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A BAD DAY IN CHEMICAL VALLEY The Elk River chemical spill: a worst-case scenario

The 2014 chemical spill into the Elk River, near Charleston, WV contaminated the water supply to some 300,000 local residents. Photo credit: © AP Photo/Tyler Evert

The Elk River region near Charleston, West Virginia, is nicknamed “Chemical Valley,” thanks to its long history of being a center for the chemical industry. Many of those companies have since closed or moved elsewhere, but for years, pro-industry regulations made it easy for chemical companies to operate in the area with little to no offi cial oversight. This led to an unusually high concentration of environmental accidents from these facilities over the last few decades, but one in particular from 2014 stands out—not just as an example of what can happen when industrial facilities are left insuffi ciently monitored, but how much environmental impairment liability they can generate with just a single event. This is the story of Freedom Industries and the now-infamous Elk River chemical spill.

Just after sunrise on January 9, 2014, residents in and around Charleston, WV, began complaining of a The Elk River spill strange, licorice-like odor near the Elk River. By 11:15 a.m., state Department of Environmental Protection was a case of inspectors had traced the smell to a chemical storage facility on the Elk River just 1.5 miles away from extreme negligence downtown Charleston. The facility, run by Freedom Industries, was a distribution hub for chemicals used and bad behavior. in coal mining, with 14 storage tanks and a combined storage capacity of four million gallons.

Visibly rusty and 76 years old, Tank #398 probably shouldn’t have been containing anything, let alone some 40,000+ gallons of crude MCHM, or 4-methylcyclohexanemethanol, a toxic foaming agent used to clean coal particulate before being shipped to market. But like much of the rest of the Elk River facility, it had been pressed into service despite years of minimal inspection, maintenance and repair, made possible thanks to almost nonexistent environmental regulations. The tank had a 1-inch diameter hole in it that was spilling thousands of gallons of MCHM directly into the Elk River, which was literally a stone’s throw away.

1 Not only had Freedom Industries failed to notify officials about the leak—which had evidently been under way for some time—but all that had been put in place to contain the leak was a single cinder block and a 50 lb. bag of safety absorbent powder, in what DEP officials called a “Band-Aid approach.” The spill quickly overwhelmed the tank’s paltry containment dike and over the course of the day, some 10,000 gallons of MCHM leaked out. Much of the spill—though exactly how much nobody could determine— entered the Elk River, just a short distance upstream from the intake valves of the West Virginia American Water Company, which provided municipal tap water to a nine-county area, including Charleston.

A lack of information on the toxicity of MCHM, a poorly coordinated official response and other factors led to a confused scene throughout the day. MCHM was toxic, but nobody knew how toxic, thanks to scant data on the chemical itself.

Unable to guarantee the safety of the water, West Virginia Water issued a Do Not Drink advisory for the area around 5:00 p.m., noting that the water was suitable for toilet flushing only. Some 300,000 The Do Not Drink people—nearly one-sixth of West Virginia’s total population—suddenly found themselves both without advisory affected water and wondering how much MCHM they had consumed over the course of the day. some 300,000 people for days. The Do Not Drink advisory remained in place for five days, as the West Virginia National Guard rushed in bottled water for local residents. West Virginia Poison Control received over 1,000 calls related to the spill—its largest event in 20 years—with reports of vomiting, dizziness, headaches, diarrhea, reddening skin, itches and rashes. 169 people were treated for symptoms and released. 14 were hospitalized. There were no deaths.

Perhaps the greatest impact of the water stoppage was on local establishments, such as schools, medical offices, restaurants, hotels and retail stories, many of which simply could not operate without clean water. The Marshall University Center for Business and Economic Research investigated the incident and estimated that the total economic loss was around $19 million per business day due to the Do Not Drink order, for a total loss of $61 million, or about 24% of the total economic activity of the affected area. Some 75,000 workers—about 41% of the local workforce—were affected each day of the water ban.

Three days after the Do Not Drink ban lifted—and only eight days after the spill was detected, Freedom Industries declared bankruptcy. Creditors sought more than $176 million from the company, but a proposed $2.9 million insurance settlement was the only pot of cash to be had.

