Environmental Claims

Many different contaminants are present in the air we breathe, the water we drink, the food we eat and the ground we walk on. In investigating an environmental claim, positive identification of the source and cause of pollution is essential. It can be tempting to jump to conclusions about causation, but an adjuster must rely on experts in this part of the investigation. For example, if gasoline vapours are permeating the basement of a home that’s next to a service station, it’s easy to assume the service station is the source of the fumes. However, some contaminants can have a variety of possible sources, and an expert may be able to examine the migration pattern of the fumes or identify a specific contaminant, proving a different source was fully or partly responsible.

Fingerprinting the culprit

Investigations into toxins can include “fingerprinting” to identify the exact chemical composition of the contaminant and possibly link it to a specific source. Hydrogeologists, geochemists, soil engineers and other experts may assist in determining the identity and source of pollutants and may recommend appropriate cleanup efforts. Experts may also be able to recommend the most economical ways of remediating a contaminated site. In addition, toxicologists, epidemiologists, biologists, veterinarians and medical doctors may be needed in order to prove or disprove the effects of pollutants on plants, animals and humans.

When possible, it’s best to choose a prominent expert in the particular discipline applicable to the claim. In the service station example above, an expert in aromatic hydrocarbons would be appropriate. In more complex cases, however, it may not be clear which chemical or contaminant is present and what type of expert could best help identify the source. In such cases, care should be taken to select a generalist firm of experts who have specialists in a range of areas, or who are willing to recommend other appropriate experts to supplement the firm’s own strengths.

Costs and benefits

Consideration must be given to balancing the cost-effectiveness of expert investigation against the potential loss savings. Experts of considerable experience and education in the chemical and environmental fields charge for their services accordingly. Although the best experts may be expensive, their evidence may save insurers money in the end.

Exposing the exposure

One of the adjuster’s roles in any investigation is to assess the exposure faced by the insurer and recommend a reserve. It’s easy to feel intimidated by this task when millions of dollars may be involved, but each item claimed should be validated. The exposure assessment should include:

• Overall estimate of entire loss or cleanup costs

• Estimate of the insured’s liability, making appropriate adjustments for other defendants involved

• Consideration of the allocation theory or theories that may apply– for example, how many years was the insured exposed and to what amount per year?

• Identification of insurance policies available for each coverage year, along with relevant limits and exclusions

• Identification of policies of the insurer that are involved

• Defence costs for the insured

• Consideration of a defence sharing agreement if other insurers are at risk

• Estimated costs of defending coverage issues

Even in circumstances where it is highly unlikely the insurer will be liable to indemnify or defend the insured, a full investigation must still be undertaken. The adjuster must be clear about the complaint in order to determine whether or not there is an insurance claim.

The nuances of nuisance

Many third party environmental claims allege nuisance — a tort involving interference with the right to enjoy property. Nuisance claims are difficult to defend because negligence need not be proven for the claim to succeed; the claimant just has to prove that interference with the right to enjoy property took place, and the interference came from property owned or occupied by the defendant.

However, there are several possible defences to nuisance claims:

• Reasonableness of interference: Complaints about the ordinary levels of noise from factories in an industrial area will not be taken seriously. Likewise, the owner of a garage is expected to accept that road salt from cars may cause damage to the premises.

• Sensitivity of claimant: When a claimant is highly vulnerable, such as a manufacturer of extremely sensitive electronic radar equipment, it is not reasonable for that claimant to complain of, say, power line interference from the welding equipment of a neighbouring business.

• Statutory authority: When legislation imposes a duty that inevitably results in nuisance, the nuisance is deemed to be authorized and a third party claimant will recover only if there is a finding of negligence. For example, in most circumstances claims against a municipality for escapes from sewage lines provided as a public duty will not succeed.

Discharges of certain pollutants (mainly in resource industries or other heavy industrial processes) are authorized by government through a licensing process. For example, a pulp and paper mill operation can obtain permission from the Ministry of the Environment to discharge waste water containing certain toxic substances. Regulations and permissible discharges are forms of statutory authority, so compliance with them may be a defence.

Polluter-pay provisions

Under the federal Environmental Protection Act, each province and territory has put legislation in place to ensure cleanup of polluted land. This legislation generally imposes absolute liability on polluters — the polluter-pay principle. In other words, even if an insured abided in the past by what was a reasonable standard of care at the time, the insured would still be liable today for the pollution caused. In addition, an insured who merely acquired polluted land could be held liable for cleanup costs associated with prior pollution of the property. (Some legislative exemptions are available for redevelopment of brownfield sites.) Other legislation dealing with dangerous goods and materials may also impose onerous responsibilities. Loss adjusters must become familiar with applicable legislation in relevant jurisdictions.

The steep costs of defending environmental claims and contesting coverage cannot be overemphasized. Each case has a settlement value, and it may be more prudent for an insurer to settle with the insured or a third party than to continue litigation. No reasonable settlement opportunity should be ignored, and settlement options must be given consideration whenever they arise during the investigation.

This article is based on excerpts from the study material in the Claims Professional Series of applied courses -a core of the CIP Program that helps adjusters learn the functional knowledge and skills required of their profession.

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The loss adjuster must manage the use of experts

• Recommend the appropriate expert

• Arrange and coordinate the assignment

• Monitor the expert’s activities

• Receive and read reports and recommendations

• Analyze and coordinate findings

• Assess the impact on liability and quantum