Superfund and the Insurance Issues Surrounding Abandoned Hazardous Waste Sites

December 1995
Executive Summary

Since 1992, property/casualty insurers have paid out more than $6 billion in environmental and asbestos losses and loss adjustment expenses. Between 1992 and 1994, insurers increased reserves by $6.0 billion to $7.0 billion for future payments, and most industry analysts expect further increases.

This study focuses on a major component of those costs — inactive hazardous waste sites. [1]1. This report does not study other potential environmental hazards that have important implications for insurers. These hazards include underground storage tanks, lead, electromagnetic fields, radon, and household chemicals. This report does not cover asbestos, except where noted. Insurers are incurring the bulk of their hazardous waste costs on policies issued decades ago. Environmental pollution was not then an issue for insurers. Insurers generally argue that, at the time, they did not anticipate or intend to cover gradual pollution and that they did not collect premium to pay for this coverage. Others, representing the interests of the insureds, disagree with this argument and have challenged it in the courts many times, with varying degrees of success.

ISO offers this study as an introduction to Superfund and the insurance issues surrounding the cleanup of abandoned hazardous waste sites. The study summarizes technical and legal concerns, concentrating on the costs of settling claims on commercial liability policies written before 1986. [2]2. Most commercial liability policies written after 1985 contain a pollution exclusion that significantly changes the way those policies respond to pollution claim

The study also discusses the major issues confronting policymakers as they consider potential reforms of the nation's Superfund law. ISO hopes the study will help to inform insurer personnel, public policymakers, and other interested parties who would like introductory background material about environmental issues or need to become familiar with these issues because of emerging business needs.

Hazardous waste consists of industrial byproducts and spent or contaminated materials that may threaten human health or the environment if discarded improperly. Hazardous waste sites include landfills, waste dumps, and other places containing hazardous substances.

In 1980, Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), better known as Superfund. The law's purpose was to clean up the nation's most hazardous abandoned waste sites, ensuring wherever possible that "the polluter pays."

Superfund changed the rules and standards for determining liability for hazardous waste site cleanups. For example, companies that generated, transported, stored, or discarded hazardous waste can be liable for cleanup costs under Superfund even if all their actions were legal. And a minor contributor to a waste site can be liable for the entire cost of cleanup if other contributors are insolvent or unidentifiable.

Insurers' principal concerns with hazardous waste sites — and with Superfund in particular — include:

• Court decisions that find, in old insurance policies, coverage the insurers did not intend to provide
• Difficulty in establishing plausible estimates of liabilities and reserves
• Unfair cost allocation among responsible parties and their insurers
• High costs of litigation related to both coverage issues and policyholder defense

How Superfund Works
Under Superfund, parties found responsible for polluting a site must clean up the contamination or reimburse the Environmental Protection Agency (EPA) for doing so. The agency adds the most hazardous sites to the National Priorities List (NPL). Only NPL sites are eligible for federally funded cleanup. The EPA refers non-NPL sites to the states for handling.

For an NPL site, the EPA then begins the search for potentially responsible parties (PRPs). Superfund requires responsible parties either to clean up the site themselves under EPA supervision or to reimburse the EPA for a government-led cleanup. If the EPA cannot locate any financially viable PRPs, the EPA may fund the entire cleanup.

PRPs have taken the lead in more site cleanups than has the EPA in recent years. Studies indicate that PRP-led cleanups are more cost-effective than EPA-led cleanups.

Superfund's liability system is based on the principle that the polluter — not the taxpayer — should pay for cleanup. Liability is strict, retroactive, and joint and several.

• Strict liability means that the government need not show that the responsible party acted with intent or negligence. A party may be liable even if it has always complied with every law, rule, and regulation on waste disposal.
• Retroactive liability means that liability applies to actions that took place before enactment of Superfund.
• Joint and several liability means that a responsible party may have to pay the entire judgment against all liable parties, if the other parties are not financially viable.

As of November 1995, 1,290 sites are on the EPA's National Priorities List. Since Superfund started in 1980, the EPA has classified 304 sites as "construction complete." That is, physical construction is complete for all remedial and removal work required at the entire site. Of those 304 sites, the EPA has deleted 84 from the NPL. The other 220 sites remain on the NPL while ongoing operation and maintenance are needed to achieve cleanup goals.

Table 1

Estimates of Ultimate Number of Nonfederal NPL Sites
(Intermediate-Case Estimates)

Note:
The General Accounting Office estimate that, of the nonfederal sites reported to the EPA through September 1993, the EPA would eventually place 3,674 to 3,976 on the NPL; 3,825 is the average of this range.

