Water Crisis

Water Crisis Damages Flint Businesses

Flint businesses are seeing a loss of revenues and continue to face reputational damage.
By: | March 11, 2016 • 3 min read

Early this year, President Obama declared a state of emergency due to the water crisis in Flint, Mich., making the city and its residents eligible for federal disaster aid.

Officials eventually took action to make Flint’s water supply safer, but businesses still face reputational damage, loss of revenue and for the most part, no insurance coverage due to pollution exclusions.

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In April 2014, Flint switched from using Detroit’s water system to draw its own drinking water from the Flint River. Since then, the river’s acidic water corroded lead pipes, leaking lead into the city’s drinking water.

While residents began complaining in 2015 about the odd smell, taste, and discoloration of the water, public officials insisted it was safe to drink. That was until a September 2015 study by the Hurley Medical Center found that the number of children with above-average levels of lead in their blood nearly doubled after the city changed its water source.

Flint officials acknowledged the problem and the city started getting water from Detroit again the following month.

But the damage had already been done, not just to the thousands of residents who were exposed to high levels of lead, but to homes and businesses with lead plumbing that began to corrode from the acidity.

While a safer source of water is now in place, the physical and economic damages could mount for years.

Businesses in the city are “significantly impacted,” said George Wilkinson, group vice president of the Flint and Genese Chamber of Commerce.

The event is not only a public health crisis but an economic crisis that is resulting in a loss of sales and a halting of business operations, he said. It has been especially problematic for restaurants, hotels and those in the hospitality industry.

“They’re seeing a significant decline in [revenue]. There’s also an increase in expenses because they’re buying bottled water and having to install filtration systems,” Wilkinson said.

Flint’s restaurants now regularly test their water and some installed filtration systems that can cost up to $2,000 each.

While business owners can act to ensure their water is lead-free, the real problem is the reputational damage that the city faces, he said.

“They can be cleared by the Health Department but the real problem is the negative perception. The media is portraying Flint as a war zone,” Wilkinson said.

Flint business owners are largely left exposed because business interruption insurance has stringent pollution exclusions, said Micha Knapp, a producer at the Graham Co. in Philadelphia.

Most general liability and property policies preclude any business interruption or property damage arguments a customer could make, he said. In addition, commercial general liability policies do not cover risks associated with polluted water as they often contain an Absolute Pollution Exclusion or a Total Pollution Exclusion specific to lead.

“From a liability and property perspective, there’s often a suite of pollution exclusions that will remove any coverage for a pollutant or containment like lead. It can leave a company susceptible,” Knapp said.

Dave Walker, president of Hartland Insurance Agency in Hartland, Mich., said few businesses in Flint have the specialized insurance necessary to cover businesses losses.

“They would have to have expected this to have that kind of coverage in place. It’s not something most businesses carry,” he said. “Most will have to [cover losses] out of pocket.”

Knapp said it’s important for Flint businesses to continue to effectively test the water for environmental hazards that could impact customers’ health. He recommended they also consider eventually removing and replacing lead pipes on their properties.

Companies can also consider a Pollution Legal Liability insurance policy, which is geared specifically to the restaurant, hospitality and real estate sectors. Such coverage will also protect companies against liability and property damage associated with Legionella.

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“Most don’t have it but there are markets out there that will pick up that coverage,” Knapp said.

Flint’s water crisis could be a glimpse into a mounting national problem, according to experts.

Fitch Ratings said in early-March that there are more than 6 million lead water service lines in existence around the country, most of which are located in the Northeast and Midwest.

Dr. Jeffrey Griffiths, a professor of public health at Tufts University and a former chairman of an advisory board for the U.S. Environmental Protection Agency’s Drinking Water Committee, said in an article for the Detroit Free Press that many of the nation’s pipes can not be located or tested.

Craig Guillot is a writer and photographer, based in New Orleans. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

RIMS Conference Opens in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.
By: | April 21, 2017 • 4 min read

As RIMS begins its annual conference in Philadelphia, it’s worth remembering that the City of Brotherly Love is not just the birthplace of liberty, but it is the birthplace of insurance in the United States as well.

In 1751, Benjamin Franklin and members of Philadelphia’s first volunteer fire brigade conceived of an insurance company, eventually named The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

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For the first time in America — but certainly not for the last time – insurers became instrumental in protecting businesses by requiring safety inspections before agreeing to issue policies.

