Insurance Risks and Water Quality

Thursday, January 30, 2014,

11:50 am to 1:30 pm EST

The opinions expressed and the material provided are those of TTG. MSO has not validated any representations made as to data, or any other information presented herein.

Agenda

• Welcome and Introductions

• Types of risk to water quality

• Who are the stakeholders in the value chain of water quality?

• Q & A

• Insurance industry implications

• Conclusion

• Q & A

• Actions going forward and follow up

Welcome

Jan Scites, CEO & President, MSO

• TTG Vendor partner with MSO • Survey on Green and Sustainability 2013 • Webinar terrific response • MSO national footprint • MSO committed to providing education to the

insurance industry

Welcome

• Transitioning to Green, LLC – Help organizations determine where they are, where they want to

go and how they can get there in the green economy

– We do this through, consulting, training and LeaderShip for Sustainability.

• Our promise is simple… by applying “holistic sustainability” business practices, we assist every organization we touch to simultaneously and synergistically:

– Engage your People

– Sustain Our Planet

– Optimize your Profitability 4

Jeana Wirtenberg, President & CEO, Transitioning to Green

Today’s Presenters

• Bill Russell, Principal, Transitioning to Green, LLC – Chemical Engineer, MBA-Finance – Hazardous waste site investigator / engineer – Former US environmental practice leader of

PwC • Expert witness on Superfund and Asbestos

Litigation • Advisor to insurance industry on new

environmental risk products • Advisor to industry on Sustainable Enterprise

practices

– Professor, Green Accounting Columbia University

5

• Linda Kelley, Principal, Transitioning to Green, LLC – Enterprise Ecologist

– Artist and naturalist

– Practitioner of whole systems approach to strategy, innovation, leadership , collaboration, and learning

– Consultant to business and government

– Pioneer in virtual technologies for collaborative learning

Transitioning to Green MSO Webinars

• High level perspective of sustainability related to insurance risks

• Highlighting the nexus between traditional insurance interests and the emerging nexus of energy, water and food

• A series of three webinars that address concerns and interests expressed by insurance professionals in the MSO Survey in the Spring of 2013

– Hydraulic Fracking and Insurance – Insurance Risks and Water Quality – Issues of Food Security and Insurance

Top Industry Risks Related to Greening, continued

29

40

43

10

0

3

1038

0 20 40 60

8

7

12

4

Column1

Column2

Column3

Important

Critical

4. How important are risks related to water and energy quality and reliability?

12. How important is quantifying economic impacts and financial value of "green" risks?

7. How important are risk issues related to air pollution, smog and indoor air quality?

8. How important are risk issues related to wetlands preservation, biodiversity and ecosystem conservation?

Important + Critical = 39%

Important + Critical = 48%

Important + Critical = 46%

Important + Critical = 40%

Top Industry Risks Related to Greening, continued

Important + Critical = 36%

Important + Critical = 30%

Important + Critical = 26%

Important + Critical = 16%

3. How important are risks related to green vehicles, accidents and repair?

11. How important is green marketing and false advertising liabilities related to "greenwashing"?

1. From your company's perspective, how important is assessing risks related to green buildings certifications and service professionals performance claims (e.g. architect design not able to achieve LEED Gold certification level as originally planned?)

10. How important are Directors and Officers insurance policy implications/riders for green/sustainability business practices?

Water-Food-Energy nexus

Water, food and energy are inexorably interconnected

Business and water are linked

http://www.lloyds.com/~/media/Lloyds/Reports/360/360%20Climate%20reports/7209_360_Water_Scarcity_AW.pdf

Insurance Risk and Water Quality

The risk to water supply and quality is increasing along with the rapid growth in both public and private demand for its use.

Severe weather events such as storms and flooding combined with aging infrastructure, faulty handling of waste, and inadequate system design among other factors contribute to increased liability exposure for insurers.

In this webinar we will use case examples to look at some of the critical issues that insurers are facing as risks to water quality.