The severe negligence in this case—namely, that Freedom knew about critical flaws at its facility and never did anything about it—was considered criminal activity by various federal prosecutors, who indicted Freedom Industries itself on a number of environmental violations, which could result in fines of up to $25,000 per day of violation, or $100,000, whichever is greater. Six of Freedom Industries’ owner-operators were charged with various environmental violations that carry maximum three-year sentences. To date, one of these owner-operators has pled guilty.

The FBI charged Freedom Industries president Gary Southern with bankruptcy fraud, wire fraud and lying under oath. If convicted on all charges, Southern could face 30 years in prison.

The Elk River spill stands out as a case example on a number of fronts. It highlighted the risks of lightweight regulation of industries that pose a potential threat to public health and safety. In the months that followed the spill, numerous state and federal environmental regulations have been proposed or enacted to prevent such an event from recurring, but to date, more than 1,100 chemical tanks in West Virginia are still operating, and are considered unsafe.

2 As an exercise in crisis management, the spill showed what can happen when there is poor materials data on hand, poor coordination between industry and officials, and poor communication with the public itself. A disastrous press conference by Gary Southern—in which he drank bottled water on camera and repeatedly tried to duck reporters’ questions—sticks out as a factor that exacerbated public frustration.

But as an example of environmental liability, Elk River really stands apart. This event was entirely preventable and made more severe by a number of unusual conditions—namely a ridiculously pro-industry climate that led to virtually absent regulation, and a bad actor of a company that showed a clear disregard for public safety. Freedom Industries, and the spill for which it is responsible, is not a good example of how all chemical companies behave. But it does provide a clear picture of what kind of harm an accidental release of environmental contaminants can do in terms of causing personal harm on a widespread basis and disrupting the businesses of others.

While the conditions that led to the Elk River spill might have been unusual, the hazards of the spill themselves are not. In fact, they are present not just in big chemical storage facilities, but in a wide The Elk River range of operations—from a heavy manufacturing industry that accidentally releases excessive amounts spill was a fully of harmful emissions from its smokestacks, to a small landscaping contractor that accidentally lets too preventable much fertilizer runoff contaminate a pond stocked with lots of expensive fish, and everything in between. pollution event. But there is good news: these risks are insurable, and the Starr Companies’ Environmental program provides businesses of all types and sizes with the protection they need in the event of an environmental accident. Nobody wants to be the next Freedom Industries. And thanks to proper preventative measures and a strong insurance program, nobody has to be.

3 ENVIRONMENTAL INSURANCE Understanding a complex and valuable coverage

Sofia, Bulgaria—May 19, 2015: A team working with toxic acids and chemicals is approaching a chemical cargo train crash near Sofia. Teams from fire departments are participating in an emergency training with spilled toxic and flammable materials.

In the 1960s and 1970s, growing public environmental awareness spurred a number of regulatory changes meant to impose responsibility on those who cause severe pollution and contamination of air, water and soil. This legislation hit an apex with the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), also known as Superfund, which imposed very costly new environmental cleanup standards. In response, many polluters sought relief from their commercial general liability policies, which were never meant to cover such losses.

After years of legal wrangling, the insurance industry developed new policy language that by 1984 EIL started as had fully excluded most pollution losses from CGL policies. (Some exceptions remained, such as smoke specialty coverage damage from an out-of-control fire). Instead, these risks would be covered by a new kind of coverage: but has become impairment environmental liability insurance. more mainstream. Also known as EIL, this specialty insurance covers a wide range of costs that stem from environmental damage caused by the insured. These costs can either be “sudden and accidental” (e.g., a leaking chemical tank) or they can be gradual (e.g., dioxin buildup in the soil of an industrial facility).

The costs covered by an EIL policy can include:

• Cleanup costs resulting from statutory remediation requirements

• Civil liability and legal expenses resulting from bodily injury or property damage to third parties from pollution or environmental contamination

4 • Legal liability claims resulting from an error or omission committed by an environmental consultant who advises third parties about environmental conditions

• Liabilities associated with environmental remediation operations

• Liabilities associated with research facilities that analyze hazardous materials in water, air or soil

• Certain EIL policies will cover lenders and real estate agents of properties they sell if they are later found out to be environmentally contaminated

EIL policies typically do not cover:

• Spills of oil or other toxic substances from maritime vessels. This is covered by specialized marine pollution cleanup indemnity policies that the vessels themselves are required to carry

• Underground storage tank pollution liability. This is typically covered by a standalone policy, since the risks of underground storage tanks are so acute and particular

EIL is perhaps one of the most steadily evolving risks for which there is insurance today. What an EIL policy typically covers has changed since these policies were first marketed decades ago, and as environmental regulations (particularly in the United States) continue to change, so too will the language of EIL coverage, and the scope of the coverage itself.