“That included fire brigades and the knowledge that a brick house was less susceptible to fire than a wood house,” said Martin Frappolli, director of knowledge resources at The Institutes.

It also included good hygiene habits, such as not placing oily rags next to a furnace and having a trap door to the roof to help the fire brigade fight roof and chimney blazes.

Businesses with high risk of fire, such as apothecary shops and brewers, were either denied policies or insured at significantly higher rates, according to the Independence Hall Association.

Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business, University of South Carolina

Before that, fire was generally “not considered an insurable risk because it was so common and so destructive,” Frappolli said.

“Over the years, we have developed a lot of really good hygiene habits regarding the risk of fire and a lot of those were prompted by the insurance considerations,” he said. “There are parallels in a lot of other areas.”

Insurance companies were instrumental in the creation of Underwriters Laboratories (UL), which helps create standards for electrical devices, and the Insurance Institute for Highway Safety, which works to improve the safety of vehicles and highways, said Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina and former president of the Insurance Information Institute.

Insurers have also been active through the years in strengthening building codes and promoting wiser land use and zoning rules, he said.

When shipping was the predominant mode of commercial transport, insurers were active in ports, making sure vessels were seaworthy, captains were experienced and cargoes were stored safety, particularly since it was the common, but hazardous, practice to transport oil in barrels, Hartwig said.

Some underwriters refused to insure ships that carried oil, he said.

When commercial enterprises engaged in hazardous activities and were charged more for insurance, “insurers were sending a message about risk,” he said.

In the industrial area, the common risk of boiler and machinery explosions led insurers to insist on inspections. “The idea was to prevent an accident from occurring,” Hartwig said. Insurers of the day – and some like FM Global and Hartford Steam Boiler continue to exist today — “took a very active and early role in prevention and risk management.”

Whenever insurance gets involved in business, the emphasis on safety, loss control and risk mitigation takes on a higher priority, Frappolli said.

“It’s a really good example of how consideration for insurance has driven the nature of what needs to be insured and leads to better and safer habits,” he said.

Workers’ compensation insurance prompted the same response, he said. When workers’ compensation laws were passed in the early 1900s, employee injuries were frequent and costly, especially in factories and for other physical types of work.

Because insurers wanted to reduce losses and employers wanted reduced insurance premiums, safety procedures were introduced.

“Employers knew insurance would cost a lot more if they didn’t do the things necessary to reduce employee injury,” Frappolli said.

Martin J. Frappolli, senior director of knowledge resources, The Institutes

Cyber risk, he said, is another example where insurance companies are helping employers reduce their risk of loss by increasing cyber hygiene.

Cyber risk is immature now, Frappolli said, but it’s similar in some ways to boiler and machinery explosions. “That was once horribly damaging, unpredictable and expensive,” he said. “With prompting from risk management and insurance, people were educated about it and learned how to mitigate that risk.

“Insurance is just one tool in the toolbox. A true risk manager appreciates and cares about mitigating the risk and not just securing a lower insurance rate.

“Someone looking at managing risk for the long term will take a longer view, and as a byproduct, that will lead to lower insurance rates.”

Whenever technology has evolved, Hartwig said, insurance has been instrumental in increasing safety, whether it was when railroads eclipsed sailing ships for commerce, or when trucking and aviation took precedence.

The risks of terrorism and cyber attacks have led insurance companies and brokers to partner with outside companies with expertise in prevention and reduction of potential losses, he said. That knowledge is transmitted to insureds, who are provided insurance coverage that results in financial resources even when the risk management methods fail to prevent a cyber attack.

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This year’s RIMS Conference in Philadelphia shares with risk managers much of the knowledge that has been developed on so many critical exposures. Interestingly enough, the opening reception is at The Franklin Institute, which celebrates some of Ben Franklin’s innovations.

But in-depth sessions on a variety of industry sectors as well as presentations on emerging risks, cyber risk management, risk finance, technology and claims management, as well as other issues of concern help risk managers prepare their organizations to face continuing disruption, and take advantage of successful mitigation techniques.

“This is just the next iteration of the insurance world,” Hartwig said. “The insurance industry constantly reinvents itself. It is always on the cutting edge of insuring new and different risks and that will never change.” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]