Waves of bankruptcies convulsing the coal industry in the United States leave billions of dollars in mine remediation costs potentially unfunded, and raise ominous questions for both tactical insurance and strategic risk management.
Dozens of coal companies are in court-supervised reorganization or liquidation, some of them for the second time in just a few years.
Many had taken advantage of the Surface Mining Control and Reclamation Act of 1977, or SMCRA, a federal law that allowed self-bonding in lieu of surety bonds, dedicated cash reserves or other provisions for environmental obligations.
Self-bonds are legally binding corporate promises without separate surety or collateral, available only to entities that meet certain financial tests.
In response to the volatility in the coal industry and recent bankruptcies, the Office of Surface Mining Reclamation and Enforcement (OSMRE), part of the Department of the Interior, sought public comment in response to a petition from WildEarth Guardians asking the office to consider restricting or eliminating self-bonding.
Specifically, the group wants to prevent coal companies with a history of financial insolvency, and their subsidiaries, from using “self-bonding” as a means to ensure disturbed lands are restored after mining operations are completed.
VIDEO: There are many challenges when working to remediate abandoned mines.
OSMRE received more than 117,000 comments on the petition to restrict or eliminate self-bonding, and announced on Aug. 16 that it would begin the rulemaking process to “strengthen regulations on self-bonding to help ensure that companies are financially able to restore lands disturbed by coal mining when extraction operations are completed.”
“The U.S. coal market is dramatically different from when our self-bonding regulations were last updated 30 years ago,” said OSMRE Director Joe Pizarchik.
“This is a turbulent time of energy transformation in our country, of declining use of coal and increased use of cheaper natural gas and renewable energy. These conditions have exposed the limitations of the current self-bonding rule and we have a responsibility to protect the public’s interest by keeping up with these changes.”
Requests for public comment on similar initiatives are underway in several states for mines under their jurisdiction; states where taxpayers could be on the hook for cleanup costs for busted mines if bankruptcy courts do not set those funds high enough in the hierarchy of expenses to be paid.
Within the broader economic and social dislocation in the near-collapse of a major industry, there are two key questions for insurance markets and risk managers.
On the commercial side, will the surety and broader insurance markets have the capacity and the willingness to underwrite billions in new coverage for an industry with a notorious past and a checkered future?
In risk management, there is a larger question of whether the 1977 self-bonding provisions were flawed from the start, or whether they were functional until overwhelmed by the tsunami of corporate failures in recent years.
“We know that there are many companies that rely on the surety bond market for meeting their compliance obligations,” said Tom Sanzillo, director of the Institute for Energy Economics & Financial Analysis (IEEFA), based in Cleveland.
“We imagine that would expand significantly if there were new regulations that restricted or even eliminated self-bonding for coal companies.”
In response to an inquiry from R&I, an OSMRE representative stressed that, “self-bonding remains a legal option sanctioned by [SMCRA] as a means that a qualified company can guarantee reclamation. There are cases in which self-bonding guarantees have been replaced by surety and collateral bonds.
“In addition, it is important to note that no operator currently in operation with self-bonds has ceased operations and forfeited on the bonded obligations. OSMRE stands committed to ensuring that mine operators will be held accountable to complete the legally required reclamation when or if they complete mining operations.”
The forthcoming rulemaking process is intended to modify “self-bonding eligibility standards, including for parent and other corporate guarantors, to include criteria that are more forward looking, instead of only focusing narrowly on past performance.”
It also will require an independent third-party financial review of self-bonded entities, establish the percentage of self-bonds supported by collateral and provide regulatory authorities with better tools to obtain replacement bonds when a self-bonding entity no longer meets the eligibility criteria.
However, federal rulemaking, even the simplest, is a long and complex effort. Congress can also amend SMCRA to modify the bonding system.
“What we have here is a [self-bonding] system that is flawed in many respects, and the industry’s decline exposes those flaws graphically,” Sanzillo said.
“When I saw the OSMRE statement expressing concern about possible collusion between state regulators and coal companies,” he said, “I nodded, because we did an initial study on the self-bonding program in Texas several years ago and found that it was completely inadequate,” he said.
In addition to West Virginia, Texas recently became one of the states that intervened in bankruptcy proceedings pressing for full funding of remediation costs.
In Texas, the IEEFA findings were submitted to the state Railroad Commission, which has jurisdiction over coal mining, and the legislature.
