Not much usually happens in Washington, D.C., in midsummer. But this year, despite a heat wave, the Senate held hearings about an equally hot issue: the potential for environmental contamination from toxins in electronic scrap. Further hearings were held in September with the object of forming a national e-waste recycling policy.
Some states are already ahead of the federal government. California, for example, enacted a tax earlier this year to pay for the disposal of computer toxins. A few smaller Eastern states have collection or dumping regulations already in place.
The benchmark study in the field is now a little out of date, but gives a good sense of the scale of the issue. The Electronic Product Recovery and Recycling Baseline Report, issued in 1999 by the Environmental Health Center of the National Safety Council, found that only 6 percent of computers were recycled in 1998. By 2004, the center projected there would be more than 315 million obsolete computers in the United States. Some experts estimate that number could easily doubled due to toxins from televisions, cellular telephones and personal digital devices.
According to the Environmental Protection Agency's most recent data, consumer electronics accounted for slightly more than 1 percent of the municipal solid waste stream in 2003: 2.79 million tons out of a total of 236.1 million tons. Used components are e-scrap; after precious metals and other valuable materials are removed through physical and chemical processes, the remainder is e-waste. E-toxics are present at each stage, but usually in small amounts.
Awareness of the potential environmental exposures, as well as the need for risk management and insurance coverage, is spreading rapidly. Underwriters estimate the entire pollution legal liability market at about $2 billion to $3 billion in annual premiums. Specific e-toxics coverage is a very small percentage of that so far. But for the Senate chambers to be filled in late July, the issue is starting to appear on many radar screens.
Rick Goss, director of environmental affairs for the Electronic Industries Alliance, a Herndon, Va.-based association representing the $400-billion U.S. high-tech and electronics industries, says the lead, mercury and other chemicals in question are used in devices "for very specific performance reasons."
Most importantly, Goss told senators that "EIA member companies are on target to be in compliance with the European Union Directive on the Restriction of Hazardous Substances, which will take effect on July 1, 2006." The EIA is made up of 1,300 member companies.
Those rules sharply restrict lead, hexavalent chromium, mercury, polybrominated biphenyl, cadmium and polybrominated diphenyl ether. Goss notes those voluntary reductions, along with improvements in energy efficiency and durability, will help reduce future volumes into the waste stream.
Goss stresses that the relative risks remain low for e-toxics. "EPA has made it clear going in that they do not think (electronics) represent a health risk in appropriate land fills. Absent an exposure threat, there is no risk. That point often gets lost. However, that does not solve the problem. I have had numerous discussions with member companies?your household names?and they are very aware of both their legal liability and their public-relations liability."
THE DUMPING DIVIDE
The other side of that awareness, and one reason why EIA is so active in this issue, is that the original equipment manufacturers do not want to touch it.
Dell, the largest computer maker, ignored repeated inquiries about its programs and coverage. IBM, which has an extensive "asset recovery program," said its expert was away for several weeks, and a representative for Hewlett-Packard said flatly that the R&I inquiry was "not relevant to what HP is doing in this space."
Similarly, the big national solid-waste companies--Allied Waste, Republic Services, Waste Management and Safety-Kleen--ignored or declined repeated inquiries.
In contrast, however, the specialized electronics recyclers were proud of their practices and relationships with brokers and underwriters. Later this month the International Association of Electronics Recyclers, based in Albany, N.Y., will issue a new benchmark report on its industry. The last report, issued in 2003, estimated industry revenues at $700 million.
Peter Muscanelli, president and founder of IAER, says, "We recognize that anything we do has risk, and we work with insurers to minimize those risks for both parties." The association has established a certification process to examine environmental, health and safety, and management practices. Five companies have been certified, and 15 more are in the process, according to Muscanelli.
Two of those certified are Metech International, based in Worcester, Mass., and Earth Protection Services, based in Phoenix.
"The three pillars of our business are: environmental responsibility, intellectual property protection and maximum asset recovery," says Sam Advani, president of Metech, which handles about 500 tons per month at two processing centers. "We have a standard pollution liability policy, nothing out of the ordinary. Coverage is not cheap, but it is certainly available."
"We are ISO 9001 and 14001 certified," adds Jim Gardner, director of business development. "And we audit all the people we send hazardous materials to. That gives a high comfort level to our underwriters."
Metech and Earth Protection Services, which has processing facilities in California, Oregon, Texas, South Carolina and Pennsylvania, are large.
The industry, however, is mostly composed of small operations and that presents a challenge and an opportunity to underwriters. "We are a full-service environmental management company," says Andy Ewing, environmental compliance manager of EPS, "so we have coverage to protect ourselves and our clients. For us pollution liability is a must. And that is a strategic advantage for us, because some processors do not (carry coverage)." EPS works with a local broker, Brown & Brown.
Gary Rodrigues, senior vice president and managing director at Willis North America's environmental practice, says, he is "not aware of any major toxic torts, but I find it almost hard to believe. Of course, there is a big potential for liability, and a dump would aggregate the problem. The full potential of exposure has not really hit yet."
BROKERS A DRIVING FORCE
Basic coverage in the field starts with pollution and legal liability, or PALL, coverage. "Specific risks are covered by a manuscripted policy or endorsement," says Rodrigues. "That may cover specific sites or blanket exposures for multiple production or waste services sites. AIG also offers a contractors operations professional combined policy beyond pollution liability, as well as environmental and general liability that is much more limited than PALL, but offers some protection. It is the lower-priced option."
