Most tenants assume their rented home will be a safe environment. But what if they couldn't really breathe easily in their home because the air was contaminated?
When we think of environmental risk, we think of the traditional causes — fires, explosions, leaking tanks or pipelines, and spills. While major catastrophe claims for traditional environmental exposures continue to comprise the majority of claims processed, new emerging risks like microbial contamination or secondary contamination are becoming major contributors to environmental risk claims. These emerging risks have risen in cost and frequency over the last five years, predominantly driven by an increase in extreme weather. Insurers and their clients can protect against both traditional and emerging environmental risks by understanding them and reviewing the past few years to see what can be learned about the changing environmental risk landscape.
Weather events and climate change
Climate change is a worldwide concern, and the rise of extreme weather events — severe hurricanes and tornadoes due to the El Niño phenomenon — contributes greatly to the increase in emerging environmental risk, as does flooding from rain storms. Extreme weather events like Hurricane Sandy also caused massive sewage backups.
For Sandy, this led to sewage overflows in which “11 billion gallons of untreated and partially treated sewage flowed into rivers, bays, canals, and in some cases, city streets, largely as a result of record storm-surge flooding that swamped the region's major sewage treatment facilities” says Climate Central. Lives and homes were destroyed, but sewage backups of this nature also resulted in mold, which left insurers with the additional dilemma of determining what was general liability and what was environmental risk to help their clients with response management and claims.
While flooding triggers traditional environmental risks like mold from water damage, pollutants and leakage, non-traditional impacts from microbial contaminants are also on the rise and insureds should be aware of the risks and costs associated with clean-up, remediation and prevention.
The Centers for Disease Control and Prevention (CDC) defines Legionella as a water-borne bacterium, which grows best in cooling towers and large plumbing systems. It has gained recognition from recent high-profile contamination cases and causes illnesses such as Legionnaire's disease and Pontiac fever when people inhale mist or vapor in which the bacterium is present. In an article published by Cambridge University Press, researchers found that “studies that have focused specifically on water quality parameters and microbial growth have shown that many bacteria and protozoa increase in water samples after rain,” indicating a relationship between these illnesses and the amount of rainfall.
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Contaminated soil or groundwater can release volatile chemical vapors into a building. (Photo: iStock)
Another dangerous emerging exposure that is becoming more prevalent involves vapor intrusion.
When soil or ground water is contaminated, it can release vapors that enable volatile chemicals to move into the indoor air of a building [New York Dept. of Environmental Conservation]. While vapor intrusion has commanded much regulatory attention and concern recently, it is still not a major driver of environmental claims. However, it remains a concern for future loss emergence and should be factored into risk management decisions.
In addition to vapor intrusion, other air pollutants such as microbial contamination can increase the cost of claims if they are not properly managed and lead to lawsuits. The Clean Air Act and Clean Water Act were established to regulate air emissions and the discharges of pollutants into water. As a result, citizens have had the ability to bring lawsuits against those who violate the National Ambient Air Quality Standards or discharge pollutants into navigable waters without a permit.
Assessing financial risks
Extreme weather events have a broad-reaching impact. But who suffers financially from them? Small manufacturers, contractors and real estate companies have much at stake in the face of emerging environmental risks. By acknowledging and preparing for these risks, they can protect the value of their assets, namely their real estate. Understanding the risks inherent with extreme weather also enables commercial real estate owners to protect their investments and minimize risk.
These parties must also manage another aspect of extreme weather — the cost of cleaning up the aftermath. The damage from Hurricane Sandy was estimated to be $70 billion spread across eight states. More recently, a severe storm in Portland, Ore., caused heavy rain and flooding that filled the city, and even entered buildings. In one case, flood waters entered an elevator shaft and the oil normally in the elevator shaft mixed with the water, making a bad situation worse. Usually, flood water can be pumped back into the drain system, but water contaminated with oil requires special disposal, which increases the cost and activates an environmental policy.
Contractors face these types of risks when they assume the costs of oil cleanup from day tanks. They are also at risk when construction efforts contaminate the site.
Pollution caused by an adjoining property is a less common risk, but has similar effects. In these cases, pollutants migrate and contaminate surrounding areas, and whoever is responsible for the source of the pollution is liable. Causes may include sewage, oil, underground storage tanks, even dry cleaning fluids.
However, natural resource damages pose a much greater threat to contractors. When a person's or a business's actions hurt the environment, the government quantifies what the value of that damage is worth. The government agency then issues a fine, which can total six to seven figures. In New Jersey, a judge approved a $225 million judgement against ExxonMobil Corp. to resolve natural damage claims. The ruling caused public outcry and disappointment because the state's original analysis of the damage quantified it at $8.9 billion.
Unlike natural resource damage assessments, which can be caused by one's own negligence, in non-owned disposal sites, the originator of waste is financially responsible for the cleanup even if the waste was disposed of properly at an approved facility. Essentially, the producer of waste is responsible for the waste forever, long after it has been sent to a landfill. If a disposal site has an environmental issue, the Environmental Protection Agency will require the original owners of the waste to bear the cleanup cost.
There are a number of emerging environmental risks today. Some are easy to see and others may appear invisible. Individuals with a vested interest in real estate holdings should be aware of and address these threats. Traditional environmental hazards like fires, explosions, tank leakage, and other perils still contribute to the top severity claims, but as environmental risks evolve and new kinds emerge, it is important to evaluate how liability insurance can help manage them.
Marcel Ricciardelli is senior vice president of Allied World Assurance's environmental and engineering division. He is based in Philadelphia.
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