NRD Claims Muddy Insurance Waters
The black hole of insurance liability may be shrinking for pollution cleanups, but experts warn that natural resource damages assessment might be the next big problem.
Kevin Bruno, a lawyer for Robertson, Freilich, Bruno & Cohen in Newark, N.J., labeled NRD the next “black hole of environmental liabilities.”
The history of NRD dates back to 1980 and the passage of the Comprehensive Environmental Response, Compensation and Liability Act, explained William Wilt, an analyst for Morgan Stanley in New York, who alerted investors to the issue in a July 2004 research report.
CERCLA gave the Environmental Protection Agency authority to appoint trustees federal or state agencies to act on behalf of the public to seek compensation from polluters for destruction of natural resources, he said. Resources include marshlands, wildlife habitats, drinking water supplies and fishing areas.
“You can spend millions cleaning up a site and once you’re done, you still face a multimillion-dollar NRD exposure,” said Peter Mintzer, an attorney for Cozen O’Connor in Seattle. With NRD, he said, “you’re dealing with a group of trustees that can include the National Oceanographic and Atmospheric Administration, the National Marine Fishery Service, and Indian tribes that have treaty fishing rights.”
Mr. Bruno said that “one of the most complicated things [is] that damages are not easily quantified,” contrasting an NRD valuation with a more concrete cleanup situation. He went on to describe a method that consultants might use to set a value.
“They might survey thousands of households, asking, If you were planning a vacation to Idaho and you wanted to see pristine forest and came across an open mine site instead, what would be the value lost to you?” he said. If the average person would pay $1, they might multiply that by the number of people who visit the state each year and then by a number of years. “That’s just one component of the NRD determination. You can see how numbers get into tens or hundreds of millions.”
Mr. Bruno’s example was a simplified description of a process that is much more complex. Understanding all of that is probably “beyond the scope of your article,” Mr. Mintzer advised, after trying to explain studies known as “Habitat Equivalency Analyses” and injury measures known as DSAYs discount service acre years.
Consultants “look at what was the pollution discharge, what area of waterway was damaged; they put that into a black box and crank it up,” he said. Estimates can be “millions of dollars apart,” he noted. “On just about every variable in the econometric model, there’s huge room for debate.”
Mr. Bruno said that for the regulated community, the most recent concern is involvement of states in this process and New Jersey, in particular.
New Jersey is “drawing the attention of just about everyone,” not only because the state’s Department of Environmental Protection announced its intention to address 4,000 NRD claims in 2003, but because of a novel approach that involves using a private plaintiffs’ attorney, working on a contingency fee basis, to recover damages.
The state uses a simple formula to try to develop “what they term is a settlement number.” If companies don’t settle, “it goes to litigation, and the state reserves the right to come up with a completely different and much larger number,” he said.
The formula claim “that has really thrown people” was a $950 million assessment on 66 companies for alleged damage to the Passaic River Basin, he said.
According to an N.J. DEP statement, the formula calculates groundwater injury by estimating the volume of contaminated water, the value of water and the duration of the injury to arrive at a settlement amount.
Regulated entities are most concerned about the state’s decision to retain Louisiana plaintiffs lawyer Allan Kanner “to function essentially as a private attorney general” if litigation is started at any of sites, he said.
Mr. Kanner has not brought any cases so far. As this article went to press, a report in the New Jersey Star Ledger suggested that the state attorney general’s office had been pulling back his authority and that a looming statute of limitations might further limit his ability to launch multimillion-dollar suits.
Other concerns relate to the formula amount that companies must accept or face litigation. The formula “analysis doesn’t address the fact that some groundwater, even where there’s been no pollution impact, can’t be used because it’s brackish in quality,” Mr. Bruno said.
Both Mr. Bruno and Mr. Mintzer said that some insurers have been released from NRD exposures with policy buyouts, but they had different assessments of when such releases were put in place.
Mr. Bruno believes that more recent policy releases, starting about five years ago, included resolutions of NRD claims. Mr. Mintzer said that while old settlements had very broad releases, newer ones have specific carve-outs allowing policyholders to go back to their policies for NRD coverage.
Still, “many insurers have not settled out environmental liabilities at all. Or they’ve settled for certain sites, but not others,” Mr. Mintzer added.
Laurence Eisenstein, a lawyer for the Washington-based firm Eisenstein Malanchuk, agreed that more recent buyouts release insurers from NRD claims.
“Were seeing more NRD claims than before, but it hasn’t been an explosion,” he said. “I think there’s a tendency to say environmental [cleanup exposure] is diminishing, but NRD is popping up. I don’t want to minimize NRD, but even if you had no NRD, we’d be busy for many years.”
Reproduced from National Underwriter Edition, April 8, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.