Today's Headlines, Tomorrow's Long-Tail Environmental Claims Require the Right Balance Between Risk and Controls
And while it will take some time before the true impact of the Japanese quake is determined, two recent events, both of which fall into the "man made" category already have shown how essential it is for contractors and energy companies to have a range of critical pollution coverage in case things go wrong.
According to Alex Pittignano, Vice President for Crisis Management & Environmental at Starr Indemnity & Liability Company (Starr Indemnity), a member of Starr Companies, both the Deepwater Horizon oil rig explosion, the subsequent oil spill in April 2010 and the ongoing emergence of a controversial natural gas drilling technique known as hydraulic fracturing, or "fracking," underline the pivotal value of appropriate coverage and sound underwriting when it comes to environmental risks.
Pittignano says in the case of the Deepwater Horizon oil spill, subsequent litigation and claims resolution could have a 20-year time horizon, much like that of the Exxon Valdez. As a result, Starr Indemnity's perspective on the cleanup of the spill is that it has been and will continue to be an extremely complex process to provide insurance for the contractors performing such work.
"There is a very large ad hoc workforce required to respond to emerging and post-control issues, to mitigate those impacts from the massive spill," Pittignano says.
Immediate concerns were that in order to find enough workers for the post-spill cleanup, many contractors had to add to their existing workforce using workers that may not have had the benefit of the specialized training that would ordinarily be provided to them to join the effort to mitigate the pollution.
"We need to know if new workers are being trained properly, and was their health and safety a prime consideration in doing the cleanup work?" he says. "Not having a properly trained workforce was a limiting factor for us in providing coverage to some of those contractors."
Another point from a liability perspective is that mainstream pollution coverage is insufficient where there is likely to be a long, drawn-out recovery process. At the same time, the Deepwater Horizon tragedy demonstrated a clear shortage of adequately trained and experienced professionals available to respond to such a massive disaster.
"In the end, we had a limited exposure to the contractors that provided response services to the Deepwater Horizon spill and that was by design," Pittignano explains. "We've applied stringent underwriting criteria, focused on loss control, and required senior management review on all risks we've written." Richard Bessinger, Starr Indemnity's Senior Vice President, says Starr Indemnity made sure those types of controls were in place by vetting each individual contractor very carefully, including any subcontractors.
"We had to be sure that we were insuring the appropriate risks," Bessinger says. "We had an opportunity to write a substantial amount of liability business, but any accounts we wrote had to have the right risk management controls."
While the Deepwater Horizon cleanup was a reactive process, the second scenario, the emergence of fracking, is primarily being driven by the push for reducing the nation's appetite for foreign oil, says Pittignano. In and of itself, that's a good reason. The problem is that the long-term effects of fracking, which uses large quantities of water to create "fractures" that allow natural gas to be released from a solid shale formation and flow freely, are still open to debate.
Though fracking procedures are documented and now in use, controversy has dogged its use in the recent past as these operations have increased. Just recently, two natural gas companies agreed to temporarily suspend use of injection wells in central Arkansas, where earthquakes keep occurring. In fact, there have been more than 800 quakes in the area in the past 6-7 months, and a magnitude 4.7 quake--the strongest in Arkansas in 35 years--recently occurred.
"Fracking is a relatively new technique and it represents a dilemma for everyone," says Pittignano. "While using the technique to get at natural gas can generate a tremendous amount of energy for the country, there is always some uncertainty regarding the long term impacts as you work through its use. While its understood that the energy and drilling companies are using great care and best practices to mitigate risks associated with these operations, uncertainty remains due to the relative newness of the implementation of this technology."
Pittignano says with fracking on the upswing, society needs to determine if in the long-term the positive result of less energy dependency is counterbalanced by the potential for unanticipated environmental impact. "The entire country has to grapple with it," Bessinger adds. "There are many unknowns. For example, will there be any impacts to the aquifers or ground water from fracking?"
Between the energy company, the drilling company and the landowner, it is a very complex issue with significant upside to our country, he adds. But those trying to get that natural gas out are facing the struggles of going to a concept that works, extracting the energy from the source, on the one hand, to folks with concerns about things such as flammable groundwater and other pollution risks on the other.
"If you look at the various interests, clearly the energy companies and drillers will have some level of GL coverage, but that typically will include a pollution exclusion. So they need specialized contractor coverage," Bessinger says. "Some will have a reduced amount of coverage, but it will not be broad enough to cover them for long-term claims that could arise."
Also, landowners who enter into contracts with energy or drilling companies also will have some level of liability depending on the specific contract language, so they also will need specialized coverage should something go wrong.
"We are at the infancy stage when it comes to the use of fracking," Pittignano adds. "It's a potential boom for employment and less dependency on foreign fuels, because there is a lot of natural gas to be found. But there also are the stresses in the system, so there is the delicate balance between the economic gain and the environmental uncertainty. For now, there will continue to be a public debate on the long vs. short-term results."
For both situations and more--the massive cleanup of an oil spill or an emerging energy-related technology that could lead to an environmental claim--Starr Indemnity has its ECO Starr Suite of products, which offer a broad range of comprehensive liability products for environmental contractors, consultants, and waste facilities, among other entities.
"Our package policies allow insureds to select the coverages that most effectively address their particular risk," Pittignano explains. "Policy offerings can include general liability coverage, commercial automobile liability, workers' compensation coverage, contractor pollution liability, professional liability, site pollution liability, transportation pollution liability, and follow form excess."
Bessinger says that through its Energy Division, for example, Starr Indemnity would look at coverage for drilling contractors involved in natural gas extraction and potentially provide pollution and general liability as well. However, he adds, Starr Indemnity's underwriting philosophy is clear.
"We look at each risk on its own merits," Bessinger says. "A lot depends on the expertise, professionalism and history of the company seeking insurance."
For more information, visit http://www.starrcompanies.com
(The above piece is part of our continuing Insights series designed to highlight key products and services to our readers. This paid-for Insights was written and edited by Risk & Insurance®
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March 23, 2011
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