With Spring on the way, our thoughts turn to the outdoors and our beautiful, natural surroundings here on Delmarva. As stewards of the environment, it’s our shared responsibility to ensure a healthy planet for future generations. Insurance can help.
Environmental liability exposures refer to the legal and financial responsibilities organizations incur when their operations harm the environment. Environmental contamination can arise from many sources, adversely affecting air, water, soil and natural resources. Pollution incidents may also pose risks to human health, potentially causing illness or injury if people come into contact with hazardous substances.
Following contamination incidents, companies may be obligated to remedy, mitigate and compensate for the harm caused. Growing litigation risks and a heightened environmental awareness among regulators and the public are driving greater scrutiny of business operations and increasing the potential consequences of environmental mismanagement.
Fortunately, organizations can reduce their exposure to environmental liabilities through robust insurance and risk management practices.
What Is Environmental Liability?
Environmental liability is often associated with hazardous waste, chemical spills and industrial sites. In reality, its scope is far broader. Under federal laws such as the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Clean Water Act (CWA), and the Clean Air Act (CAA), liability can apply to any activity that causes harm to air, water or land. For instance, a company conducting renovation work might disturb an old plumbing system, releasing Legionella bacteria into the air, or a storm could cause a sewerage treatment site to inadvertently discharge hazardous materials into nearby waterways.
Regardless of the cause, organizations may face significant financial consequences when environmental liability incidents occur. These can include regulatory fines issued by the Environmental Protection Agency (EPA), extensive cleanup and remediation costs, and operational disruptions. Businesses may also be held liable for third-party claims, including bodily injury or illness resulting from exposure to contaminants, as well as property damage.
Common Sources of Environmental Liability Exposures
Environmental liability exposures can occur suddenly or gradually and stem from numerous circumstances. Consider the following common sources of environmental liability exposures:
- Operational activities—Environmental liability can arise when pollution is created, unintentionally released or mishandled during routine business operations. Everyday processes such as manufacturing, food production and vehicle movements can release dust, fumes or vapor emissions, while accidental spills of fuel or chemicals, failures in waste disposal systems or improper waste handling can contaminate soil or groundwater. Importantly, organizations can still be held liable even if the contamination is discovered years after the initial release.
- Property issues—Environmental liability can arise from the ownership or operation of contaminated sites. Hidden hazards (e.g., underground storage tanks, historic spills, asbestos and lead paint) discovered during property transactions or site assessments can create unexpected liabilities, including disputes between landlords and tenants, reduced asset value and breach-of-warranty claims.
- Supply chain risks—Environmental liability can arise from pollution events that occur anywhere along the supply chain. Businesses can be held liable if a supplier’s manufacturing processes create unexpected pollution or a distributor spills hazardous materials in transit, particularly if contracts lack strong indemnity provisions or environmental compliance clauses.
- Regulatory enforcement—Environmental liability can arise from noncompliance with the CERCLA, CWA, CAA, and other environmental regulations at the state or local level. In some circumstances, affected neighbors, community groups or other third parties may file citizen suits or bring other legal claims, including actions seeking compensation for bodily injury, illness or property damage.
Financial and Operations Impacts
Environmental liability incidents can have significant financial and operational impacts for affected organizations. Extensive cleanup and remediation costs include expenses for site investigations, contaminant removal efforts and post-remediation monitoring activities.
Environmental incidents can also lead to temporary shutdowns and supply chain disruptions, hindering operations and causing reputational damage. Moreover, legal expenses stemming from actions brought by regulators or third parties can compound losses and, in some cases, exceed initial remediation costs.
Managing Environmental Liability Exposures
To limit their exposure to environmental liabilities, organizations should consider the following measures:
- Organize robust compliance programs. Organizations should regularly review their responsibilities under local, state and federal environmental regulations and conduct periodic environmental audits to identify potential liabilities and guide risk-mitigation decisions. Audits should be paired with robust workforce training (e.g., proper storage and disposal of waste, leak-detection and spill response procedures) and reliable reporting and monitoring processes that track environmental performance and ensure ongoing compliance. Organizations may also benefit from maintaining up-to-date emergency response plans to guide actions in the event of spills or other pollution incidents.
- Conduct due diligence. Organizations should carefully examine potential environmental liabilities that may arise from property transactions, supply chain activities, or legacy contamination at previously used or developed sites. In particular, companies should conduct environmental site assessments during transactions, evaluate suppliers and partners for environmental compliance, and incorporate robust contractual protections (e.g., environmental indemnities and clear allocation of cleanup responsibilities).
- Review insurance coverage. Organizations should review their insurance coverage to ensure they are financially protected against both first- and third-party environmental losses, including accidental pollution (e.g., toxic spills) and contamination incidents (e.g., Legionella, asbestos and mold). Since commercial property and general liability policies typically exclude coverage for pollution-related losses, organizations should consider a standalone environmental liability policy and work with an experienced insurance broker to tailor coverage to their specific exposures.
Conclusion
Environmental pollution events may be infrequent, but if they do occur, they can result in significant financial and legal obligations. Take time to review your environmental exposures, implement robust risk mitigation measures and reach out to the friendly, local insurance experts at Deeley Insurance Group to discuss a tailored environmental liability insurance policy to address your specific needs and risks. Call or text us at 410.213.5600.
