Aquifer: Nothing in the Bank
SCENARIO: Jon Gullo eyed the monitor as the nanobots burrowed underground, searching for moisture.
He and his lawyers had managed to convince regulators to let him explore the apparently empty aquifer under his 115 acres of almond trees in California’s Central Valley.
The nanobots were a last-ditch effort to find adequate water supplies in the face of a drought that was browning what had been the country’s richest agricultural zone.
Regulators were helping. Every other week, the U.S. Department of Agriculture collected data from satellites as they passed over the Western states. Like the nanobots, the satellites were searching, in vain mostly, for signs of water in the depleted aquifers, many of which had been pumped dry due to public and private sector mismanagement.
Now the chickens were coming home to roost. With the aquifers depleted, an economic sea-change was in the offing.
In the drought’s early years, businesses and governments invested billions in water recycling, desalination, and freshwater capture, storage and transport. They also drilled deeper and deeper into the aquifers, until stronger regulation of groundwater usage took effect. But the efforts couldn’t stop the aquifers, long a buffer against drought, from running dry.
Now the chickens were coming home to roost. With the aquifers depleted, an economic sea-change was in the offing.
Agriculture, one of the state’s biggest water users, was bearing the brunt of the shortage, and consumers paid for it at grocery stores and in restaurants. Although other areas of the world were ramping up production, fields were not producing fast enough to keep up, plus several batches of imported fruits and vegetables were found to contain traces of banned pesticides.
As the shortage continued, California’s politically powerful cities refused to take deeper cuts in their share of the remaining water supplies. And it was too costly in rural areas to pipe in water from desalination plants, or engage in the same aggressive recycling and conservation efforts used by larger metro centers.
Most of Gullo’s neighbors were already gone. His orchards were surrounded by fields of sand and dust, and abandoned food processing plants.
Undaunted, he was hoping to squeeze what he could from the depleted aquifers under his property.
The potential payoff was worth it, reasoned Gullo. Almonds were fetching astronomical prices thanks to production declines in the Central Valley, which had been the world’s leading grower.
Although he hesitated to admit it, he was frightened to try to sell his property. Few wanted to move to an area where jobs were disappearing and water was so scarce and expensive.
The dearth of homebuyers spurred by the water shortage resulted in a mini-foreclosure crisis up and down the Central Valley.
At least his county had oil and mining to fall back on, though automation and climate-change regulation had put dents in the workforce.
All newcomers could hope for were jobs in construction — fixing the damage to roads and bridges caused by the land subsidence that occurred after the aquifers ran dry.
But if there were no trucks ferrying crates of grapes, almonds and oranges, who needed roads?
ANALYSIS: As California’s drought wears on, no needles register precisely the decline of aquifers in the Central Valley, one of the country’s leading agricultural regions.
But water levels are clearly dropping. In some areas, the land has subsided more than a foot.
Ideally, the return of normal rainfall patterns will replenish the aquifers, though a full refill could take decades. However, the odds of even longer droughts — and even more strain on underground aquifers — are rising, according to climate scientists.
They cite the impact of global climate change, as well as the geological record. Medieval-era droughts in the American Southwest lasted 30 years or more.
Aquifers served as a buffer for those populations, which nonetheless succumbed to malnutrition and conflict, said B. Lynn Ingram, a professor of earth and planetary science at the University of California, Berkeley. That buffer is shrinking today.
“It’s kind of like the water in the bank that we’re using up now,” said Ingram, author of “The West Without Water.”
It’s not just a U.S. problem. Aquifers around the world are emptying, according to research by James Famiglietti, a professor of earth system science at the University of California, Irvine. Sao Paulo in Brazil, for example, has been hit hard, with the city experiencing widespread water shortages.
While modern economies are more technologically advanced, an extended drought and continued aquifer depletion would be painful, especially for agriculture.
The U.S. could see higher food prices and disruption to supply chains, according to insurance and agricultural experts.
The U.S. food supply is becoming more resilient, thanks to interest in local farms, said Dawn Thilmany, a professor of agricultural economics at Colorado State University.