Coverage is widely offered, "but in truth it is bought weekly more than daily," says Rodrigues. "People buy coverage when they become aware of exposure." While some large OEMs may have broad coverage, or may self-insure some exposures, one of the most popular policies in the market is for smaller companies, particularly waste handlers. The underwriter is Ace insurance of Philadelphia. Called Recycle Guard, it is sold out of Willis's Program Group, and handlers who are members of certain trade associations can buy coverage at the program rate.
Ace is actually the second underwriter for that policy. "Willis had managed the program with another carrier and about a year ago brought the opportunity to us," says Gerry Rojewski, vice president of the commercial market division for Ace Environmental Risk. "We looked at the potential client base and the need in the market and were able to develop the coverage."
He says Ace figured that the sector would become profitable quickly and also that the policy would be a way for the company to get into a growing market. "We are responding to industry's pull as carriers back off on other areas of coverage, like mold and silica. There are good pieces of business out there."
Lana F. Keppel, product line manager and vice president at AIG Environmental, agrees that the brokers have been an important factor in driving the growth in covering e-scrap. "We only sell through brokers, and the exposures are really not so mystical. The technology is very easy for a broker to examine--we don't need them to be experts--that is what they come to us for."
The demand, she says, has mostly come from "waste handlers, transporters and recyclers. But people don't come to me for coverage of toxic metals, or coverage of brominated flame retardants. They come to me for pollution liability. And when we look at a pollution risk, we don't just look at contaminants, we look at the overall risk."
Echoing Rodrigues, Keppel feels that one of AIG's strengths in this emerging market is the flexibility arising from its experience. "We have great resources, even our own engineering company. But we've also got 25 years' experience. Some of the other majors may have 10 or 15 years in the market, others maybe just two or three. And our strength is our creativity. Our products are set up to be flexible."
In contrast to AIG's broad lines of business, Gene Wingert, environmental specialist in loss-control services at Chubb, says his firm "does not have a specific program or product line (for e-scrap), but we do have a small number of policies out there under environmental site liability."
When Chubb writes business, "we focus on management practices," says Wingert. "We look at any incidents in the site, or releases from it. We look at our surveys, and at management practice from intake to separation with particular interest in handling. We are also very interested in training, and in tracking. It's not just physical handling, but also management practices."
If David Bennick, director of the environmental practice at Aon, had his way, OEMs and handlers alike would move even faster to cover their exposures. "This is certainly a relevant issue. E-toxics are gaining momentum and visibility. Under the Resource Conservation and Recovery Act, manufacturers could be ultimately liable. A lot of this stuff ends up in landfills, legally or not. It is very difficult to find the users or the sellers, but if a dump were to become a Superfund site, the manufacturers would face joint and several liability. And there are electronic components in everything these days. So there are probably some latent exposures out there."
To address that potential exposure, Aon has crafted an endorsement for nonowned disposal sites. Coverage is available for products disposed in a landfill or facility approved by the underwriter and scheduled onto the policy. In writing that endorsement, Aon encourages clients to develop an integrated environmental risk management program through final disposal.
Jim Cox, managing director of Aon's environmental practice, adds that "the level of interest (in all coverage) is rising."
"We are seeing schedules on the PALL contract for manufacturers, transporters, handlers and recyclers," says Cox. He also notes that case law is developing in this field. "The question is whether or not liability is sold along with the commodity," he says. "Where is the final obligation? Insurance has done well by the waste industry over the years, but terms are getting more onerous. Premiums, however, are remaining relatively flat."
Mark Vuono, executive underwriter for XL Environmental, says the main policy for the e-scrap market is a combined pollution and remediation legal liability. It covers costs for remediation, injury and damages. The main purchasers, he says, are mostly those with tangential exposure.
"We are seeing a lot of interest from hospitals and nursing homes, schools, and apartment buildings," says Vuono. "The entire real-estate sector is a big market for PARLL. Five years ago, the landfills were the key market, and real estate was a minor part of the portfolio. Now the landfill segment is stagnant."
Vuono also says that there has not been much business with local governments. "Municipalities typically do not go out to purchase special liability. I don't know if they are trying to self-insure, or hope to get coverage under their general liability policies."
He agrees that premiums have been flat because the market is more competitive, and adds, "Premiums today are only a fraction of what they were 10 or 15 years ago. Not only are we able to offer better pricing, but better terms and conditions. For us that is because we have a good spread of risk over many classes of business."
That competition, of course, is relative. Where there might be 50 companies competing in general liability, there may be six competing in pollution liability. Vuono says XL Environmental, which was known as ECS until it was acquired by XL in 1999, has been writing business in this field for 25 years.
Lynette Starin, an associate in risk control, stresses that, because of that experience, XL understands the technology and the exposures in e-scrap. "We have the background down to specific chemicals. Our clients appreciate that because many agents do not understand."
Keppel, at AIG, adds that technical expertise by carriers, especially in the absence of a major incident or lawsuit, may be helping to drive growth at a reasonable rate.
"In the past it was considered discretionary, but coverage is becoming more common," says Keppel. "Premiums are rising, but I really can't say by what percentage. If there are new regulations, there may be a spike, especially if the rules include financial responsibility. Many more people would choose to insure those exposures."
GREGORY DL MORRIS
is a writer based in New York City.
October 1, 2005
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