The U.S. Coast Guard and other authorities have completed one phase of an investigation into severed underwater cables that leaked about 600 gallons of mineral oil insulation fluid in the Straits of Mackinac. Officials suspect a boat anchor strike on April 1 damaged the cables and dented oil pipelines in the waterway that connects Lake Michigan and Lake Huron.
The incident, which could have devastating impacts on the local environment and create a huge financial burden for one or more parties determined to be at fault, is prompting organizations to ask whether they have sufficient Environmental insurance to limit risk.
It still may be days or weeks before investigators determine the party at fault in this situation, but the amount of insurance the party has will be crucial to its ability to pay for what could amount to millions or even billions of dollars in fines, cleanup costs, lost work hours, structural damage and other expenses. Both Environmental and Protection and Indemnity (P&I) insurance may be utilized depending on the outcome.
“Many organizations don’t feel they have an exposure and thus don’t want to pay for a policy. Absence of loss doesn’t mean absence of risk, though” – Gina Jones, Burns & Wilcox
Crews capped and sealed the cables last month. While 600 gallons may not seem like a lot given the scope of the Great Lakes, a spill of only one gallon of oil can contaminate a million gallons of water, according to the Minnesota Rural Water Association.
As more global environmental regulations have been enacted by governments and pushed by special interest groups in recent years, the penalties for non-compliance, and thus the liability organizations face, have increased. Environmental policies today are designed to address the changing regulatory landscape. For an environmental insurance policy to cover an incident, the party at fault must have been liable to causing some type of pollution. But anything taken out of its natural environment is generally considered pollution, according to Gina Jones, Vice President and Director, Environmental Programs, Burns & Wilcox.
“We can craft policies that are very customizable to an organization,” Jones said. “But many organizations don’t feel they have an exposure and thus don’t want to pay for a policy. Absence of loss doesn’t mean absence of risk, though.”
Environmental policies cover costs that a GL will not
Industry figures indicate there are more than $1 billion of uninsured environmental losses on average per year in the U.S. alone. “While most organizations will have a General Liability (GL) policy, there is often little, if any, environmental liability protection in a GL policy, so issues such as pollution caused by contractors or pollution that may occur on owned land generally will not be covered to any significant degree,” said Jones.
Insured parties who own, lease or operate facilities also face environmental exposure and potential for risk, such as a building owner who has an undetected water leak that results in mold or a warehouse fire that spreads toxins and gases in the air. An environmental impairment liability policy is designed to address such situations. Other environmental policies can cover cleanup costs, damages to products, facilities, litigation costs and fees, business losses and other expenses.
“Any one of these costs could put a smaller contractor out of business,” Jones said.
A study recently commissioned by a special interest group estimates that an oil spill resulting from Enbridge’s Line 5 pipeline in the Straits of Mackinac could have an economic impact of $6 billion in costs to the State of Michigan for natural resources restoration, impact on tourism, commercial fishing, municipal water systems, coastal value properties and other expenses.
Few industries are insulated against environmental liability
Environmental mishaps are not uncommon. In Montana, an estimated 600 barrels of crude oil and 90,000 barrels of brine leaked from a wellhead over several months this winter. It is believed the wellhead froze and cracked. In South Dakota, a pipeline leaked 9,700 barrels of crude oil into farmland in November. Construction flaws in 2008 may have contributed to the leak according to a preliminary report.
Jones said manufacturers and contractors such as plumbers, painters and even owners of large pieces of property are among those who should consider environmental insurance. Yet practically any industry could be impacted.
“There are some large businesses that require contractors to have such insurance to work on their property,” Jones said. “Options should always be considered for peace of mind.”
P&I Insurance is required by law – but more is needed
Given that the recent Straits of Mackinac incident happened in a body of water, any parties at fault likely also will have P&I insurance, which is liability insurance that can cover maritime liability risks associated with the operation of a vessel, particularly as it relates to the insured working with third parties.
P&I insurance covers the majority of legal liabilities that a party at fault will face in the daily operation of one or more vessels. That includes costs associated with crew, cargo, the vessel itself, other costs associated with work loss and much more, said Richard Platt, Director, Lochain Patrick, a leading independent Lloyd’s broker specializing in marine and energy.
“It’s a very complex process to purchase P&I,” Platt said. “It will cover most third party exposure and available options vary greatly based on the size of the organization requiring insurance.”
P&I insurance is required by virtually any port in the world and country inspectors will require proof of it before entry. Yet many companies involved in maritime business do not have sufficient insurance coverage that would protect them in the case of an accident, such as what happened last month in the Great Lakes, according to Robert Hubbard, Director, Lochain Patrick.
“Companies and operators need to make sure they are insured with a properly rated company because if something happens they don’t want to be saddled with third-class claims service,” Hubbard said. “That’s a mistake many small operators make and it can impact how policies are paid out.”
As maritime authorities investigate the cause of an incident like an oil spill, P&I insurance is available to potentially pay for the organization hiring its own investigators, and any resulting penalties and costs.
“You can’t make decisions on P&I coverage solely based on price,” Platt said. “It’s a very complex process, which is why you want to speak with an insurance specialist who can walk you through the options.”
The price of environmental insurance is likely more affordable than most realize, Jones said. Annual costs may range from $1,250 for a minimum premium to $5,000 for manufacturers that may have a higher risk profile. A decade ago, a minimum premium cost was closer to $10,000 per year.
“Now there are more than 55 carriers offering this niche insurance so you have lower premiums and better coverage,” Jones said.
As with any coverage need, an insurance broker or agent must be consulted. Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.
This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent if an Environmental or P&I policy is right for you.