Regulations mean Likewise, as the precedent for regulatory fines and civil liability for environmental damage continues that any EIL to strengthen, so too has the need for EIL coverage: what began as a niche product handled by only claim can be an a few insurers has become a fiercely competitive market today, with some 40 insurers and some expensive one. $600 million in capacity.

And, as companies of all sizes and operations recognize the need to protect themselves from environmental liability, sales of EIL have increased by some 30% or more each year.

Still, this coverage is not without its challenges.

• Despite the fact that industry is getting safer across the board, environmental claims are increasing in frequency and severity every year, often in double digits.

• EIL claims can be expensive. The average soil cleanup project, for example, currently costs between $500,000 and $1 million.

• This is still a relatively young insurance market, so the claims data on hand is still not deep enough to significantly aid underwriting. This makes pricing EIL difficult, even though the competitive marketplace urges many insurers to try to compete on price.

• Terms for pollution liability used to run 10 years on average, but most policies typically run for five years today, with especially difficult classes—such as energy risks, petrochemical operations and utilities—typically obtaining coverage for only two-year periods.

5 New risks continue to emerge. In recent years, EIL losses from natural catastrophes have gained Toxic tort litigation many insurers’ attention. Windstorms can cause storage tanks to rupture; winter weather can cause is just one emerging pipelines to freeze and burst; flooding can overwhelm wastewater systems. The widespread impact EIL risk to watch. of catastrophe-related environmental claims in a particular region can make this business a difficult one for insurers not prepared for it.

Other new EIL risks are more theoretical in nature, but require no less diligence on the part of insurers. These include:

• Natural resource damage assessments to an area’s air, soil, water, flora and/or fauna as a way to take a second pass at polluters who have been deemed to have paid insufficiently for past pollution or contamination

• Toxic tort litigation for liabilities arising from new uses of nanotechnology or genetically modified organisms

• Liabilities stemming from the use of alternate fuels (such as E-85), which could pose a new degree of storage tank risk

• Liabilities assigned to damages caused by climate change, considered to have been caused by man-made impacts upon the environment

6 ECO STARR Building a better environmental insurance program

This demolition project in Turkey involved clearing tons of rubble and making sure that no fuels or contaminants from the site leaked into the ground or nearby water systems.

In the fiercely competitive environmental impairment liability insurance space, many insurers attempt to compete on price, despite the increasing cost of claims. The Starr Companies’ approach is different. Rather than race to the bottom in pricing, Starr provides its clients with outstanding EIL programs built on strong underwriting, value-added loss control services, swift claims resolution and seamless integration with other coverages.

Starr provides a suite of EIL coverages called ECO Starr, which consists of two main components: ECO STARR contractor pollution and site pollution. These programs are written on ISO-based coverage forms using state-of-the-art policy language. Starr’s coverage is offered on both an occurrence and claims-made basis, depending on client needs. And ECO Starr also provides extensions for other kinds of related coverage, including products pollution, hired & non-owned auto, employee benefits, and more.

7 The ECO Starr contractor pollution liability program covers pollution incidents resulting from work CONTRACTOR by the policyholder or someone working on the policyholder’s behalf. Covered losses include cleanup POLLUTION costs, third-party bodily injury and third-party property damage. Coverage is offered on either an occurrence or claims-made basis, depending on the insured’s scope of operations, and their needs.

This program covers damages caused by asbestos, lead, mold, PCB and dioxin. It also offers Completed Operations coverage. Additional coverages are available through endorsements, including Transportation Pollution Liability, additional insureds, and waivers of subrogation.

The program offers limits of up to $25 million and offers project policies with terms of up to fi ve years. Multiyear practice policies are also available for companies with less than $1.5 million in revenue and/or less than $500K in payroll. This program automatically provides a three-month extended reporting period, with an optional extended reporting period of up to fi ve years for claims-made policies.

