Although most every manufacturing company conducts compliance audits of industrial operations, mere regulatory compliance is a passive means of managing risk. The most effective way to reduce risk is through a proactive risk management program that encompasses efforts to reduce exposures, as well as insurance to protect against the unbudgeted costs associated with pollution claims.
An environmental risk assessment survey (ERAS) that identifies specific exposures serves as a baseline for such a program.
When the ERAS is properly conducted, it can improve compliance with local, state and federal regulations. Furthermore, the potential liabilities uncovered may prevent the occurrence of damaging situations like the following:
o In one case, a battery manufacturer was sued for the release of historical air emissions containing lead particulate , a result of its manufacturing operations. Although the company had been cited for excellence in environmental standards, nearby residents claimed that their children had high lead levels in their blood and that lead-contaminated soil on their properties decreased their property values.
The residents sued to recover damages, including punitive damages. The final settlement was $6 million, including structured settlement for the children in case of future adverse medical conditions.
o At a cold storage warehouse, daily maintenance was being performed on the ammonia refrigeration system when a gas release occurred. Neighboring businesses were evacuated until the gas dissipated. A few of the neighboring employees complained of headaches and nausea, and the businesses filed claims against the warehouse for business interruption and bodily injury, which totaled $85,000.
Though the companies in the preceding examples were in compliance, they nevertheless incurred environmental liabilities. An effective risk management program can uncover unknown risks.
& #711; The Keys To
The effectiveness of your risk management program depends on several key factors:
o Management Support. Commitment and support from upper management and corporate personnel is critical to the success of your risk management program. Without support from upper management, the ERAS will not accomplish its goal of reducing or eliminating potential exposures.
o Identifying And Mitigating Loss Exposures. There are many potential exposures associated with industrial activities. The Insurance Society of America defines a loss exposure as “a condition or situation that presents a possibility of financial loss.”
Proactive risk management programs strive to minimize the exposures associated with your particular facility.
o Risk Transfer. Today’s environmental insurance marketplace offers a variety of pollution policies that address the environmental exposures of industrial operations. A commitment to insuring all exposures protects against any unexpected additional budget expenditures or fortuitous claims.
& #711; Structure Of Environmental
Risk Assessment Survey
To uncover potential exposures associated with industrial operations, the environmental risk assessment survey is constructed so that existing standard operating procedures and facility programs can be evaluated for their effectiveness in reducing or eliminating catastrophic and/or gradually occurring events. To evaluate these procedures and programs, the ERAS analyzes various areas including: the corporate organization, environmental setting, layout and history, operations, training, and contingency planning.
After completing the ERAS, the risk management consultant summarizes both the positive aspects of the company’s operations as well as those areas needing improvement, and recommends a program that continues positive initiatives and improves deficient areas. In addition, the ERAS is an important component in the underwriting of environmental insurance for your facility.
& #711; Common
Although loss exposures vary by industry, they can be broadly categorized. The ERAS evaluates each different type of exposure and recommends solutions to minimize risks. The following are examples of common exposure categories:
o Chemicals. Exposures can range from storage of incompatible materials such as alcohols and concentrated acids or bases to those with dangerous physical properties.
o Accidents. An accident in an industrial facility most likely results in a sudden release of a chemical or hazardous material. Examples include a driver backing into a storage tank, improper process valve settings, discharge during loading activities, and so forth.
o Failures. Equipment failures generally cause a release of liquids and/or gases into the surrounding environment and range from minor discharges that can be easily localized to catastrophic events affecting an operation at large and surrounding areas.
o Disasters. Natural disasters , such as floods, violent storms, earthquakes, etc. , are unpredictable, but can be anticipated. Take precautions to minimize the impact of possible disasters.
o Sabotage. Sabotage can come from sources that are internal (e.g., disgruntled employees) and external (e.g. random vandals, “midnight dumping,” terrorism, etc.). External threats can often be dealt with by protecting all processes, storage tanks and loading/unloading areas during non-working hours. This may be accomplished with fences, motion detectors, or other advanced security systems. During working hours, vigilant security checks at entrance/exit areas are a common first-line deterrent.
o Surrounding Environment. Areas surrounding an industrial operation can be impacted by plant activities. Such areas may include surface water bodies, outdoor recreation areas, residential neighborhoods, or neighboring plant facilities. Thoroughly evaluate surrounding areas to determine the impact of day-to-day activities, the potential impact of likely environmental incidents, and third-party claims that may result from such activities and incidents.
& #711; The Role
For industrial facilities, the majority of environmental claims result from exposures associated with underground and above-ground storage tank releases; unknown historical issues; soil and ground water contamination; and air emissions , both off-site migration, as well as sick building syndrome issues. Another issue that can significantly impact the bottom line is Superfund liability for past waste disposal practices.
Overall, pollution claims are lower in frequency but higher in severity. Specialty environmental insurance products offer broad coverage that responds to most of the preceding exposures.
A pollution legal liability policy provides coverage for liability arising from sudden and gradual pollution conditions that emanate from covered locations. A pollution and remediation legal liability policy provides coverage for loss, remediation expense and legal defense expense under one policy for sudden and gradual pollution conditions on, at, under or emanating from covered locations.
These policies respond to the high cost of third-party bodily injury and property damage claims discussed throughout this article.
While the exposures faced by environmental facilities vary, they do have one factor in common , the potential to cause significant financial loss. However, proactive businesses can protect their financial stability and future profitability with an effective risk management program that includes environmental insurance. Increasingly, companies are opting for insurance rather than indemnification or self-insurance to guard against the severity of pollution losses.
A proactive risk management program, anchored by an ERAS and augmented by an environmental insurance coverage, protects worker, facility and environmental safety by cost-effectively identifying and mitigating exposures on an ongoing basis, instead of reacting to costly crisis situations.
Bedingfield, CIC, AAI, is a vice president of Cavignac & Associates, a local commercial insurance brokerage firm specializing in insurance for the manufacturing industry.