Sources of Freshwater

• Lakes and reservoirs

• Rivers

• Aquifers

• Ocean desalination

• Recycled water, purified for reuse

Types of Risks to Water Quality

• Water contamination – Accidental and careless

– Malicious or intentional

• Water infrastructure deterioration

• Storms and overflows

• Droughts

Contamination: Toxic Algae and Bacteria

• Toxic algae in Lake Erie may threaten public water supplies

• Coliforms and e-Coli

http://oceanservice.noaa.gov/news/features/feb12/cyanobacteria.html

http://www.mlive.com/news/muskegon/index.ssf/2012/11/boil_water_order_in_effect_for.html

Contamination: antibiotics and endocrine disruptors in water supplies

• Flushed pharmaceuticals

• Antibiotics from farm animals

• Endocrine disruptors

– Beauty products

– Some Plastics

Water treatment plants remove only about half of the drugs, antibiotics and herbicides from drinking water

http://www.processingmagazine.com/articles/126456-wastewater-treatment-plants-remove-only-half-of-drugs-in-water

Dumped Waste

• Household • Industrial • Agricultural

http://enviropolicyintro.wordpress.com/2013/04/26/reduce-reuse-recycle/

Berkshire Environmental Action Team river cleanup

http://seaotters.com/2012/08/22/agricultural-runoff-bad-for-us-bad-for-otters/

Failing Water Infrastructure in the US • Wastewater: The grade for wastewater

improved slightly to a D. Capital investment needs for the nation’s wastewater and stormwater systems are estimated to total $298 billion over the next 20 years. Pipes represent the largest capital need, comprising three quarters of total needs.

• Nearly 170,000 public drinking water systems are located across the United States. Of these, 54,000 are community water systems that collectively serve more than 264 million people

.

• In all likelihood, businesses and households will be forced to adjust to unreliable water delivery by strengthening sustainable practices employed in production and daily water use. WWW.INFRASTRUCTUREREPORTCARD.ORG

Flood Insurance: Who pays what, where and how?

Popular Flood Insurance Law Is Target of Both Political Parties • “This week the Senate is expected to approve a measure that would block, repeal or delay many of the key provisions of

the Biggert-Waters Flood Insurance Reform Act”

• “The aim of the measure was to shift the financial risk of insuring flood-prone properties from taxpayers to the private market. Homeowners, rather than taxpayers, would shoulder the true cost of building in flood zones.”

http://www.nytimes.com/2014/01/29/us/politics/popular-flood-insurance-law-is-target-of-both-political-parties.html?_r=0

Cedar Rapids, Iowa: A traffic light above a flooded city street in Cedar Rapids, Iowa (June 13, 2008). Source: Scott Olson/Getty Images

Droughts happen…even in the Northeast and Mid-Atlantic

View of the Delaware River looking downstream from Morrisville, Pa. towards Trenton, N.J., Oct. 1963.

http://www.state.nj.us/drbc/hydrological/drought/

Who are the stakeholders in the value chain of water quality?

• Power plants • Agriculture • Restaurants • Homeowners • Municipalities • Water processors • Manufacturers • Fishing and recreation • And more…

http://www.limno.com/

Example: 1997 New York City Watershed Memorandum of Agreement

Stakeholders • The City of New York • The State of New York • The United States Environmental

Protection Agency • The Coalition of Watershed Towns

(West of the Hudson River) • The Catskill Watershed Corporation • The County of Putnam, New York • The County of Westchester • "Municipal Parties” (Counties,

Towns and Villages) • "Environmental Parties“ (nonprofit

environmental organizations)

NYC Watershed

Review of precedents, including water related superfund sites as examples and

case studies, and anticipating future risks

• Risk analysis of categories

– Water contamination from toxic metals

– Water contamination from pharmaceuticals

– Water infrastructure degradation

– Wastewater processing failures and inadequacies

• Natural resources damage claims

Clean Water Act

• The Clean Water Act (CWA) establishes the basic structure for regulating discharges of pollutants into the waters of the United States and regulating quality standards for surface waters.

• The CWA compliance assistance program provides businesses, federal facilities, local governments and tribes with tools to help meet environmental regulatory requirements.

The 1972 amendments to the Federal Water Pollution Control Act (known as the Clean Water Act or CWA) provide the statutory basis for the NPDES permit program and the basic structure for regulating the discharge of pollutants from point sources to waters of the United States. Section 402 of the CWA specifically required EPA to develop and implement the NPDES program.

Precautionary Principle to the wind Most chemicals in use have not been tested for human safety

• Pharmaceuticals and pesticides must have some testing before they are sold

• Industrial chemicals do not have required tests

• Companies are not required to provide any safety data for new chemicals

http://www.nytimes.com/2013/04/14/sunday-review/think-those-chemicals-have-been-tested.html

What spilled into West Virginia’s Elk River and how dangerous is it?

