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A New Era for Environmental
Financial Liability

By Charles Hernick and Dr. Bentley Coffey, The Cadmus Group, Inc.

This year marks a continued transition into a new era for financial risk management of environmental liabilities. In addition to congressional action aimed at changing liability caps for oil and gas companies, we expect to see the U.S. Environmental Protection Agency (EPA) establish more-demanding financial responsibility requirements for firms in a number of industries. Under Superfund, the federal law designed to clean up contaminated sites, it is likely that these requirements will affect firms in the mining, chemical, petroleum and electric power industries.

The EPA is also establishing financial requirements for firms injecting carbon dioxide into geologic formations. By capturing carbon from sources like coal-fired power plants, geologic sequestration could play a major role in mitigating climate change.

The EPA’s policy responses are motivated by a mission to protect public health and the environment. Financial responsibility requirements are generally designed to ensure that business costs do not get passed along to the public (e.g., to ensure that the polluter pays). Absent a regulatory driver, the reality today is that any enterprise can be at risk for environmental claims. Industries as varied as agribusiness, construction, manufacturing, warehousing and professional services should consider their exposure. Businesses have an incentive to effectively manage environmental risks simply to stay in business.

Today’s technological advances drive many considerations and must be contemplated. “While improvements in science and technology broaden opportunities for business, they also broaden risk,” says Julie Dun ai, who heads Zurich North America Commercial’s Environmental unit. In managing financial risks for environmental liabilities, private liability insurance has evolved as a flexible risk management option for firms.

Effectively Managing Environmental Liabilities
Historically, businesses could purchase comprehensive general liability insurance to cover most environmental liabilities. However, in the 1970s and 1980s, the insurance industry responded to society’s heightened understanding of environmental issues and federal regulation by using express exclusions more frequently. Since then, specific environmental insurance policies have emerged to fill the gaps created by the “exclusions” written into general liability policies.

Today, businesses can choose from numerous insurers and policies to meet their needs. Indeed, customization is seen more often in the marketplace compared to just a few years ago. Dunai says, “At Zurich, we focus on understanding which risks our clients would like to transfer and which risks they would like to keep to come up with a level of coverage that is their own.”

As new opportunities arise, businesses can benefit from ensuring that environmental financial liabilities are identified and effectively managed over time.

www.zurichna.com/environmental