Distilling Dilemma

The Devilish Details in the ‘Angels’ Share

Whiskey fungus litigation fueled by ethanol emissions complicates liquor production.
By: | December 1, 2013 • 7 min read

As glasses clink with the warmth of whiskey this coming winter, class-action lawsuits are also heating up in the courts.

Plaintiffs have claimed that the making of whiskey is causing the growth of black gunk on structures near the distilleries. Attorneys and risk managers following the “whiskey fungus” cases agreed this will not evolve into the next asbestos or tobacco litigation, but the dispute is an instructive case in emerging environmental risk management.

When spirits are aged, roughly 2 percent of the ethanol escapes through the wood of the barrels. Since antiquity that has been known as “the angels’ share.” Whiskey fungus has also been known for centuries, and has been identified as Baudoinia compniacensis. It is not known to be hazardous to human health, as are other fungus and the mold infamous around New Orleans in the aftermath of Hurricane Katrina. It also is not known to be a threat to the structural integrity of buildings. Rather, it creates a gummy, sooty film on walls and vehicles. It can be scrubbed off with bleach or power washed, but it is tenacious.

The City of Louisville, Ky., published a report in 2012 tracing whiskey fungus complaints in the area to 2006. In June 2012, several homeowners in the city filed class-action suits against five regional distillers. There are several cases, but the lead case is now styled Merrick et al. vs. Diageo.


The plaintiffs allege that “as a result of the accumulation of whiskey fungus caused by defendants’ operations, plaintiffs and others similarly situated are required to expend an abnormal amount of time and money cleaning surfaces in and around their property, including gutters, siding, fencing and cars; [and that] whiskey fungus and the extreme cleaning methods necessary for its removal cause early weathering of surfaces affected by the fungus.”

At press time, the court was considering Diageo’s motion to dismiss the first amended complaint. In its motion, the company noted that its “allegedly tortious conduct, the emission of ethanol from whiskey aging or other facilities, falls directly within the class of activities regulated by the Clean Air Act, [and that] ethanol emissions are explicitly authorized by state operating permits issued under the CAA.” The defendants further asserted that the fungus is ambient in the environment and therefore not their responsibility.

R12-13p30-32_03alcohol.indd“Is this an insurable risk, or is this the cost of doing business? If insurers see claims like this continuing, then it becomes likely this type of thing will be considered a normal part of the business and is likely to be excluded from policies.”
— Kenneth Cornell, executive vice president and chief underwriter for Aspen Environmental, part of Aspen Insurance Holdings

The issues being addressed are characteristic of a lot of emerging environmental risks, said Kenneth Cornell, executive vice president and chief underwriter for Aspen Environmental, part of Aspen Insurance Holdings. “So far, the claims, both insurance and legal, are for property damage. There is always the potential for bodily damage, though, because the science is not perfect.”

The insurance implications for the whiskey fungus depend largely on the outcome of the Kentucky cases, and to a lesser extent similar litigation taking place in Scotland. “Is this an insurable risk, or is this the cost of doing business?” Cornell asked. “If insurers see claims like this continuing, then it becomes likely this type of thing will be considered a normal part of the business and is likely to be excluded from policies.”

At that point, Cornell added, “you would get to some interesting risk management decisions. As the distillers have pointed out, they are operating in compliance with their air permits. The question is if they could — or whether they would want to — try to capture or manage ethanol emissions in some way. A lot turns on the class-action suits in Kentucky, but the risk-management part here needs to be studied further in any case.”

Specific to underwriting Cornell noted that the key question is to what extent the distillers have or can exert control over the ethanol emissions from their aging warehouses.

A Centuries-Old Dilemma

David Rieser, special counsel in the environment and regulatory practice at law firm Much Shelist, does not downplay the broader environmental implications of situations like that of the whiskey fungus, but also tries to keep this particular hazard in perspective. “This condition has been known for centuries. If there were a serious health problem, my sense is that it would be well known, too. For example, we have the term ‘mad as a hatter,’ from the use of mercury in treating pelts.”

The challenge with whiskey fungus does not appear to be its serious threat to people or property, but rather its ubiquity and that it tends to be a “chronic problem,” Rieser said. Those conditions also pose a challenge for attorneys and underwriters, he added. “Because of the ubiquity of the fungus in the environment, it is difficult to establish a cause-effect relationship.”

R12-13p30-32_03alcohol.indd“Now with class-action litigation under way, carriers will be less likely or willing to cover such exposures.”
— Matt Pateidl, vice president of Environmental Risk, Lockton Cos.

Putting fungus and mold issues into perspective, Rieser said that “10 years ago in environmental law, many people were afraid mold would become the next asbestos. That has not really happened. There are health and property damage concerns, but not as serious in most cases as once was feared.”

The risk management lesson here, Rieser said, is that awareness of environmental hazards continues to evolve. “For distillers, their insurers, and their neighbors, the assumption has long been that the angels’ share just evaporates from the casks and that is the end of it. As with many environmental risks, now we are learning that may not be the end of it.”

At least the damage seems to be cosmetic and not structural, said Rieser. “Since the flurry of coverage last year, I have searched through the trade press and legal publications and as far as I have found, whiskey fungus does appear to be very limited in its impact, so far.”


He stressed “so far,” because one of the fast-growing segments of the spirits sector is craft distilling. Riding the coattails of the national renaissance in craft brewing, artisanal distillers are popping up all over. “I handle lots of permitting,” Rieser said. And while a major corporation might be able to handle litigation regarding whiskey fungus claims, such a burden would be heavy on a small operation, he said.

In any case, Rieser urged distillers to be vigilant. “I certainly would not be out knocking on doors, you don’t want to put ideas in anyone’s head. But, be aware. Look around your area for evidence of the fungus.” He also urged anyone in the field to keep current on the litigation and to stay abreast of coverage in the trade press.

Historical Context

There could be other exposures as well, said Matt Pateidl, vice president of environmental risk at Lockton Cos. “We have seen instances of mold in areas around bakeries, but not around breweries. So far, the links to this type of surface growth is around spirits and baking.”

Taking the historic context back an order of magnitude Pateidl cited a biblical reference (Leviticus 14:43-53) as the first historical reference for a mold remediation plan. He sees a similar pattern in the insurance and legal developments around whiskey fungus as was seen in mold exposures. “At first there was a thought that mold was gold,” said Pateidl. “We started seeing mold exclusions in general liability coverage. Now that whiskey fungus is spawning lawsuits, we may see the same type of exclusions being added.”

Pateidl said the essential question is whether the whiskey fungus is an insurable condition, either for distillers or for their neighbors. But the time may have passed for that contemplation. “Now with class-action litigation under way, carriers will be less likely or willing to cover such exposures.”

He likened the situation to the debates and litigation over odors from feedlots or “confined animal feeding facilities.” There were insurance claims and lawsuits turning on the point of “diminution of value.”

Pateidl also offered a cautionary note: “The insurance industry mostly saw the odor claims as nuisance claims, but there were several multi-million-dollar rulings.”


Bringing the discussions back around to the key point in the Kentucky class action, Pateidl stressed that there have been no claims that the distillers violated their air permits.

If the litigation continues or even grows, there is always the chance that legislators or regulators may look into fugitive emissions in future permit rules.

“For insureds and their carriers, the first question is whether these emissions can be captured or prevented from migrating,” said Pateidl.

“With class actions under way, carriers are going to be very cautious about issuing policies to cover this situation. They will look at coverage case by case and client by client,” he said. “I’m not saying it would not be covered, but it will be heavily underwritten and closely scrutinized.”


Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]