But local farmers won’t be able to make up everything, and water scarcity may not be limited to California.
One alternative is crops genetically modified to withstand drought, experts said. More efficient water use is another. But as the globe warms, production may ultimately shift to northern states.
Imports from other countries also might make up the difference, but they bring new risks, especially if growers overseas are using pesticides or fungicides banned in the U.S., said Rodney Taylor, a managing director in the environmental services group for Aon Risk Solutions.
To guard against liability risks, food distributors and processors should scrutinize any new producers, said Tim McAuliffe, president of specialty casualty and programs for Ironshore. If crops shrink and prices rise, producers may be less rigorous about quality control.
VIDEO: California Gov. Jerry Brown announces the state’s first-ever mandatory water restriction rules.
New sources of surface water also pose a risk of contamination, as does water from deep inside an aquifer, he said. “I would call those a little more remote. But if the drought does continue at severe levels, it’s something that we would watch a lot closer.”
In California, urban areas could recycle wastewater and desalinate ocean water, said David Sedlak, a professor in the department of civil and environmental engineering at U.C., Berkeley. While costly, those efforts will keep the taps flowing.
“It’s just hard for me to imagine a situation where the cities run out of water,” said Sedlak.
Still, the shortage of water could have ripple effects. Electricity production, for example, may be stretched if dams are less productive and higher temperatures translate into greater demand.
“You could end up having situations where you have brownouts because there is so much strain,” said Kirsten Orwig, an atmospheric perils specialist for the reinsurer Swiss Re.
Risk managers will have to consider access to water when assessing supply chains and new operations, insurance executives said.
And if conditions stay dry, wildfires will worsen.
Interstate conflicts over water will flare, too, said David Bookbinder, a partner at Element VI Consulting, which focuses on climate change policy.
Aquifers and watersheds don’t follow state boundaries, he noted. The Supreme Court usually winds up arbitrating disputes over water.
“It’s problematic that our political structure is not set up to deal with this,” Bookbinder said. “That, I think, is going to be the biggest problem.”
Complete coverage of 2015’s Most Dangerous Emerging Risks:
Corporate Privacy: Nowhere to Hide. Rapid advances in technology are ushering in an era of hyper-transparency.
Implantable Devices: Medical Devices Open to Cyber Threats. The threat of hacking implantable defibrillators and other devices is growing.
Athletic Head Injuries: An Increasing Liability. Liability for brain injury and disease isn’t limited to professional sports organizations.
Vaping: Smoking Gun. As e-cigarette usage rises, danger lies in the lack of regulations and unknown long-term health effects.
Aquifer: Nothing in the Bank. Once we deplete our aquifers, there is nothing helping us get through extended droughts.
Most Dangerous Emerging Risks: A Look Back. Each year since 2011, we identified and reported on the Most Dangerous Emerging Risks. Here’s how we did on some of them.
Transferring Polluted Properties
Close and trusting relationships among all parties is the single most important factor for the success of a real estate transaction involving an environmentally contaminated — or “brownfield” — property.
In the best of these transactions, the underwriter has good relationships with brokers, underwriters, clients and vendors, said Christopher Alviggi, business development leader, Alliant Insurance Services Inc., a Newport Beach, Calif.-based specialty insurance brokerage firm.
“You want to make sure everybody’s interests are aligned before you close. That will make claims settlement easier, post-close.”
And loop in the regulators, said Randall Jostes, chief executive officer, Environmental Liability Transfer Inc., an environmental liability buyout company. “If they’re included early in the transaction process, they’ll clearly communicate their expectations.”
Different states have different environmental standards and regulations, and different types of properties are subject to different federal regulation. To sort out the regulatory requirements, Jostes said, “we need relationships with federal and state regulators as well as other trusted parties: brokers, carriers, buyers and sellers. They all have their own jurisdictions and expectations.”
The circle of trusting relationships also extends to the consultant that performs the Phase I Environmental Site Assessment — the first step in environmental due diligence that identifies potential or existing environmental contamination liabilities — said David Rieser, head of the Environmental, Regulatory & Redevelopment Law practice.
