Morgan Stanley Eyes Insurer Environmental Reserves

By Susanne Sclafane

NU Online News Service, July 16, 4 :26 p.m.EDT?Can insurers' loss reserves withstand a new round ofenvironmental claims?[@@]

That's the question Morgan Stanley analysts are asking in aresearch report released today focusing on natural resource damagecosts?an easily forgotten component of the property-casualtyinsurance industry's potential tab for environmental exposures.

Natural resource damages are essentially assessments madeagainst corporations?pursued by state or Federal agencies on behalfof the public?where assessment dollars are used to restoreresources damaged by pollution. The funds are intended to restorenatural resources?land, fish, wildlife, drinking water supplies,etc.?to a pre-damaged state and to compensate the public for lossof use.

Corporations can seek coverage of NRD costs under existinginsurance policies, as they have for costs for cleanup and remedyof hazardous waste sites, third-party liability claims, andassociated litigation costs.

The report, "Environmental Liabilities: Wait, There's More," ispart of an ongoing look at the potential impact of environmentalliabilities on p-c insurers that Morgan Stanley began in April.

In the earlier report?"Forget-E-Not: Environmental LiabilitiesPoised to Rise?"?Morgan Stanley analysts looked only at"traditional pollution claims" for site cleanup and remediation.That report warned that politics and rating agency scrutiny couldboost environmental claims.

Focusing attention on non-traditional NRD claims, the latestreport highlights increased activity in New Jersey, where stateofficials announced (in late 2003) their intention to pursue NRDsat 4,000 sites. While NRD claims have been dormant historically,the N.J. activity has implications for other states that may learnfrom the Garden State, and for insurers, the report suggests.

Noting that New Jersey is home to 10 percent of the sites on theEnvironmental Protection Agency's National Priority List, andextrapolating an average cost for NRDs already recovered there ($40million for 48 N.J. sites) to the 4,000 site total, the cost couldbe $3.5 billion just for New Jersey.

Emphasizing the rough nature of this estimate, the report says,"We are reluctant to apply a factor of ten" to that to reflectpotential national NRD costs. "But clearly this is not a trivialrisk for the [insurance] industry."

The report provides historical background on NRDs, created underthe Superfund law (the Comprehensive Environmental Response,Compensation and Liability Act of 1980), noting that NRDs areprobably not contemplated in most insurers' already weakenvironmental reserves.

While case law is developing, there is good reason to think NRDclaims are covered by insurance, Morgan Stanley said, notinghowever that there are some mitigating factors for insurers.

One mitigating factor is the existence of a CERCLA provisionthat says that damages which took place before CERCLA passed cannotbe pursued. This provision, together with the fact that insurersput absolute pollution exclusions in policies in 1986, argues for alower potential exposure but is subject to interpretations as towhen the damage took place, Morgan Stanley pointed out.