• 4-methylcyclohexane methanol (MCHM) is somewhat of a mystery compound • PPH, a mixture of polyglycol ethers (Freedom Industries is not being fully disclosing

the nature of the compound, claiming it is proprietary) • The real danger of these chemicals is unknown

AP

http://thedianerehmshow.org/shows/2014-01-23/new-chemical-identified-west-virginias-elk-river-spill http://www.businessweek.com/articles/2014-01-23/a-second-toxic-chemical-spilled-in-west-virginia-and-freedom-industries-said-nothing-until-now

Coping with no water

Bottled water for drinking, cooking, washing

Business in Charleston, WV closed. 300,000 people in 9 counties without safe drinking water for three days (14 Jan 2014)

www.huffingtonpost.com

• West Virginia-American Water is a private company that provides municipal drinking water to parts of 9 counties in this area of West Virginia, including the city of Charleston

• WVAW had a drinking water intake just a mile and a half downstream from Freedom’s chemical storage tanks on the Elk River

• “Asked over the weekend whether there should have been more oversight and emergency planning, Governor Tomblin replied, 'I'm not someone who runs West Virginia American Water.’” http://www.newyorker.com/online/blogs/newsdesk/2014/01/a-chemical-spill-along-the-elk-river-in-west-virginia.html

Freedom Industries Files Bankruptcy

• Freedom Industries is the product of a merger effective Dec. 31, 2013

• Elk River spill, January 9, 2014

• The company filed a Chapter 11 petition with the U.S. Bankruptcy Court in the Southern District of West Virginia on January 18, 2014

Freedom Industries President Gary Southern

Mayflower, AR, a lakeshore community, and its Exxon oil spill

• The spill

• The consequences

• The lawsuits

http://www.huffingtonpost.com/2013/05/30/mayflower-oil-spill-lawsuit_n_3359777.html

Q & A

Insurance Industry Implications

• Starting small: Water pipe insurance

• Expanding the system: Aging water infrastructure expanding risks

• Expanding the pockets: Duty to defend, class action suits

• Expanding the damage claims: Property value diminution suits and quantifying “stigma”

• Expanding the system again: Natural resource damages, intangibles, social costs and externalities

Homeowner Water Pipe Insurance

Homeowners are not aware that repairs to the water and sewer lines that run from their home’s exterior to the mains in the street are their responsibility.

NYC Insurance Case Example

• NYC DEP sends out a letter just after Superstorm Sandy announcing a new insurance program covering home water and sewer lines.

• The “aging pipes” are increasingly frail, and that, once they

burst, homeowners are liable for repairs. • Water line repairs range between $3,000 and $5,000 • Sewer line repairs range between $10,000 and $15,000. • Pricing – $3.99/month for water line protection, and $7.99 for

sewer, or $11.98 for both – is built right into your water bill, as opposed to an additional bill.

Homeowner water pipe insurance

• In 2012, the NYC DEP responded to more than 3,000

complaints of street leaks.

• 2,339 of these – 77 percent – were breaks to private infrastructure,”…

• Could not say how many of those were from wear-and-tear versus extraordinary circumstances.

• The insurance only covers normal wear and tear that come from age and use.

• Other factors, like contractors cut your service line, or a natural disaster, that’s not part of this program.

Municipal Water Pipe Claims

• Philadelphia water-main break floods part of city two summers ago has long been repaired, and the city has committed to paying for the damages.

• Water damage to dozens of homes

and businesses flooded that night - estimated at $2.8 million

• More than five times what the city is statutorily allowed to pay out.

Municipal Water Pipe Claims

• Claimants, including utility giants Verizon and Peco, fight for the $500,000 pot of city money.

• Verizon claiming more than $100,000 for damages to cables

and ducts during repair of the water main. • Peco largest claim of $932,448 for damage to underground

infrastructure. Peco is self-insured, but money is for when Peco liable for damages to customers.

• One homeowner filed a claim for $29,462 in damages and

their insurance does not cover flooding, so he has had to pay • He and others will likely only get a fraction of the cost back

from the city.

Municipal Water Pipe Claims

• State Sen. Larry Farnese (D., Phila.), whose district includes the area, introduces bill to raise the cap, set in 1980, to $2 million.

• Increase the claim cap in anticipation that other big water-

main breaks are bound to happen. • 2012 break just one of hundreds the city has each year. • Some pipes are more than a century old; the average age is

67.