“Hire a reputable consultant,” he said. “A great deal depends on the quality of the people who do the work.”
A careless assessment could miss things such as underground storage tanks, which are prone to leaks, “weird pipes you can’t understand” and an unexplained patch of fresh cement — any of which should trigger further investigation, Rieser said.
Those problems could kill the deal or change its terms, since liability for problems on a property transfers with ownership.
Phase I Environmental Site Assessments also include reviewing public documents, such as government databases, building permits and historic fire maps. They create a safe harbor against liability from contaminations.
Demand for Phase I assessments boomed after enactment of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), which holds a buyer, lessor or lender responsible for remediation of hazardous substance residues, even if a prior owner caused the contamination.
Risk Transfer Strategies
The National Brownfield Association estimates that $2 trillion of real estate in the United States is devalued due to the presence of environmental hazards — an enormous opportunity for those who can unlock the properties’ redevelopment potential, said Jostes.
The money to be made is legendary: Think Manhattan’s Meatpacking District, the exorbitant neighborhood of young hipsters and boutique-lined streets whose name is the sole relic of its gritty past.
Every kind of property is game for redevelopment, each with its own possible contaminations and risks, said John Wasilchuk, account executive and environmental specialist, Lockton.
Abandoned residential buildings, for example, may have mold, asbestos or lead that require remediation. They may have housed meth labs, leaving behind chemical waste that may be reactive and toxic to human health and the environment, since meth cooks — unlike the fictional Walter White — tend not to be meticulous housekeepers.
Defunct gas stations may suffer petroleum contaminations in soil and groundwater from leaky underground storage tanks, and old agricultural sites could leave fertilizer, pesticide and herbicide contaminations behind, especially at points where the chemicals were stored, loaded or unloaded.
“Even if the indemnifier’s parent company is highly rated by Moody’s or A.M. Best, do we have the financial backing of the parent, or is it limited to the assets of the limited liability company?” — Matt O’Malley, president, North America environmental insurance business, XL Group
Between developers’ appetite for brownfield properties as the economy recovers and strict environmental regulation, the robust pollution legal liability market is “a huge enabler” of brownfield development, said Jim Vetter, environmental risk, insurance and solutions expert, managing director, Marsh.
Traditional pollution insurance will cover unknown contaminations that emerge post-sale, but not known contaminants, many of which buyers, sellers, insurers and regulators should be aware of from the due diligence studies, said Wasilchuk.
Along with “workhorse” pollution legal liability products, transactions also lean on the resurging remediation cost cap insurance market, said Vetter. Although many buyers and sellers still “play hot potato” with known cleanup liabilities through transactional methods, such as indemnification, purchase price adjustment and escrow accounts, they also look to environmental liability buyouts.
In these transactions, a third party assumes ownership in perpetuity of a property’s known environmental conditions in exchange for payment. The buyout company takes on responsibility for remediation and liability.
Among the advantages, said Jostes, is that such arrangements free property owners to concentrate on their core business while the buyout company “owns” and neutralizes the relationship with regulators, which can be adversarial with property owners.
The Power of Indemnification
In some cases, said Mary Ann Susavidge, chief underwriting officer, XL Group, sellers don’t want buyers to perform due diligence and will sell a property only on a “buy as is, where is” basis.
Lacking an appetite for environmental risk, banks often require a Phase I inspection, but buyers that finance the purchase themselves may still accept those risks for a desirable property, either stand-alone or bundled in a portfolio.
“If the property is so desirable, and if the buyer feels it’s educated enough about potential risks, it becomes a ‘don’t ask, don’t tell,’ situation,” Susavidge said. “If they poke around, state or federal regulations may force them to take corrective action.”
For example, the Industrial Site Recovery Act (ISRA) may pertain to New Jersey properties, where certain types of operations trigger a requirement to perform an environmental investigation that may not be required in other states.
“If the new entity wants to add the property to its portfolio, it might be motivated to take on the perceived risk. It’s a risk management choice,” Susavidge said.
