March 1, 2015 by Thomas Ptacek, Senior Vice President, Marsh USA Inc.; and George Boire, Environmental Practice Leader, Marsh Canada Limited
A sunken anchor. A stuck valve. A buried tank.
A seemingly small problem at a port or terminal can lead to environmental events costing millions of dollars to repair and taking years to resolve. Add that the risk of such events occurring has increased with the rapid, albeit temporarily suppressed, rise in North American oil production. This comes at a time when crude transportation, especially by rail, has caused significant damage.
Use of marine terminals and facilities by the energy sector creates revenue opportunities, but carries great environmental risk, including uncovering unknown contaminants during expansion and running afoul of complex regulations. An understanding of these issues, combined with thoughtful co-ordination of marine and environmental insurance solutions, helps to address these risks.
ENVIRONMENTAL RISKS AT PORTS AND TERMINALS
Environmental releases at ports and terminals can develop from a range of daily operations involving vessel berthing, containerized cargo, railcar transfers, and liquid and dry bulk cargo. Any release has the potential to result in clean-up and disposal costs, regulatory fines and compliance requirements, as well as lost revenue. The resulting legal and insurance issues may have long tails, taking years to resolve.
Beyond oil and chemical spills, ports and terminals could have environmental exposures as a result of the following:
• Construction activity: Ports and terminals are frequently situated on reclaimed, low-lying land, with imported fill, which may contain contaminated materials. Construction activities at these sites can result in new pollution conditions as well as the exacerbation of any existing contamination.
• Storage facilities: Liquid bulk tanks with connecting pipelines and railcar transfer stations could be subject to sudden and accidental structure failure, or gradual ground seepage and leakage.
• Ancillary operations: Tank cleaning, ballast water treatment, shipbuilding, ship repair or demolition, metal finishing and plating, fire protection activities, paint shops, foundries and manufactured gas works present environmental exposures.
These activities could release metals, fuel, oil waste, low-level radioactive material, dispersing agents, polychlorinated biphenyls (PCBs), asbestos and other agents now considered “bad actors.” Remediation projects involving contaminants are complex and costly.
HISTORICAL AND LEGACY RISKS
Ports and terminals also face legacy issues from past operations, including those conducted by tenants or unrelated businesses previously operating on the site. Such claims extend decades into the past and, in the case of undiscovered seepage, lead to claims today that may not have been filed at the time of the original incident. Past tenants or unrelated businesses may no longer be viable entities – increasing exposures to existing ports and terminal operators.
Among the examples of legacy claims include those noted below:
• waste management and/or remediation activity required under various acts and regulations;
• toxic tort occupational disease arising from exposure to environmental pollutants (e.g., asbestos); and
• unknown environmental issues that are associated with past land transfers or expansion projects.
Environmental losses or claims can be complex, potentially involving a variety of regulations from environmental agencies. Regulations, and particularly site clean-up standards, have changed and have generally become more stringent across Canada.
When pursuing companies for violating environmental regulations, government agencies and prosecutors typically interpret legislation to cast the broadest net possible, seeking financially viable targets to effect restitution.
In situations that are often high-profile and politically charged, regulators and prosecutors often rely on the concept of joint and several pollution liabilities under most provincial regulations as they pursue targets with “deep pockets.” In some cases, regulators have targeted current and former directors and officers of potential responsible companies/entities.
RISK TRANSFER’S ROLE IN PROTECTING THE BOTTOM LINE OF PORTS AND TERMINALS
Ports and terminals can transfer many environmental risks to insurers.
Marine insurance solutions
Marine insurers have historically recognized the pollution exposures inherent in shore-side operations, and have incorporated pollution coverage into policies without needing extensive underwriting, environmental surveys or premiums.
Sudden and accidental (S&A) time-element pollution liability coverage is found in a variety of marine liability insurance products typically purchased by ports and terminals.
Compared with non-marine liability markets, marine insurers are not as rigidly bound to specific insurance language. They are receptive to broader, manuscript pollution wording, allowing for coverage beyond a limited set of perils.
