By Katie Kuehner-Hebert
Scenario: A large financial services company with branches and back-office operations in many states, contracts with a national electronic waste recycler to haul away its discarded laptops, personal computers, back-office computer systems, landline phones,
cell phones, and the flat-screen TVs it uses as marketing tools in its branches.
However, the recycling firm
-- while marketing itself as a certified operator that provides
"turnkey services" -- ultimately sells much of the e-waste to Chinese processors that use toxic
chemicals to extract and sell valuable metals from the units. The leftover electronic debris and
used chemicals essentially form polluted
Chemicals such as lead, mercury and cadmium from the e-waste contaminate
the soil and groundwater underneath the dumps. The contaminated
water seeps into nearby residential neighborhoods.
leached toxins cause neurological damage to hundreds of children, killing many, and Chinese government environmental regulators launch an investigation.
investigation results in stiff penalties for violating regulations pertaining to e-waste disposal, similar to the penalties imposed by U.S. regulators under the U.S. Comprehensive Environmental Response Compensation and Liability Act.
Chinese regulators file a lawsuit against the recycler, the U.S. financial services firm and several other large firms whose e-waste ended up in the dumps, demanding millions in penalties and
The affected families that live near the toxic dumps
file a class-action lawsuit against the companies, demanding hundreds of millions in damages.
The risk manager of the U.S. financial services firm initially doesn't worry because the firm's environmental liability policy covers pollution conditions arising from non-owned disposal sites. Additionally, the risk manager contractually required the recycler to hold a similar policy to cover any claims that involved the firm's e-waste.
However, the recycler then files for Chapter 13 bankruptcy, and as such, does not have insurance to cover any claims. Then the financial services firm's insurance broker informs the risk manager that he isn't sure whether the carrier would be able to cover the claims if the Chinese plaintiffs prevailed in each of their lawsuits, because the lawsuits were filed in Chinese courts.
The broker explains that, since blanket coverage for non-owned disposal sites is typically associated with the e-waste stream being processed or disposed of within the United States, U.S. jurisdictions and Canada, coverage may or may not be afforded.
This is not a good development
for the risk manager, who now has to inform
his CFO. The CFO in turn has to issue a report to the CEO, who for his part
has to communicate the dire information
to the company?s board of directors.
Not wanting to wait for the insurance carrier to decide
if it would cover the claims if the Chinese plaintiffs won in court, the board members and top executives of the financial services firm decide to ante up millions to quietly settle the cases.
Later, a Chinese jury does, in fact, award hundreds of millions in collective damages to the regulators and the Chinese families. Even though the financial services firm settled the cases and was not part of the eventual trial, the firm, its board members and top executives suffer a massive reputational hit when media outlets list the company as one of those involved in causing neurological damage to hundreds of Chinese children.
The volume of global electronic waste is rising dramatically as technology consumers continuously upgrade to next-generation products.
About 50 million tons of e-waste is generated globally each year, according to the International Environmental Technology Center of the United Nations Environment Program. The developing environmental problem is exacerbated by processors in emerging markets using harmful chemical processes to extract valuable components.
"You are going to see more of a focus from underwriters on how operators are managing this kind of waste, to help prevent lead, arsenic, cadmium and mercury from getting into the soil and groundwater," said Rich Sheldon, environmental practice leader at Willis North America in Radnor, Pa.
One of the concerns around e-waste is the issue of CERCLA liability, adds Anthony M. Wagar,Willis' executive vice president, environmentalpractice in New York. CERCLA stands for the Comprehensive Environmental Response Compensation and Liability Act of 1980, which taxed industries to create a fund, known as Superfund, to clean up toxic waste sites. The act also created liability for those firms found to have dumped toxic substances.
"The far-reaching arm of CERCLA -- aka, Superfund -- can cast a very large net of liability over our clients," Wagar said. "This addresses 'cradle to grave' management of waste and is strict, joint, several and retroactive in nature. Whether the manufacturer, recycler, landfill, processor of the waste or end-user has done everything right, they may still be pulled back into the liability chain."
Because of that strict liability scheme, brokers generally advise clients to take out a pollution liability policy inclusive of non-owned disposal site coverage to help manage and transfer the risk, he said.
Steve Manz, Marsh Inc.'s senior vice president, Midwest environmental practice leader in Detroit, said problems can occur when materials end up in undesirable places or are processed illegally -- unbeknownst to clients.
"Companies want to do the right thing and recycle the materials properly, so they try to use certified and qualified companies to do the recycling, to ensure that hazardous conditions aren't caused in the processing, and materials go to where they are supposed to go," Manz said. "Some of the transporters may say they keep the waste and provide turnkey services, but they end up shipping it overseas. There are reports that, in China, materials are being recovered from electronic equipment, which is essentially creating new Superfund-type sites like those that we used to have in this country."
While there have been some reforms in the toxic tort liability rules in China, Manz said, he is not sure whether U.S. manufacturers or any other company in the e-waste stream would be liable if their materials ended up in such a site.
Moreover, there is a question about whether or not such companies would have coverage under their U.S.-based insurance policies. That can depending on where the suit is brought -- within the United States or in an overseas jurisdiction -- and the overall aspects of the claim, said Robert B. Newmarker, head of environmental site-specialty products at Zurich North America Commercial in Boston.
"The complexity of jurisdictional law from an enforcement and legal perspective on top of the insurance regulation saying how claims can be handled within a foreign jurisdiction make this issue extremely complex," Newmarker said.
As such, customers have to be very careful whom they choose to be their disposal company, Newmarker said.
"First, is the company that they are contracted with actually disposing of their waste or are they just a hauler who is transporting the waste to a facility they do not own or operate?" he asked. "Second, where is the waste ultimately ending up?"
No matter what, companies should be aware of the financial condition of their disposal vendor, Newmarker said.
"The risk to the customer -- the generator of the waste -- is that the disposal company goes bankrupt and doesn't have the proper coverages," he said. "In that situation, the EPA could intervene and pull in all companies that sent waste to the facility. At which point, the non-owned disposal site coverage most likely would be triggered."
E-waste recyclers, said Greg Schilz, managing director of Aon Risk Solutions' Environmental Services Group in San Francisco, should obtain an insurance policy that combines general liability and pollution liability.
"The combined policy works very seamlessly, which eliminates any potential gray areas of operational coverage between the GL policy or the pollution coverage," Schilz said. "For example, if a fire starts in the plant and creates a pollution condition that causes third-party damage, the combined policy would be able to address the GL loss as well as the pollution damage."
If a recycler has separate policies with different carriers, there might be finger pointing between the two carriers and their respective policies, and the claims might not get paid, he said.
"I think there is going to be more scrutiny in the U.S. for businesses involved in the recycling and processing of e-waste, to make sure they are taking all the appropriate steps to prevent environmental contamination, whether it comes from regulation or other private party lawsuits that will force them to be more responsible in how they handle the e-waste materials," Schilz said.
"There's also going to be more pressure for them to take financial responsibility for the environmental cleanup."
KATIE KUEHNER-HERBERT is a freelance writer specializing in financial services. She can be reached at firstname.lastname@example.org.
April 12, 2013
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