A buyer forewarned of likely contamination may negotiate a reduced price, said Cathy Cleary, executive underwriter, XL Group, who is also an environmental attorney. She looks at a laundry list of contractual items that make a strong indemnity for buyers and sellers. It may come in the form of a purchase and sale agreement, or a separate indemnity agreement.
For example, who is responsible for investigation of any environmental issues and subsequent cleanups? If there are claims, how are they made, and who pays? What kind of protection is the buyer getting for future environmental liability obligations, and how long will the indemnity last?
Are there monetary caps on the indemnity — say, for the first $2 million only? Are there retentions before the indemnification pays? If contamination migrates to or from another property, who is responsible for the cleanup? Who is responsible for bodily injuries in the community? Property claims? Third party claims?
Most important is the financial strength of the indemnifier. A seller that is a limited liability company raises a red flag, said Matt O’Malley, president, North America environmental insurance business, XL Group. “Even if the indemnifier’s parent company is highly rated by Moody’s or A.M. Best, do we have the financial backing of the parent, or is it limited to the assets of the limited liability company?”
Quantify the Risks
Ann Viner, general counsel and director of environmental risk management, WCD Group, said brownfield risk management is like a three-legged stool composed of the contract, the insurance, and properly scoped schedule and budget.
All three are best managed by quantifying the property’s environmental risk, she said, which is separate and distinct from a qualitative “guestimate” based on the kind of contamination and historical outcomes of similar properties.
Quantifying the risk is relatively easy in transactions involving a single property, said Marc S. Faecher, senior vice president at TRC, a risk management, engineering, and construction management organization.
With a single property, he said, “you know where the property is located and what its issues are.”
However, he said, portfolios of real estate that blend desirable and impaired properties across primary, secondary and tertiary markets require more detailed analysis. Portfolios likely involve sites facing a variety of issues, and apportionment of responsibility between buyer and seller can be complicated.
“You need to analyze what ultimate cleanup costs would be and what cash flow impacts would be. You need to analyze when the liability would hit and deal with structuring remediation programs to reduce liability over time,” Faecher said.
Experienced consultants aim for a cost risk with a 95 percent degree of confidence, said Viner.
To quantify risk, the consultant develops data inputs for a risk modeling program, then runs iterations based on various scenarios. A lower confidence level can produce a spread of several million dollars in estimated cleanup costs, but a good quantitative analysis will identify the driver for the low confidence level, such as PCBs in the sediment.
Once aware of what information is missing, the consultant can obtain additional data on that driver. Using the new data, a risk modeling program produces a closer estimate of likely remediation costs.
“We know more about what remediations are called for, how much they’ll cost and how long they’ll take,” Viner said. “We can define better contract terms, better and more specific insurance coverage. Quantifying risk helps all three legs of the risk management stool.”
Healthcare: The Hardest Job in Risk Management
Radically changing cost and reimbursement models.
Rapidly evolving service delivery approaches.
It is difficult to imagine an industry more complex and uncertain than healthcare. Providers are being forced to lower costs and improve efficiencies on a scale that is almost beyond imagination. At the same time, quality of care must remain high.
After all, this is more than just a business.
The pressure on risk managers, brokers and CFOs is intense. If navigating these challenges wasn’t stress inducing enough, these professionals also need to ensure continued profitability.
“Healthcare companies don’t hide the fact that they’re looking to reduce costs and improve efficiencies in practically every facet of their business. Insurance purchasing and financing are high on that list,” said Leo Carroll, who heads the healthcare professional liability underwriting unit for Berkshire Hathaway Specialty Insurance.
But it’s about a lot more than just price. The complexity of the healthcare system and unique footprint of each provider requires customized solutions that can reduce risk, minimize losses and improve efficiencies.
“Each provider is faced with a different set of challenges. Therefore, our approach is to carefully listen to the needs of each client and respond with a creative proposal that often requires great flexibility on the part of our team,” explained Carroll.
Creativity? Flexibility? Those are not terms often used to describe an insurance carrier. But BHSI Healthcare is a new type of insurer.