Cost Estimates
Many studies have estimated the cost of cleaning up the nation's most hazardous waste sites, and the figures vary widely. The differences come largely from variations in assumptions and in the scope of the estimates. Cost estimates have generally declined as more information has become available.

This ISO study summarizes the cost estimates of a number of other analysts.

Most estimates of ultimate NPL cleanup costs start with assumptions or estimates of the number of sites eventually subject to cleanup as NPL sites. Of the studies ISO considered for this summary, most conclude that the EPA will ultimately place 2,000 to 4,500 nonfederal sites on the NPL. [3]3. NPL sites owned or used by federal agencies are called "federal" NPL sites. Except where noted, this study relates to the other NPL sites, generally called "nonfederal" NPL sites.

Table 1 lists the estimates from four important studies. The most recent study — a public policy monograph by the American Academy of Actuaries — notes slow growth in the number of NPL sites and budget pressure on the EPA. Therefore, the Academy's study concludes that the ultimate number of nonfederal NPL sites is likely to be about 2,000.

Some studies provide assumptions or estimates of the average cleanup cost per site. The studies ISO considered for this summary conclude that the average cost for cleaning up an NPL site is between $30 million and $40 million. ISO found that existing analyses of these average costs are difficult to compare because of inconsistent and unclear assumptions and calculations.

The most difficult cleanup component to analyze is the cost of operation and maintenance — a sometimes lengthy process that may include decades of monitoring after the initial cleanup. Since few cleanups are now complete, the studies have little actual experience on which to base projections. The result is substantial variation in the studies' estimate operation and maintenance costs.

Another important element in estimates of the total cost of hazardous waste cleanup is transaction costs — the costs of determining responsibility for the cleanups. The studies considered for this summary generally agree that total transaction costs are now roughly $1.0 billion to $1.3 billion per year, with the private sector — PRPs and insurers — incurring about $900 million of those costs. One study predicts that private-sector transaction costs will rise several years but should start to fall during the next decade.

The studies ISO considered for this summary generally estimate cleanup costs separately from transaction costs. Table 2 lists the total undiscounted NPL cleanup estimates from five important studies. The estimates range from $80 billion to $164 billion. The more recent studies tend to indicate lower costs.

Since the various parties will pay for cleaning up hazardous waste sites over many years, discounted cost estimates (adjusted to today's dollars) can provide a more meaningful picture than undiscounted costs. The American Academy of Actuaries study suggests that discounted cleanup costs could range from 40% to 65% of undiscounted costs.

Cleanup activities are not restricted to NPL sites. Although non-NPL sites generally cost less to clean up, they are more common than NPL sites. Cleanup costs associated with non-NPL sites may place heavy burdens on PRPs, the states, and insurers. The studies ISO reviewed estimate undiscounted non-NPL cleanup costs at $30 billion to $75 billion.

Table 2

Ultimate Nonfederal NPL Cleanup Costs
Undiscounted Base-Case Estimates
Excluding Transaction Costs
(In billions)

Note:

The American Academy of Actuaries estimated that the Congressional Budget Office figure would be $164 billion excluding transaction costs. The Academy also calculated the Brookings figure of $131 billion based on the Congressional Budget Office's estimate of 4,500 sites and Brookings's estimated average cost per site.

How Hazardous Waste Affects Insurers
When the EPA names potentially responsible parties (PRPs) for an NPL site, those parties typically take one or more of three courses of action:

• Dispute the potential liability in court
• Seek out other PRPs to share or bear the costs
• Try to assert coverage under old insurance policies for legal and cleanup costs

Litigation frequently follows. Often, insurers deny claims for environmental damage by arguing that the old policies did not cover pollution other than "sudden and accidental" events — and that the insurers did not consider gradual pollution when they determined the premiums for those policies. Many of these disputes lead to litigation between insured and insurer. If the insured has policies from several different carriers, litigation among insurers can result. Consequent legal expenses for PRPs and insurers can approach or exceed actual cleanup costs.

The wording of general liability insurance policies before 1986 is often the focus of coverage disputes and litigation. Insurers and their policyholders often disagree about whether the commonly used commercial liability forms covered pollution. Litigation on these matters continues to this day.

In 1985, ISO introduced a new pollution exclusion that substantially changed the way many policies respond to pollution claims. Courts have generally, though not uniformly, ruled that the 1985 language is clear and unambiguous. Also, in 1986, Congress passed the Superfund Amendments and Reauthorization Act (SARA), which clarified companies' responsibilities for waste disposal. Therefore, this study concentrates on the costs of settling claims on commercial liability policies written before 1986.

