An Inconvenient Mess

Disaster is a strong word, but cleaning up an environmental mess — whether it results from a fuel oil or hydraulic fluid spill from a garbage truck accident, or years of illegal waste dumping — can turn disastrous if not handled effectively. The cost of a 200-gallon diesel fuel spill along a highway may be deemed a minor incident by a large oil company but could devastate a small trucking company.

From an individual company's perspective, the severity of the environmental crisis depends on several factors:

  • Environmental impact

    The environmental impact of an incident can be assessed shortly after the event takes place. If the event results in the release of hazardous substances, they may cause damage to soil, surface water, groundwater and air, incurring significant cleanup costs. The company is also subject to large fines and penalties for damage to natural resources.

  • Impact on human health

    People that are injured, sickened or killed as a result of an environmental incident are among the greatest liability that a company may face. Liability will vary depending on the toxicity of the material released, the route of exposure, the length of exposure and the pre-disposition of exposed individuals.

  • Property damage

    Even after the environmental impact has been remediated, other property damages may have been sustained.

  • Business interruption

    The impact on the business of the responsible party is no less significant than the three exposures described above.

Preparing for all four potential economic impacts of an environmental incident is critical to reducing costs and controlling liability.

One of the most important ways to minimize liability in an environmental incident is through rapid response to the crisis. Often, that means sending environmental consultants, remediation contractors and claims experts to the scene of an environmental incident — be it a fuel oil spill on a highway, a ruptured sewer or the discovery of a leaking storage tank. Early containment of a spill or the safe evacuation of area residents may keep an incident from becoming a complete disaster.

Developing a response plan is a crucial part of rapid response. In fact, current environmental regulations require many facilities to establish protocols to deal with a spill situation. These regulations are meant to protect the environment. However, such preparations also will reduce the risks to human health as well as the likelihood of business and property damage. Unfortunately, many response plans fail when called upon because companies neglect to practice those protocols. Conducting periodic mock drills, for instance, will help ensure that the emergency response plan is effective when it needs to be.

An environmental incident is best handled by a primary incident commander (IC), the individual designated to spearhead containment and cleanup efforts. When an incident occurs, all eyes will be on the IC and the cost incurred will be heavily influenced by the capabilities and decisions of the IC. As a precaution, be sure to designate a backup IC.

Pre-qualification of environmental emergency response contractors and consultants can determine which vendors have the proper equipment, trained personnel and appropriate insurance coverage to handle a situation. This inventory process also allows a business to pre-arrange rates, terms and conditions, which will speed their mobilization when the time comes.

Likewise, the adequacy of a company's insurance coverage is an important consideration. Commercial general liability (CGL) policies likely do not cover environmental liabilities. Most CGL policies, for instance, offer little or no pollution coverage. When pollution coverage is offered, it is usually limited in scope.

Therefore, it is important to know the extent of a company's protection and to consider the purchase of a separate policy to address clean ups. Another advantage of such specialized coverage is access to expertise, including technical consultants and law and claims experts. Such expertise can facilitate a quick response to an environmental incident, which will minimize potential liability and control clean up costs.
Kate McGinn
XL Specialty Insurance Company