The Foundation: Financial Strength
Berkshire Hathaway is synonymous with financial strength. Leveraging the company’s well-capitalized balance sheet provides BHSI with unmatched capabilities to take on substantial risks in a sustainable way.
For one, BHSI is the highest rated paper available to healthcare providers. Given the severity of risks faced by the industry, this is a very important attribute.
But BHSI operationalizes its balance sheet in many ways beyond just strong financial ratings.
For example, BHSI has never relied on reinsurance. Without the need to manage those relationships, BHSI is able to eliminate a significant amount of overhead. The result is an industry leading expense ratio and the ability to pass on savings to clients.
“The impact of operationalizing our balance sheet is remarkable. We don’t impose our business needs on our clients. Our financial strength provides us the freedom to genuinely listen to our clients and propose unique, creative solutions,” Carroll said.
Keeping Things Simple
Healthcare professional liability policy language is often bloated and difficult to decipher. Insurers are attempting to tackle complex, evolving issues and account for a broad range of scenarios and contingencies. The result often confuses and contradicts.
Carroll said BHSI strives to be as simple and straightforward as possible with policy language across all lines of business. It comes down to making it easy and transparent to do business with BHSI.
“Our goal is to be as straightforward as we can and at the same time provide coverage that’s meaningful and addresses the exposures our customers need addressed,” Carroll said.
Claims: More Than an After Thought
Complex litigation is an unfortunate fact of life for large healthcare customers. Carroll, who began his insurance career in medical claims management, understands how important complex claims management is to the BHSI value proposition.
In fact, “claims management is so critical to customers, that BHSI Claims contributes to all aspects of its operations – from product development through risk analysis, servicing and claims resolution,” said Robert Romeo, head of Healthcare and Casualty Claims.
And as part of the focus on building long-term relationships, BHSI has made it a priority to introduce customers to the claims team as early as possible and before a claim is made on a policy.
“Being so closely aligned automatically delivers efficiency and simplicity in the way we work,” explained Carroll. “We have a common understanding of our forms, endorsements and coverage, so there is less opportunity for disagreement or misunderstanding between what our underwriters wrote and how our claims professionals interpret it.”
Responding To Ebola: Creativity + Flexibility
The recent Ebola outbreak provided a prime example of BHSI Healthcare’s customer-centric approach in action.
Almost immediately, many healthcare systems recognized the need to improve their infectious disease management protocols. The urgency intensified after several nurses who treated Ebola patients were themselves infected.
BHSI Healthcare was uniquely positioned to rapidly respond. Carroll and his team approached several of their clients who were widely recognized as the leading infectious disease management institutions. With the help of these institutions, BHSI was able to compile tools, checklists, libraries and other materials.
These best practices were immediately made available to all BHSI Healthcare clients who leveraged the information to improve their operations.
At the same time, healthcare providers were at risk of multiple exposures associated with the evolving Ebola situation. Carroll and his Healthcare team worked with clients from a professional liability and general liability perspective. Concurrently, other BHSI groups worked with the same clients on offerings for business interruption, disinfection and cleaning costs.
Ever vigilant, the BHSI chief underwriting officer, David Fields, created a point of central command to monitor the situation, field client requests and execute the company’s response. The results were highly customized packages designed specifically for several clients. On some programs, net limits exceeded $100 million and covered many exposures underwritten by multiple BHSI groups.
“At the height of the outbreak, there was a lot of fear and panic in the healthcare industry. Our team responded not by pulling back but by leaning in. We demonstrated that we are risk seekers and as an organization we can deploy our substantial resources in times of crisis. The results were creative solutions and very substantial coverage options for our clients,” said Carroll.
It turns out that creativity and flexibly requires both significant financial resources and passionate professionals. That is why no other insurer can match Berkshire Hathaway Specialty Insurance.
To learn more about BHSI Healthcare, please visit www.bhspecialty.com.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, and homeowners insurance. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has regional underwriting offices in Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Toronto, Hong Kong, Singapore and New Zealand. For more information, contact firstname.lastname@example.org.
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.