“We had a robust discussion,” said Sanzillo, “and they took some diligent action, including requesting $1 billion in notes from one debtor-in-possession financing.”
OSMRE added that the State of Texas successfully navigated the problems associated with self-bonding, through its actions with respect to Luminant, the largest electricity producer in Texas, in 2011-2012.
The Railroad Commission, the state attorney general’s office, and the operator devised a way to have Luminant replace several hundred million dollars in self-bonds with collateral bonds when the company declared bankruptcy.
In a recent large bankruptcy case involving Alpha Natural Resources, “the West Virginia Department of Environmental Protection has been very vocal that the $1.1 billion in remediation costs have got to be addressed in the reorganization plan,” said Ted O’Brien, CEO of Doyle Trading Consultants, a coal-industry advisory.
Reorganized as Contura Energy Inc., the producer will contribute up to $100 million to help Alpha’s ongoing reclamation activities, according to published reports.
“What this down market is revealing is that there is far more coal being claimed as reserves than is economically available for mining. Insurance companies should ask if the valuations that are being reported to them are valid,” Sanzillo said.
“Any insurer looking into coal as a new market may get some pushback from other stakeholders,” said O’Brien, “but there has always been a market for surety, if you have someone willing to get their hands dirty. Coal is not going away. ” &
The Zika Battle’s Unintended Consequences
More than 3,100 cases of Zika infection have been recorded in the U.S., most of those contracted due to international travel. South Carolina has 31 recorded cases and infection in every case appears to have happened overseas.
But after four local residents were diagnosed with Zika, officials in one South Carolina county sought to contain its spread and arranged for an aerial spraying of the pesticide Naled, which kills the Aedes mosquito known to carry the Zika virus.
In their haste to halt the advance of the virus, Dorchester County officials gave inadequate public notice for an early Sunday morning spraying on August 28.
A local farmer didn’t get the alert and therefore didn’t shield her 43 beehives. Only when she discovered that nearly all her bees — as many as 3 million — were dead, did she figure out what happened.
The county immediately apologized for the lack of proper notice and said it will try to reimburse beekeepers after insurance adjusters determine the value of the loss.
The bee farmer suggested the figure will be vast as there is no easy replacement for lost bee colonies, honey and hives.
“There wouldn’t need to be, nor does a separate product exist to cover the municipality’s liability in this situation,” Joseph C. Peiser, executive vice president, head of casualty broking at Willis Towers Watson.
The county’s coverage should come under either a general liability program, or a pollution or environmental liability program, as the spraying and the unintended consequence of killing the bees is a form of negligence and property damage, he said.
“That is exactly what a general liability policy is designed to cover,” Peiser said.
Ever since Zika enter the U.S. earlier this year, government officials tasked with protecting public health are in uncharted territory. Worry about Zika’s devastating effects on a developing baby in utero and the virus’s unique ability to transmit from human to human is leading to remediation efforts that have not been tried in years, if at all.
The above case was Dorchester County’s first such aerial spraying in 14 years, administrator Jason Ward told CNN a few days later. The hard-hit Florida district of Wynwood also initiated new aerial sprays late this summer. It looks like the approach worked.
“After mosquitoes persisted and infections continued despite ground-based spraying, aerial spraying knocked down mosquitoes rapidly and was associated with interrupting transmission of Zika in Wynwood,” CDC Director Tom Frieden said in a statement.
“When faced with the potentially devastating outcomes of microcephaly or other serious brain defects that Zika can cause during pregnancy, we must use the best available tools to prevent infection.
According to EPA assessments, when used properly, aerial spraying with Naled for mosquito control doesn’t pose a risk to people or the environment,” he added.
The honeybee case highlights the need for insurance brokers to work with clients to weigh all options and anticipate the unintended consequences. Start with the environmental liability program, sometimes called a pollution legal liability program, Peiser said.
“Because they are spraying from the air, and that’s not from a specific site, it would be better if they have an environmental program that it is amended to include this type of operation,” he said.
Communities could add a carve-back on the pollution exclusion called ‘named perils and time element coverage.’ It can be in an umbrella policy, or the primary general liability policy, or both, Peiser said.
The ‘named perils’ portion offers coverage if the pollution is caused by one of the itemized events in the carve back, such as hostile fire, lightning or an overturned vehicle. It’s unlikely to provide coverage for this event, Peiser said.
