After the Superstorm: Environmental Claims and Risk Management

Major storm systems such as Sandy have the potential to create significant environmental challenges. The inundation of sewage treatment plants and subsequent release of raw or only partially treated sewage can pollute rivers and coastal areas as well as neighboring properties. In fact, in New York alone, 10 treatment plants reported partially treated or untreated sewage discharges into local waterways as a result of the storm.

Breaches of containment facilities, the dispersing of waste and contamination, and the escape of fuel from ruptured tanks and wrecked vehicles all have the potential to contaminate structures and land, hamper recovery efforts, and pose hazards to emergency responders, building occupants, and clean-up crews.

Flooding of Superfund sites, a diesel fuel spill in the Arthur Kill waterway between Staten Island and New Jersey, and oil and other contaminant releases from destroyed boats were all of particular worry post-storm given their potential impacts on land, freshwater resources, and marine life.

In addition, in the aftermath of the storm, mold and indoor air quality issues may become prevalent. There can also be stresses on resources such as freshwater systems, fuel systems, and waste disposal facilities, which will complicate remediation and recovery efforts.

These issues may present unforeseen risks and substantial third-party and cleanup liabilities. Therefore, it is important that all insureds with confirmed, suspected, or alleged pollution releases examine their insurance policies to determine if coverage is afforded for such liabilities and, most importantly, comply with notice provisions associated with any pollution coverage.

Liability Considerations

Some of the key liability issues for consideration following Superstorm Sandy are as follows:

Third-Party Liability

Surrounding property owners or the community may target certain affected facilities and file claims that might include property damage related to chemicals released during the storm or flooding and bodily injury related to alleged exposure to chemicals in the air or in sediments.

Debris/Waste Management

Cleaning up waste and debris can present a serious hazard, and the process should be controlled and planned to avoid exposing employees, contractors, and the community. For instance, without a clear understanding of the affected materials, incompatible chemicals may become commingled and react to create fires, explosions, or toxic substances.

Government-led cleanup operations may involve using portions of industrial sites as staging and separation areas for waste or debris, and for incineration. These activities pose the potential for creating new pollution conditions on the property or possibly exacerbating existing conditions.

For example, during the 1992 Hurricane Andrew cleanup in Florida, debris incinerators operated by the U.S. Army Corps of Engineers in compliance with state and environmental requirements were shut down due to such concerns and protests from activists and the general public.

Furthermore, given how overwhelmed the waste-disposal infrastructure may be in states impacted by the storm, waste-management and disposal contractors should be carefully assessed. Unfortunately, there are likely to be individuals who seek to take advantage of this situation. As a result, the waste may not arrive at a regulated facility, which typically results in liability for the waste generator.

Cleanup Liability

Apportionment and allocation of cleanup costs represent a significant potential liability. Site contamination may result from new on-site releases, exacerbation of existing contamination, off-site migration of contamination, and impacts to properties from third parties. Owners of previously uncontaminated property may now be facing potential cleanup requirements.

Ongoing remediation projects may also experience major disruptions in remediation activities, technologies, and controls. Legislative solutions may be developed to address these highly complex issues, but there is no guarantee.

Claims Viability

It is critical to ensure that any claim is reported in a timely manner in order to preserve your rights in the future. Most relevant policies include very strict notice provisions requiring insureds to give notice to insurers of any pollution incident within a relatively short period of time or forfeit coverage. However, constraints on access to sites in the affected areas may contribute to delays in claims reporting.

Current environmental policy offerings may include coverage for business interruption, cleanup-cost overruns, and certain known and disclosed preexisting conditions, as well as for liability associated with non-owned sites. Policies differ in their terms and conditions, exclusions, and coverage grants; but one issue remains relatively constant: the general need for a discharge, dispersal, or release of a pollutant into the environment to trigger coverage under a policy.

In addition, selected coverage may be available through casualty and property programs. As such, a careful and timely notification to applicable insurance policies is critical to protecting your rights under the policies.

Start-Up, Rebuilding, or Property Disposition

Restarting site operations can result in compliance risks. Owners and operators should be aware of regulatory constraints and reporting requirements related to starting up. Operations should be closely monitored during the start-up activities to determine if any previously unidentified conditions exist that may cause or contribute to environmental problems.