This program targets a wide range of excavation, demolition, remodeling, restoration and other contractors, including, but not limited to:

• Asbestos, lead, mold or PCB abatement contractors • Drilling contractors • Hazardous materials contractors • Indoor air-quality contractors • Response contractors • Remediation contractors • Restoration contractors • Medical waste disposal contractors • Tank installation, maintenance, and removal contractors • Pipeline maintenance • Wetlands restoration and construction • Wastewater treatment plant operators • Environmental consulting fi eld services • Trade contractors or general contractors with asbestos, lead, and mold exposures

Starr has a broad appetite for site pollution risk, with the exception of petroleum refi neries and nuclear SITE POLLUTION facilities. Starr’s site pollution coverage is a surplus lines product, able to be custom-tailored to each client’s specifi c needs.

Starr’s site pollution coverage offers limits of up to $25 million, and policy periods of up to 10 years (many other insurers offer policy periods of only fi ve years). Coverage is available for U.S. companies with international operations, and coverage can be offered in support of mergers, acquisitions and property divestitures.

Coverage is offered on a claims-made basis, is triggered by a pollution incident at or emanating from the insured site, and covers cleanup costs (both on-site and off-site), third-party bodily injury claims and third-party property damage claims.

8 This simple, two-section coverage form is easy for customers to understand. It does provide coverage Starr’s coverage is for third-party claims arising from mold, asbestos and lead-based paints, and coverage is available for simply written and both pre-existing and new conditions. easy to understand. Like the contractor pollution program, the site pollution program has an automatic three-month extended reporting period, with an optional extended reporting period of up to fi ve years.

Aboveground storage tanks are automatically included, as are “unknown” underground storage tanks. “Known” underground storage tanks require separate, optional coverage, as does Transportation Pollution Liability.

This program targets a wide range of operations, including, but not limited to:

• Landfi lls (municipal solid waste, and construction debris) • Municipal waste incinerators • Recycling facilities • Composting facilities • Warehousing and bulk storage • Municipalities • Manufacturing facilities • Chemical manufacturing • Commercial properties • Real estate portfolios • Food processors • Agricultural properties • Schools and universities

9 THE STARR DIFFERENCE Program integration and loss control are the key

A professor from the University of Texas at El Paso tests samples of untreated raw sewage runoff from a canal in Ciudad Juarez, Mexico, where tainted water used for irrigation raises concerns about harmful bacteria on both sides of the border.

To Starr Companies’ considerable advantage, it offers environmental coverage in tandem with other forms of business insurance. Most insurers only provide environmental coverage either to a narrow range of potential clients, or strictly on a standalone basis. Starr Companies, however, views its EIL programs as part of an integrated whole, so it also offers general liability, commercial auto liability, follow form excess AN INTEGRATED liability, professional liability for environmental consultants, workers’ compensation and employer’s liability APPROACH coverages to its EIL clients. The result is that Starr is one of a very small handful of insurers willing to provide all coverages in an integrated package to its clients. In a market as competitive as EIL, Starr’s own competitive set is actually extremely small because of its ability to be a one-stop shop for its policyholders.

Starr can do this because it has both the breadth of products to offer, and the underwriting skill to make sure these risks do not overwhelm each other. At Starr, these different risks are looked at as part of a larger story about the client, whereas other insurers might look at each risk in isolation. That approach can miss critical information, however—for example, how one’s commercial auto safety culture might impact their environmental liability. Thanks to Starr Companies’ flat organizational structure, collaboration across our own insurance units is openly encouraged and easily accomplished, making a holistic approach to our environmental clients not just doable, but the preferred way to handle business.

10 Starr is willing to meet client needs across the country, and from a wide range of industries, especially with contractors that deal with hazardous sites or any kind of identified contaminant (such as lead, mold or asbestos). Starr provides very broad coverage on an admitted basis, which is a huge advantage for clients working at the municipal, state or federal level, where they might need a waiver to procure non-admitted coverage. But Starr also provides coverage on a non-admitted basis, which allows for a great deal of form and rate flexibility. By providing both admitted and non-admitted coverage, Starr can handle any client need in a way that other insurers simply can’t.