Municipal Water Pipe Legislation

• November 24, 2013, Representative Earl Blumenauer (OR-03) introduced the bipartisan Water Protection and Reinvestment Trust Fund Act of 2013

• Bill would provide a small, deficit-neutral, protected source

of revenue to help states and local government replace, repair, and rehabilitate critical wastewater treatment facilities

• Creates a voluntary labeling and contributory system to which businesses that rely on a clean water source could opt-in.

Municipal Water Pipe Legislation • Businesses place a small label on their products indicating

their commitment to protecting America's clean water. • For each unit displaying a label, companies would

contribute $0.03 to the Water Trust Fund. • Blumenauer. “This bill doesn't cost the taxpayers a cent…

and yet allows businesses and the public to enjoy the benefits..”

West Virginia Water Contamination Suits

• “CHARLESTON – Less than 24 hours after a chemical leak began to wreak havoc on Charleston and surrounding areas, a class action complaint already had been filed against the company responsible.”

• “The complaint — filed by attorneys from Mani, Ellis & Layne PLLC and The Sutter Law Firm PLLC – says this is a West Virginia-only class action “to recover lost business profits and other damages for business entities affected by a government close order as a result of a chemical spill into the Elk River emanating from Defendant Freedom’s Etowah River Terminal, which was distributed to all water customers of West Virginia American Water Company”

• “The restaurants seek compensatory damages, interest, statutory damages, punitive damages, injunctive relief, attorney fees, costs and other relief.”

Other Insured Stakeholder Claims

• Homeowners

• Water Industry

• Government Suits – i.e. Attorney General files “citizen suit” seeking injunctive relief and civil penalties for

surface water contamination

Property Value Diminution Claims

Builds upon Fracking discussions, pollution exclusions and contaminated water claims.

• Diminution is sometimes used to denote a decrease in value caused by actual contamination of a property while stigma is sometimes used to refer to a decrease in value caused by a property’s association with contamination.

• Case law and articles generally use the terms interchangeably

Potential Fracking Claims

• Environmental/pollution claims: Any bodily injury or property damage caused as a result of hydrofracking-related pollution or groundwater contamination.

• Comprehensive general liability claims: Coverage for liability resulting from

bodily injury or property damage that takes place during the policy period and is caused by an occurrence. Unless specifically excluded, CGL policies usually also provide coverage for losses associated with products, completed operations, premises and operations, and contractors. Moreover, those entities involved in the storage, treatment, transportation and disposal of hydrofracking fluids face potential liability under their CGL policies (as well as other possible sources of coverage).

• Operators’ extra expense claims: Hydrofracking wells have occasionally suffered blowouts as a result of the large amounts and highly pressurized water, “proppants” (sand or ceramic beads) and chemicals that are injected into underground shale formations. Should a blowout occur, many of the energy and drilling companies could look to this type of insurance to cover their losses.

Property Value Diminution Claims

Limitations on Diminution Damages

(1) Physical contamination requirements

(2) The restricted availability of diminution damages when contamination is below regulatory levels, and

(3) The rule that plaintiffs may only obtain the lesser of the cost of repair or the loss of market value.

Property Value Diminution Claims

Limitations on Diminution Damages • The law governing diminution damages in

environmental cases has grown principally from that of nuisance. – The causes of action of negligence, negligence per se,

ultra-hazardous activity, and emotional distress typically pled for personal injury in toxic tort cannot support diminution claims.

– Trespass allows diminution in value as a measure of damages, but with its requirement of ‘‘physical invasion,’’ it is not applicable when property has not been contaminated.

Property Value Diminution Claims

DeSario vs. Industrial Excess Landfill Inc. • 1991, a published decision of the Ohio Court of

Appeals • Affirmed the certification of a diminution claim of a

class numbering over 1500 properties around a landfill even though many of the properties would not be contaminated.

• Its justification? ‘‘[T]o recover damages under a private nuisance theory, the plaintiffs need not show a physical intrusion onto their land

• [It] may be premised on the public’s perception of contamination irrespective of actual land contamination.’’

Diminished Property Value Claims in a Diminished Real Estate Market

• Claims of diminution damages necessarily depend on the performance of real estate as an asset generally. • As an asset, real estate has often cycled between periods of being coveted and shunned. • Environmental diminution damage cases have not

expressly addressed these market ups and downs. • Plaintiffs interested in excluding such discussion as it is a

potential alternative cause of their injury

Natural Resource Damages Claims

BP Oil Spill Ramifications:

• While we expect to see claims brought against policyholders central to the spill, such as BP, Halliburton, Transocean and related players,

• the "downstream” liability

claims may herald coverage disputes not previously contemplated by the underwriters.

