pay out on an environmental claim, and most were unsuccessful.
Since Love Canal, a lot more is known about the science and management of environmental risks. That knowledge has enabled an environmental insurance market to develop more comprehensive and varied pollution coverages, offering financial protection against professional liability, errors and omissions, subcontracted activities, and the costs of remediation, either onsite or at an offsite, non-owned, waste-disposal site, and more. Coverages are constantly evolving to address new and emerging environmental exposures, from indoor air quality exposures, like Legionella and mold, to environmental liability faced by lenders or company executives.
Once considered a niche, specialty coverage, environmental insurance has become as necessary as general liability and automobile insurance for many businesses and public entities. Today, the availability and affordability of pollution insurance coverages offer businesses more opportunities to fill gaps in their insurance program, address new business opportunities and steer clear of courtroom disputes.
Note to readers: As XL Catlin’s team celebrates our 30 years in the environmental insurance market, we’re looking forward to sharing more insights about coverage developments, trends and helpful environmental risk management guidance. So stay tuned for more from our team. Don’t want to miss out, subscribe to Fast Fast Forward for updates.