Starr Companies does not look for a particular size of client, but rather a particular approach to risk. How does the company manage its business? Does it have the right controls, the right management structure, the right training, risk management and protocols in place? These are all things that are key to a fruitful insurance relationship, and just as they can be present in a small company, they can be absent in a large one. Smaller clients, even when it comes to EIL insurance, are not necessarily a bad thing.

Starr Companies also has a deep commitment to loss control with all of its clients, and it is no different A COMMITMENT with environmental risk. Irrespective of the size of a client’s business, Starr’s customers receive extensive TO LOSS CONTROL loss control support services free of charge to help improve safety and reduce environmental risk. Starr does this by contracting with various third parties who can consult with insureds to conduct site reviews, safety and maintenance inspections, employee training, driver/fleet safety protocols and other precautionary services.

Starr offers these services on a consultative basis, seeking to find solutions that are a combination of best practices and that are also right for the client. This includes close follow-ups with the client to ensure that recommended solutions are working as expected, and to see if additional support is needed, such as providing additional internal expertise to improve safety culture or maintain inspections of equipment.

One area in which Starr focuses is helping clients with secondary containment—reviewing a client’s operations and insurance policies in place to ensure that there are no gaps in coverage, especially when dealing with subcontractors who are handling their own insurance programs. With environmental risk, even a small gap can prove very costly.

This is a special focus on the contractor/subcontractor space. Starr consults closely with its clients to make sure that they understand contractual transfer of liability, whether coverage really is in place, and what constitutes good standards of coverage. For more complex businesses involving multiple contractor/ subcontractor relationships, this can become very complicated.

Servicing the account is the final piece of the puzzle. Due to its flat organizational structure, Starr can bring in underwriters, claims specialists, loss control specialists and other professionals to a client meeting to ensure that there is a single point of contact. Starr also handles all of its underwriting in-house (a rarity in the EIL market), which makes it much simpler for the policyholder, especially if they wish to add an endorsement to the policy or increase limits. Moreover, a Starr client does not only hear from its account service representatives at renewal. Starr Companies believes in maintaining close contact with its clients to see what challenges are arising, what opportunities can be seized, and how to bring both sides of the relationship to ever-higher standards of success.

11 CONCLUSION Great environmental coverage creates better businesses

Salt Lake City, Utah, U.S.—January 31, 2015: A crowd gathers in front of the Utah State Capitol building to demand changes in policy to address the air pollution issues in the state.

Environmental liability. What was an obscure talking point a few decades ago has become one of the central risks for businesses to manage today, with potential liabilities large enough to buckle even the strongest of companies.

As new industrial processes raise new environmental concerns, and an ever-more-crowded planet raises Business and age-old concerns regarding the sustainability of the world in which we all live, robust environmental Environment don’t impairment liability insurance has become mandatory coverage for many operations. have to be opposing forces. EIL insurance requires a special kind of insurer, one that can provide a breadth and depth not just of insurance products, but of the expertise that powers them, and the kind of commitment to relationship building that will turn managing this risk into another avenue of success.

Starr Companies has differentiated itself from a crowded and competitive environmental impairment liability insurance field through a mix of strong, broad coverages, value-added loss control services, an unmatched ability to service clients closely, and a dedication to providing top service for years to come.

The coverages described in this document are only a brief description of available insurance coverage. It is intended for general information purposes and does not provide any guidance regarding coverage that may or may not be available under this policy in respect to any claim. Any policy issued by Starr Indemnity & Liability Company will contain limitations, exclusions and termination provisions. Not all coverages available in all jurisdictions.

Starr Companies (or Starr) is the worldwide marketing name for the operating insurance and travel assistance companies and subsidiaries of Starr International Company, Inc. and for the investment business of C.V. Starr & Co., Inc. and its subsidiaries. Starr is a leading insurance and investment organization with a presence on five continents; through its operating insurance companies, Starr provides property, casualty, and accident & health insurance products as well as a range of specialty coverages including aviation, marine, energy and excess casualty insurance. Starr’s insurance company subsidiaries domiciled in the U.S., Bermuda, Hong Kong and Singapore each have an A.M. Best rating of “A” (Excellent). Starr’s Lloyd’s syndicate has a Standard & Poor’s rating of “A+” (Strong). Starr’s insurance company subsidiary domiciled in China has an A.M. Best rating of “A-” (Excellent).

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