Natural Resource Damages Claims

• Where injuries to natural resources have occurred as a result of releases of hazardous substances or oil as a result of natural resource injury, or as a result of implementation of a response action, damages are recoverable.

• EPA coordinates with the Department of the Interior to assess the natural resource damage, and calculate the monetary cost of restoring the natural resources.

• Damages to natural resources are evaluated by identifying the

functions or "services" provided by the resources, determining the baseline level of the services provided by the injured resource, and quantifying the reduction in service levels as a result of the contamination.

Warren Drilling Co. v. ACE American Ins. Co.

• Case involves an insurer’s (ACE American Insurance) refusal to extend coverage to its insured (Warren Drilling Company) for claims arising out of Warren’s fracking operations.

• In 2008, a homeowner claimed water was contaminated by pollutants from Warren’s fracking.

• Warren eventually settled its case with the homeowner but then sought to recover its legal fees from ACE for its refusal to defend and/or indemnify.

• For Warren to obtain a favorable ruling obligating ACE to indemnify it and to pay its legal fees, it had to show:

(1) The fracking resulted in an unexpected and unintended discharge of pollutants; and

(2) The discharge of pollutants was abrupt and instantaneous.

Pollution Exclusions

• General liability policies that were issued between the early 1970s and mid-1980s usually include the “qualified pollution exclusion.”

• This exclusion bars coverage for pollution related injuries to persons and property.

• The clause appears almost identically in all insurance policies.

This insurance does not apply…to bodily injury or property damage arising out of the discharge, dispersal, release or escape of ... toxic chemicals, liquids or gases, waste materials, or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

Pollution Exclusions

• Courts faced with coverage issues arising out of fracking operations may base their decisions on whether the claims asserted are barred by the pollution exclusion clause contained in the comprehensive general liability (CGL) policies issued by insurers.

• As for now, each individual needs to understand the specific wordings in their own policy in order to understand what to reasonably expect from their insurer.

Duty to Defend

• An insurer’s duty to defend is broader than its duty to indemnify.

• The insurer’s duty to defend arises when a complaint against the insured gives rise to any potential liability covered by the terms of the policy.

• The duty to defend exists even if the alleged claims are false or groundless.

• Additionally, the insured does not need to provide concrete evidence that the injuries were sudden and accidental; instead, the insured need only provide evidence of a reasonable possibility that the injuries were sudden and accidental.

Subrogation Recovery Opportunities

• Fracking, water contamination and or water supply disruptions all have the potential to generate a great deal of troublesome coverage and litigation issues!

• That said, it provides insureds with subrogation and recovery opportunities.

• Carriers should take appropriate steps from the outset to recognize contribution or indemnity claims against other companies or individuals who are arguably more responsible.

• Insurers facing claims against their property owner insureds should consider claims against those more directly involved on and around the property involved.

• Insurers met with claims against insureds that oversee the drilling activity must consider claims against their contractors to the extent clearly irresponsible activities may have given rise to such claims.

Subrogation Recovery Hurdles/Risks

• Factual Support: Plaintiffs have an uphill battle demonstrating a nexus between a particular contaminating (drilling) activity and alleged damages. – If a carrier indemnifies an insured for a covered loss, it then stands in

the shoes of the insured and must eventually demonstrate in any subrogation effort that the reimbursed damages were proximately caused by the negligent conduct of the subrogation targets identified.

• Contractual Limitations: Possibility exists contract contains risk allocation provisions that will limit or eliminate recovery efforts. – Hold harmless clauses.

– Arbitration clauses.

Water reclamation and recycling San Diego’s toilet to tap concept

• Irrigation

• Manufacturing

• Non-drinking

• Non-potable purposes

Recycled water gives San Diego a dependable, year-round, locally controlled water resource.

http://www.sandiego.gov/water/waterreuse/

Conclusion

• Claims examples from participants

• Actions going forward

• Follow-up

• Evaluation survey via email

Upcoming MSO Webinar by Transitioning to Green

In between the obvious risks from crop failures and livestock epidemics, and food contamination at the retail level are food security issues and risks that run through the entire food supply chain. Because there are so many interconnected threads in food security, it is important for insurers to have a grasp of the entire picture. In this webinar we will give an overview of food security and safety that includes operational, regulatory and environmental liabilities. We will use actual cases as examples.

Issues of food security and insurance Thursday, February 13, 2014

11:50 to 1:30 pm ET

Thank you for your participation