One environmental risk likely to be unique to commercial building owners that face renovation and repair is mold. As owners renovate and repair structures, careful attention must be paid to building materials that can harbor mold growth.

In an effort to perform renovations as quickly and as cost-effectively as possible, owners of some buildings might be inclined to replace only those building materials where water damage is evident. Unfortunately, extensive mold growth can occur behind walls, on building studs, and under flooring. Extra caution should be taken to determine if any of these contain moisture.

Companies may choose to abandon, sell, or redevelop sites located in the affected areas. Depending on the nature of the intended reuse of the property, state and/or federal regulations could compel investigation and remediation to a range of cleanup standards.

Residential exposures (such as apartment buildings, condominiums, daycare facilities, and nursing homes) will require a higher degree of remediation; commercial structures (such as retail and office) will require less; and industrial facilities, generally, the least. One area of uncertainty is the extent to which industrial facilities facing rebuilding will be required to implement some remedial action.

Finally, facilities may be required to upgrade pollution-control equipment as a result of triggering new control-technology requirements based on the cost of repairs/rebuilding. While some property policies may have been amended to cover the increased costs of construction associated with repairing damage, environmental-compliance costs are likely excluded. Companies may find themselves responsible for significant unexpected—and uncovered—costs for pollution-control upgrades.

Suggested Liability Management Strategies

Companies faced with an actual or potential release of pollutants from a facility after Superstorm Sandy should consider the following liability management strategies.

Review of Insurance Programs

Companies should review their existing insurance coverage to understand if their current insurance is adequate or if additional coverage is necessary to respond to the risks that are the result of a significant event such as Superstorm Sandy.

Many businesses have not taken advantage of the environmental insurance available for ongoing operations and the risks and exposures that exist when events might appear to be minor. Pollution liability and cleanup cost cap coverage will increase an organization’s ability to manage unexpected events and reduce the financial impact on the company.

Review of Operational Environmental Requirements and Limitations

Companies must be familiar with the requirements that affect restarting their operations. Adequate documentation of the start-up efforts and activities should be developed and maintained. Time limits on hazardous-waste accumulation and air-emissions requirements may be enforced unless legislation is passed to shield companies from enforcement of operational compliance during cleanup and start-up.

Waste and Debris Management

Companies should oversee or monitor the management and disposal of wastes for which they have responsibility. It is important to reduce potential long-tail liability for disposal that can be created during initial cleanup phases, developing and implementing methods for waste identification and segregation to prevent unintentional reactions from incompatible materials.

In the event a waste and debris collection, staging, or segregation point is located on your property, consider determining how your liability may be affected by the creation of new pollution conditions potentially stemming from the operation or by the exacerbation of existing conditions.

Baseline Site Conditions

Companies should assemble permits and technical or regulatory documents to establish baseline conditions for the facility. In the event another entity or regulatory agency implicates the company in certain pollution conditions, the company should be able to substantiate its preexisting environmental condition.

Claims Management

It is critical to ensure any claim is reported in a timely manner in order to preserve your rights in the future. One idea to consider is having the response/cleanup actions be managed, overseen, or reviewed by environmental claims experts.

Review of Emergency-Management Plans for Response During a Future Emergency

Companies may find that existing emergency-response plans did not work as anticipated or did not cover relevant elements of their operations/risks. Owners and operators should review their plans to ensure that they are integrated with all necessary operational aspects.

Strategies for Managing Pollution Liabilities
  • Review your existing policies for potential environmental coverage including:
    • Casualty.
    • Property (may include restoration costs).
    • Environmental site liability.
  • Provide immediate notice to all applicable insurers of the actual/ potential loss/pollution event.
  • Follow all applicable claims conditions noted within the policies, which can include:
    • Approval of expenditures by the insurer.
    • Use of approved contractors or counsel.
    • Notice requirements.
    • Regulatory requirements for remediation.
  • Establish whether or not your insurer offers emergency response services or direct access to pre-approved contractors and take advantage of such services.