Social Inflation and Specialty Chemistry: Ironshore’s Toby Smith Addresses Today’s Surging Environmental Risks

The environmental risk and insurance sector always has its share of frightening risks. And they are ongoing.
By: | September 9, 2019

The environmental risk and insurance sector always had its share of frightening risks, it seems. And they are ongoing.

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In 2018, alone, the Environmental Protection Agency procured $453 million in SuperFund cleanup commitments from responsible parties, tacking on $80 million in administrative costs for good measure.

Since the SuperFund legislation was passed in 1980, the cleanup costs levied against property owners and other responsible parties has run into the tens of billions.

Add to that the long-tailed impact of mold in the aftermath of flooding and the sharp uptick in the frequency and severity of wildfires, and the space is bracing itself for more claims while it bears down on mitigation measures.

There are currently a handful of environmental risks that are giving underwriters pause and leaving risk managers with the impression that coverage, should they be able to find it, will be expensive and could be ringed with exclusions.

Toby Smith, the president of Ironshore Environmental, has decades of experience in environmental risk.

Here are his views on some of the environmental risks that are either producing outsized jury verdicts or are so pervasive or severe that they could represent a real threat to the bottom lines of insurance companies and their insureds.

Upstream and Midstream Energy

When it comes to the balance of power in energy resources, American industry has been in a celebratory mood for some years. The United States is now the leading oil producer in the world.

A natural gas, natural gas liquids and oil production surge, aided by technology that can crack geological layers to release the resources, has been a game changer. But as substantial as this transformation is, it carries risks, among them, fires, well blowouts, pipeline failures and disposal issues with the water used in the fracking process.

Toby Smith, president, Ironshore Environmental

What’s called “produced water” has produced a surprising number of costly claims.

“Produced water absolutely is one of the factors in the increase of claims in that space,” Smith said.

Smith referred to a number of high-profile cases where produced water from a drilling operation spilled into a creek, carrying the salts and other minerals involved in the gas release process.

“States are pursuing water spills very aggressively,” Smith said.

To manage a spill like that, you might have to dam the creek, pump off the impacted water, put it in container trucks and haul it to a certified disposal site.

He said claims of $10 million plus in this scenario are not unheard of: “We spend more money cleaning up produced water spills than we spend cleaning up oil spills, and that was unexpected, to be sure.”

Smith also points to some eye-opening events in the midstream side of the energy business.

Refinery fires in recent years have produced losses in the hundreds of millions.

“We certainly didn’t think, and I don’t think anyone thought, that a terminal posed a risk that could be hundreds of millions of dollars,” Smith said.

“We always thought pipelines had that risk, but to see it at a terminal is an eye-opener.”

A significant additional risk in midstream energy is aging infrastructure, specifically aging pipelines, and the impact of that on claims.

Failures in defective seam welds and the fact that a lot of pipe that’s in the ground was placed there pre-1980 is part of the problem, Smith said.

Weather is another factor. Extreme heat and extreme cold can wreak havoc on energy infrastructure.

“We get lightning strikes, we get floods, we get freeze,” Smith said.

In one instance, negative 60-degree temperatures in North Dakota caused a valve to freeze and crack.

Thousands of barrels of oil were released, oil that needed to be cleaned up in those same frigid temperatures.

“It’s just a multiplier to clean up in that kind of cold,” Smith said.

And then there’s human error.

“One of our biggest claims came from a worker who fell asleep on the job. So, you can do all the right things and still end up with an expensive claim.”

PFAS

Perfluorooctanoic acid, or PFOA, the mere mention of this chemical is giving economic stakeholders the shivers. Used in nonstick cookware, firefighting foam, pizza boxes and a host of other applications, this extremely stable, long-lived substance represents a broad environmental threat, having been identified as a cancer-causing agent.

Regulators are keen to impose penalties on anyone involved in the manufacture or sale of substances containing it.

“I think it’s going to be an enormous deal,” Smith said.

“You’ve got some of the core manufacturers, and they’ve settled massive claims in various states around the country,” Smith said.

“So you’ve got the manufacturers, but then you have everyone downstream of them as well,” he said.

“Unless our current understanding changes, there are going to be PFAS claims for the next 50 years.” — Toby Smith, president, Ironshore Environmental

“You’re going to have dozens if not hundreds, if not thousands of defendants and you’re going to see it in all 50 states,” he said.

Smith said the regulations that are being written around this chemical are mind-boggling.

“I have done this for 16 years and I have never seen something that is so fast-paced in the rule-making space,” he said.

“Unless our current understanding changes, there are going to be PFAS claims for the next 50 years,” Smith said.

Glyphosate

The active ingredient in the popular weed killer Roundup has sparked its own raft of jury verdicts lately.

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One eye-catching court result coming out of Oakland, Calif. saw $2 billion awarded to a couple who said use of the weed killer caused their cancer. According to news reports, more than 13,400 legal actions are lined up against Monsanto and its parent company Bayer.

“Obviously, the Glyphosate verdicts are pretty astonishing,” Smith said.

And here is where the concept of social inflation, which has already caused some arched eyebrows and sweaty palms among general liability underwriters, may be elbowing its way into the environmental space.

“You go back a few years and you might see $1 million, $2 or $3 million claims, but not $80 million,” Smith said.

The science on Glyphosate is mixed; the linkage between its use and human health problems is certainly not as strong as the research around PFAS is.

“There’s a lot to get sorted out there,” Smith said.

But science aside, it’s the swell of social inflation that he finds more worrying.

“I think the bigger thing is the size of these verdicts. All of us should be on full alert because it’s probably going to transcend to different areas as well,” he said.

Mold

Environmental underwriters are well familiar with mold as a risk.

But concerns over exposure to mold are becoming pronounced in hotel and health care settings and in the public sector, particularly primary and secondary education buildings.

Say you send the kids home for the summer. Someone comes in to clean the carpets, but they leave without airing out the room. Suddenly you’ve got mold all over the place, scared parents and teachers and you have to go rent some trailers for classrooms until the problem is fixed.

“The last number of years we have seen a tremendous number of claims in the K-12 world,” Smith said.

The weather may be a factor but Smith said, “I think there is a more general awareness of mold and getting it covered.”

“If you talk to 10 environmental insurance carriers, all 10 of them would tell you that mold costs are becoming more frequent and more severe every year,” Smith said.

Smith said the environmental insurance industry made a big push into the health care and hospitality space about 10 years ago, and is now seeing mold claims as hospital and hotel executives commission renovations and see mold in places they didn’t know it existed.

Tread Carefully

Smith said it’s the nature of the environmental underwriting business that three good years can be followed by one very painful year.

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In energy in particular, many underwriters have pulled back capacity due to staggering losses such as refinery fires and explosions, and a rash of pipeline breaks.

Smith knows the space, and plans to remain very active in it, but still views it with great caution.

“You need to have great respect for the volatility in this space, but also be prepared to provide tremendous financial and other support to your clients when disaster strikes.

“Bad things happen to solid operators, and we not only are here pay their claims and offer environmental expertise along the way but also to continue to support their insurance needs after disaster. We’re proud that we’ve renewed programs after some of the largest losses we’ve seen, which leads to loyal partnerships.” &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

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