“Because they are spraying from the air, and that’s not from a specific site, it would be better if they have an environmental program that it is amended to include this type of operation.” — Joseph Peiser, EVP and head of casualty broking, Willis Towers Watson
But the ‘time element’ portion should. This allows the general liability policy to cover an event when it’s known within a set time period (say 20 days) and reported to the insurer within a certain time (say 30 to 40 days), he said.
“I think the most important amendment is to the pollution exclusion to provide ‘time element’ pollution exclusion,” Peiser said. “If they do that, all scenarios should be covered.”
But as an added measure and in order to lessen the chance of argument with the insurer, one can also amend the ‘intentional acts exclusion’ so it does not apply to property damage as the result of reasonable force or activity, Peiser said.
To date, Peiser has yet to field questions or concerns about Zika but expects that he will.
Other Unexpected Zika Claims
Other brokers agree that the Zika virus is just gaining traction as a risk management concern. When the Aedes mosquito population begins to surge again next spring, more claims and questions may pop up. Brazil’s infection rate this winter is a likely litmus test of what the U.S. will experience next summer.
As cases of Zika increase, so too will related insurance claims.
“You’ve got to anticipate the negative and then prepare for it,” said Rick Vohden, SVP and education and public entity practice leader at Marsh Risk Consulting.
Industries that could potentially be impacted by the Zika virus include health care providers and first responders, who could be exposed to blood and bodily fluids, and outdoor workers, who could be exposed to mosquito bites.
International business travelers and university staff and students studying abroad are also presenting new areas of concern, since Zika thrives in regions along the Equator.
Ample communications with employees and students may be the most important approach any business or government organization can take. Let people know what the dangers are in the area where they work and offer solutions to avoid contracting the virus, said David Marcus, managing director, public sector at Arthur J. Gallagher & Co.
“You’ve got to anticipate the negative and then prepare for it.” — Rick Vohden, SVP and education and public entity practice leader, Marsh Risk Consulting
Employees may sue if the employer does not provide adequate controls and they catch the disease, Peiser said.
“Whenever there is a pandemic you start to hear about infectious disease exclusions,” he said.
“Hotels, hospitals or universities want to make sure they don’t have an Infectious disease exclusion that is sometimes in a general liability policy,” he said.
“Sometimes it’s also in the excess workers’ comp policy if a business is self-insured.”
“We continually provide alerts to our clients that they need to be cognizant of the issue early because there is a realm of risk that you are probably going to be impacted by, if not this year, more significantly next year and I think 2018 will be worse than next year,” Vohden said
It is not too early for organizations and brokers to think through each solution and anticipate where it may cause another problem. For example, asking summertime workers to wear pants and long sleeved shirts for protection may expose them to heat exposure and heat exhaustion, Vohden said.
“So we are saying ‘here’s what you can do but if you do this, here’s your next group of consequences that we need to be wary of,” he said.
It is possible that workers’ compensation could come into play at some point. A worker could make third party over claim and sue the municipality, as well as collect workers’ comp, Peiser said.
VIDEO: South Carolina’s aerial spray for mosquito control accidentally killed millions of honeybees. WCBD’s Sofia Arazoza reports.
Since there’s potential for employees to have occupational exposure to Zika and then transmit it to their spouse, that’s another liability to consider.
“That’s stringing the potential liability out pretty far, but the potential exists if you look at similar cases that occurred with asbestos litigation in the past,” Vohden said.
Marcus, at Gallagher, is a broker for public schools districts in Florida’s Miami-Dade and Broward counties, which are the frontlines for U.S. Zika transmissions this summer.
There, students and staff were required to wear long sleeves and pants under uniforms and health officials passed out DEET products to students’ families and gave lessons on the best ways to apply it.
“It’s going to get larger before it gets smaller, just like any other disease,” Marcus said.
“There’s a full-out effort to communicate in south Florida right now to everybody on a daily basis and they are doing a phenomenal job.”
The Zika virus was first identified in monkeys in the Zika forests of Uganda in 1947 and later found in humans in 1952, according to the World Health Organization. The first large outbreak of disease caused by Zika infection was in 2007.
Zika virus is related to the dengue, yellow fever and West Nile viruses, but it is the only virus in this group so far to be capable of human-to-human transmission through sexual contact and to cause significant birth defects to babies in utero.
Visit the CDC’s website for the agency’s latest count on Zika cases in the U.S.