Although marine liability products provide robust coverage for many pollution exposures, typical pollution conditions and exclusions may result in uncovered exposures and ambiguities.
For example, consider the following:
• Marine policies provide S&A “time-element” pollution, which amounts to restricted coverage. Although the specific time periods can be negotiated, there will always be limitations.
• Marine pollution liability policies typically exclude coverage for fines, penalties, exemplary, treble and punitive damages; first-party pollution clean-up, containment and removal; and sites or locations used, in whole or in part, for the handling, processing, treatment, storage, disposal or dumping of any waste materials or waste substances produced from insured operations and a variety of other site-specific risks.
Environmental insurance solutions
Environmental insurance policies are specifically designed and engineered to provide pollution liability coverage with the intent to fill coverage gaps not insured by traditional marine and casualty markets. For ports and terminals, the two pertinent forms of environmental insurance are pollution legal liability and contractor’s pollution liability.
Pollution legal liability (PLL) insurance: PLL can provide coverage for claims related to pollution conditions from both historic and current operations at an insured property. Available for single or multiple sites, a PLL policy is designed to cover pollution liabilities arising from the following:
• clean-up and remediation;
• third-party bodily injury and property damage;
• defence costs;
• transportation upset/overturn;
• civil fines and penalties, and natural resource damage; and
• business interruption, extra expense and diminution in value.
PLL policies provide ports and terminals with the broadest environmental coverage available without the typical policy restrictions found in marine or casualty forms, and can respond to either pre-existing conditions or new conditions.
Contractor’s pollution liability (CPL) insurance: Designed to protect against liabilities associated with contracting operations performed by the insured, CPL insurance responds when a contractor causes contamination as a result of operations, or when pre-existing conditions are exacerbated.
CPL coverage is offered on a claims-made or occurrence basis, and can protect contractors on a “practice” basis through a master policy for all contractor activities, or on a “project-specific” basis. Project policy terms match the project duration and include completed operations and extended reporting extensions.
These programs are tailored to meet varying needs of ports and terminals. In addition to specialized coverage forms,
PLL insurers provide valuable claims and loss control services to defend, mitigate or avoid pollution liabilities.
Given the broad pollution coverage provided, retentions are typically higher than marine policies and PLL policies are written on a claims-made basis.
Building an effective insurance program
Both marine and environmental insurance policies afford pollution coverage, but placing these on disparate terms can lead to unanticipated, negative results. Insureds should carefully co-ordinate placement of their marine and environmental insurance policies to avoid coverage gaps and to ensure their interests are aligned with those of their insurers.
Program design options available to insureds include the following:
• Option 1: Schedule environmental insurance as primary, with marine insurance policies being excess of the S&A elements of the environmental insurance.
• Option 2: Design a marine primary liability policy to exclude pollution completely, allowing the environmental policy to cover both S&A and gradual events. A marine umbrella, or bumbershoot, would sit excess of the primary marine liabilities for non-pollution events and excess of the environmental policy for S&A events, subject to the bumbershoot’s S&A marine policy conditions.
• Option 3: Design a marine program to include S&A pollution and to be primary to the environmental policy with respect to S&A pollution. The environmental policy would provide excess S&A pollution and difference in conditions to include gradual pollution coverage. The marine bumbershoot policy would sit directly excess of the marine primary coverage and excess of the environmental policy with respect to S&A pollution, but per marine S&A policy terms.
• Option 4: Purchase independent and separate towers for marine and environmental.
In building the right insurance program structure, it is important to take care to review “other insurance” provisions, indemnity triggers, policy exclusions and conditions.
MANAGING PORTS/TERMINALS’ ENVIRONMENTAL RISKS
From vessel berthing, cargo management and liquid cargo transfers to construction and mergers and acquisitions, ports and terminals operators must understand the significant environmental risks they face from current and historic operations and regulatory scrutiny.
The good news for ports and terminals is that marine and environmental insurance policies will help to mitigate many of these risks. Insurance advisors can show how these insurance products are interrelated, and design and implement the right solutions for the operations in question.