Reporting Practices and Requirements
Studies on environmental and asbestos liability have found relatively little data on the magnitude of individual insurers' liabilities. Insurers have often been reluctant to disclose their estimated liabilities — in part out of fear that someone could use the information against them in court. Insurers are concerned that such disclosures might imply that the insurers have admitted liability and have the resources to cover losses.

Various regulatory agencies have recently added requirements to disclose environmental liabilities and to recognize them in accounting statements, yet these requirements allow some leeway in disclosing uncertain or unquantifiable liabilities. For 1995, insurers will for the first time have to provide data on environmental and asbestos costs in the statutory Annual Statement, which insurers submit for evaluation by individual state regulators. The difficulty in estimating liabilities for environmental and asbestos claims will present a challenge to insurers as they complete this report.

Table 3

Estimates of Insurer Costs
(In billions)

* A.M. Best is updating its study and is likely to revise its figures downward.

Insurer Costs Associated with Hazardous Waste Sites
The total cost to insurers of hazardous waste sites includes much more than just the cost of removing or detoxifying the hazardous materials. Among the other important categories of expense are the following:

• Transaction costs — legal and other expenses involved in determining responsibility for the cleanup
• Third-party claims — claims for bodily injury or property damage, usually from people living, working, or owning property near a waste site

The studies ISO considered for this report include differing categories of costs and use different assumptions. The resulting estimates vary widely — from a "low-end" estimate of $25 billion in one study to a "high-end" estimate of $608 billion in another. Table 3 summarizes estimates from five studies and gives a broad indication of how the variation in assumptions and scope leads to very different estimates. Estimates in Table 3 are on a "full-value" basis, not discounted for the time value of money. Discounting reduces the estimates substantially. Estimates from different studies consider different portions of the total cost, so comparisons are difficult.

To put these estimates in perspective, the property/casualty industry's statutory surplus — its net worth, calculated according to a method prescribed by insurance accounting regulations — was $191 billion at year-end 1994. However, the cost of hazardous waste cleanups will not fall evenly across the industry. Certain large writers of commercial liability insurance over several decades will bear most of the cost. The 35 insurers likely to face the greatest cleanup costs had a combined surplus of $85 billion at year-end 1994.

Key Superfund Issues
All parties familiar with Superfund acknowledge that the program has made little progress on actual cleanup of hazardous waste sites, while disputes have generated high legal expenses and other transaction costs. Debate about reform of Superfund has concentrated on changes that could reduce these costs and accelerate the cleanup. Potential revisions include:

• Eliminating retroactive liability
• Eliminating joint and several liability
• Revising cleanup standards and remedy selection
• Delegation cleanup authority to the states

Analysts agree that repeal of retroactive liability would increase cleanup costs for the federal government, reduce cleanup costs for potentially responsible parties (PRPs), and reduce transaction costs for both PRPs and the government. Some studies suggest that, on balance, repeal of retroactive liability could make Superfund less costly to society.

Many argue that repealing joint and several liability would make Superfund fairer to PRPs — requiring that they pay for cleanup only in proportion to their share of the damage or cost. Such a change would reduce transaction costs but could increase the government's cost for cleanup.

Changing the standards for cleanup involves judgments about how much cleanup is necessary. Proponents of various revisions argue that the EPA's current standards are unnecessarily high; opponents argue that less strict standards would harm the environment.

Delegating authority for cleanup to the states might expedite cleanups and eliminate duplication of effort between the states and the federal government. But such a change might increase costs for states with weak environmental laws and regulations.

Many of the proposed reforms would reduce environmental liabilities for private industry — and for insurers. At the same time, many of the reforms could increase expenses for the federal government. The government could raise the necessary money by increasing current environmental taxes or by imposing new taxes. The potential payers of these taxes, particularly the petroleum, chemical, and insurance industries, disagree on the best approach.

Superfund and the cleanup of hazardous waste sites will continue to be difficult issues for insurers, public policymakers, and society as a whole. The size of the required cleanup — and the question of who should pay the cost — will be the focus of debate for many years to come.

1. This report does not study other potential environmental hazards that have important implications for insurers. These hazards include underground storage tanks, lead, electromagnetic fields, radon, and household chemicals. This report does not cover asbestos, except where noted.

2. Most commercial liability policies written after 1985 contain a pollution exclusion that significantly changes the way those policies respond to pollution claim

3. NPL sites owned or used by federal agencies are called "federal" NPL sites. Except where noted, this study relates to the other NPL sites, generally called "nonfederal" NPL sites.