Hot Hacks That Leave You Cold
Thousands of dollars lost at the blink of an eye, and systems shut down for weeks. It might sound like something out of a movie, but it’s becoming more and more of a reality thanks to modern hackers. As technology evolves and becomes more sophisticated, so do the occurrence of cyber breaches.
“The more we rely on technology, the more everything becomes interconnected,” said Jackie Lee, associate vice president, Cyber Liability at Nationwide. “We are in an age where our car is a giant computer, and we can turn on our air conditioners with our phones. Everyone holds data. It’s everywhere.”
Phishing Out Fraud
According to Lee, phishing is on the rise as one of the most common forms of cyber attacks. What used to be easy to identify as fraudulent has become harder to distinguish. Gone are the days of the emails from the Nigerian prince, which have been replaced with much more sophisticated—and tricky—techniques that could extort millions.
“A typical phishing email is much more legitimate and plausible,” Lee said. “It could be an email appearing to be from human resources at annual benefits enrollment or it could be a seemingly authentic message from the CFO asking to release an invoice.”
According to Lee, the root of phishing is behavior and analytics. “Hackers can pick out so much from a person’s behavior, whether it’s a key word in an engagement survey or certain times when they are logging onto VPN.”
On the flip side, behavior also helps determine the best course of action to prevent phishing.
“When we send an exercise email to test how associates respond to phishing, we monitor who has clicked the first round, then a second round,” she said. “We look at repeat offenders and also determine if there is one exercise that is more susceptible. Once we understand that, we can take the right steps to make sure employees are trained to be more aware and recognize a potentially fraudulent email.”
Lee stressed that phishing can affect employees at all levels.
“When the exercise is sent out, we find that 20 percent of the opens are from employees at the executive level,” she said. “It’s just as important they are taking the right steps to ensure they are practicing what they are preaching.”
Locking Down Ransomware
Another hot hacking ploy is ransomware, a type of property-related cyber attack that prevents or limits users from accessing their system unless a ransom is paid. The average ransom request for a business is around $10,000. According to the FBI, there were 2,400 ransomware complaints in 2015, resulting in total estimated losses of more than $24 million. These threats are expected to increase by 300% this year alone.
“These events are happening, and businesses aren’t reporting them,” Lee said.
In the last five years, government entities saw the largest amount of ransomware attacks. Lee added that another popular target is hospitals.
After a recent cyber attack, a hospital in Los Angeles was without its crucial computer programs until it paid the hackers $17,000 to restore its systems.
Lee said there is beginning to be more industry-wide awareness around ransomware, and many healthcare organizations are starting to buy cyber insurance and are taking steps to safeguard their electronic files.
“A hospital holds an enormous amount of data, but there is so much more at stake than just the computer systems,” Lee said. “All their medical systems are technology-based. To lose those would be catastrophic.”
And though not all situations are life-or-death, Lee does emphasize that any kind of property loss could be crippling. “On a granular scale, you look at everything from your car to your security system. All data storage points could be controlled and compromised at some point.”
The Future of Cyber Liability
According to Lee, the Cyber product, which is still in its infancy, is poised to affect every line of business. She foresees underwriting offering more expertise in crime and becoming more segmented into areas of engineering, property, and automotive to address ongoing growing concerns.”
“Cyber coverage will become more than a one-dimensional product,” she said. “I see a large gap in coverage. Consistency is evolving, and as technology evolves, we are beginning to touch other lines. It’s no longer about if a breach will happen. It’s when.”
About Nationwide’s Cyber Solutions
Nationwide’s cyber liability coverage includes a service-based solution that helps mitigate losses. Whether it’s loss prevention resources, breach response and remediation expertise, or an experienced claim team, Nationwide’s comprehensive package of services will complement and enhance an organization’s cyber risk profile.
Nationwide currently offers up to $15 million in limits for Network Security, Data Privacy, Technology E&O, and First Party Business Interruption.
Products underwritten by Nationwide Mutual Insurance Company and Affiliated Companies. Not all Nationwide affiliated companies are mutual companies, and not all Nationwide members are insured by a mutual company. Subject to underwriting guidelines, review, and approval. Products and discounts not available to all persons in all states. Home Office: One Nationwide Plaza, Columbus, OH. Nationwide, the Nationwide N and Eagle, and other marks displayed on this page are service marks of Nationwide Mutual Insurance Company, unless otherwise disclosed. © 2016 Nationwide Mutual Insurance Company.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Nationwide. The editorial staff of Risk & Insurance had no role in its preparation.