Forest products companies in Canada today face intense scrutiny of their environmental performance by a wide variety of interested parties. And while many such companies spend millions of dollars to protect the environment in which they operate, and have developed environmental management systems, losses from pollution incidents, either gradual or sudden, can still occur. Such companies may not have considered all the options for protecting their corporate image and enhancing their balance sheet.

Environmental liability insurance, which has developed in response to coverage gaps in property and general liability policies, can play an important role in a company's response to society's ever-changing environmental expectations.

Over the past two decades, general liability policies have typically contained major limitations or exclusions for environmental liability. For example, general liability policies often exclude coverage unless the pollution results from a hostile fire, or unless the pollution is discovered within 120 hours after its commencement. And even then, they may exclude cleanup costs or pollution caused by the insured's wastes!

Coverage gaps created by such exclusions leave companies open to expensive cleanup and litigation costs in the event of any leaks, subsurface contamination (the most costly to address), cumulative effects of effluent discharges or air emissions, existing contamination, and many other sudden and/or gradual pollution exposures.

To be addressed properly, environmental liabilities need to be handled under separate environmental liability policies. While many companies recognize the limitations of the general liability and property coverages in this regard, certain myths persist regarding environmental risk management and insurance.

One common myth is that compliance with environmental regulations is sufficient. The reality is that risks go well beyond compliance issues. Even companies that are in full compliance today may be faced with sudden events or gradual undetected releases of pollutants that can pose significant cleanup costs and third-party claims.

Another common myth is that environmental insurance is unavailable or too expensive. In reality, virtually every aspect of risk is insurable, and while the range of coverages has increased, prices have decreased.

Fletcher Challenge's P&P plant at Elk Falls, BC recently completed major environmental treatment facilities. (ES&E, Nov. 1992) Photo courtesy, Columbia Geosystems, Ltd., Calgary, Alberta.

Environmental insurance addresses many of the challenges of risk management:

1. Public scrutiny will not diminish, but environmental insurance can help protect a company's corporate image by providing the services of environmental crisis management experts. Services range from reviewing existing plans to running facility-specific simulations.
2. Directors and officers may be concerned about their personal liabilities. Environmental insurance automatically includes directors, officers and other employees, while acting in their duties as such, as insureds under the coverage.
3. Pressures for disclosure of environmental liabilities in financial statements are increasing. Insurance can be shown as evidence to the financial markets that potential liabilities have been addressed.
4. Containing the costs of dealing with known contamination is a challenge, since the extent of cleanup that will ultimately be required and the timing of those expenses may be highly uncertain. Environmental insurance can help a company contain or reduce the costs and risks of anticipated remediation.
5. Minimizing the potential for large uninsured risks can be a challenge with the exclusionary language relating to pollution on most general liability policies. Environmental insurance programs can help fill in such coverage gaps.

What would your company do if one or more of the following scenarios occurred?

• A new secondary treatment facility is built to meet stricter federal Effluent Regulation criteria for BOD, TSS, and Toxicity. During start-up of the facility, variations in the aliquots of nutrients and treatment chemicals affect the toxicity of the final effluent. Neighboring fish farms are negatively affected, and bring claims for property damage and loss of business.
• A leak is detected in the underground caustic soda piping system at a pulp mill. It is further discovered that both shallow and deep aquifers and associated soil formations are impacted, indicating the leak has occurred over a long period of time and suggesting extensive cleanup will be required.
• Effluent from a mill has negatively affected the taste of a species of fish in the river to which the mill discharges. Since the mill's neighbours rely on the fish for income, a multi-million dollar claim is brought against the mill for the property damage.
• A mill's old, unlined landfill has been used for many years to dispose of miscellaneous garbage, wood wastes, incinerator ash, and refuse dumped by the neighboring residents. The leachate affects the drinking water wells of the mill's neighbours, bringing claims for the mill to construct an entirely new water supply.
• Under upset conditions, air emissions from boiler stacks and other point sources affect third parties by causing property damage (arising from deposition of particulate matter on neighboring residences and vehicles) and bodily injury claims (arising from ammonia or chlorine gas clouds). Claims of nuisance related to odours emitted from the mill also occur.

Pollution Legal Liability (PLL) is a flexible site-specific and transportation environmental liability program that addresses both sudden and gradual pollution conditions. Coverage features can include on-site and off-site cleanup of unknown pre-existing conditions or new pollution conditions, generator liabilities arising from pollution conditions at specified non-owned locations, bodily injury and property damage to third parties caused by pollution conditions, contingent liabilities related to the use of third party transporters, underground storage tanks, business interruption coverage for the insured, and more.

Cleanup Cost Cap protects against cost over-runs during environmental remediation projects. This coverage removes much of the financial uncertainty associated with complex remediation projects, thus facilitating property transactions or financing related to the property.

Owner-Controlled Insurance Program (OCIP) provides companies with coverage for the outside contractors and consultants that perform remediation work or other environmental services for them. Key benefits of such a program are that the owner has coverage tailored and dedicated to its needs, without the risk of coverage being eroded by work the contractors do for others, or the risk that coverage gaps might exist in the contractors' various policies.

Environmental Protection Program (EPP) combines risk transfer with risk-funding mechanisms to meet a company's specific financial and risk management needs. Advantages are that EPPs provide consistent long-term coverage while stabilizing insurance costs, potentially reduce costs for anticipated remediation and enhance a company's cash flow, evidence protection against environmental liabilities disclosed in the financial statements, and cover both the exposures at on-going operations and the expenses of known contamination.

While environmental insurance is an important element of a company's overall insurance program and can be used to improve the bottom line, it must be viewed in the context of the company's entire financial strategy and insurance program. It is important to consider such factors as the benefits of having one insurer when policies might overlap, international coverage is needed, or other risks (such as hedging foreign exchange and commodity prices, or insuring against shareholder actions, export risks or accounts receivable exposures) are of concern.