Environmental disasters are not confined
to just headline-grabbing oil or gas
spills. There are many ways in which every business is exposed to environmental
liability — from asbestos and groundwater
pollution to property transactions where pollution already exists in the land or facilities.
These hazards can be subject to serious violations of federal legislation to protect the
environment.
“Environmental losses tend to be severe
and significant to a business,” said Brian Slife,
vice president and account executive for Aon
Risk Services Inc. “However, some businesses are not aware that their general liability
policies exclude pollution liabilities. Businesses are often entirely uninsured.”
Smart Business spoke with Slife about the
dangers of environmental exposures and
what you can do to protect your business.
Do all businesses need to be concerned with
environmental liability?
The obvious industries that are at high risk
for environmental liabilities are the old guard
businesses, such as oil, gas and manufacturing. But all kinds of businesses — even service companies — can be exposed to environmental liabilities through different aspects of
their operations. For example, hospitals and
other health care companies have biohazard
and radiation issues. An even less obvious
example would be a real estate portfolio
manager — not considered an environmentally hazardous occupation — who is
involved with transaction of properties that
have historic environmental issues.
Regardless of the industry, every business
should evaluate its exposures to environmental liabilities, make the appropriate disclosure of those liabilities on its balance
sheet and make an educated decision about
whether or not to purchase environmental
insurance.
What types of environmental liabilities can
put a business at risk?
There are two major types of environmental risks, operational and transactional.
Operational risks are hazards that revolve
around the operation of a business, including
spills, leaks, waste disposal, transportation of products or wastes, and historic or gradual
pollution. Transactional risks are unknown
pollution issues that come to light after a
property or business is bought or sold. If environmental due diligence was not conducted
before the purchase, both the new owner
and previous owner can be liable for environmental problems associated with the site.
What problems can a business face if it does-n’t have environmental liability insurance?
The business could suffer hits to its income
and possible long-term liabilities to its balance sheets. Fines and lawsuits related to
environmental liabilities tend to be very costly. There is also a cost related to public perception of an organization’s brand, which can
be very difficult to recover from.
What legislative changes pressure businesses to examine environmental exposures?
Increasing enforcement of existing environmental laws, such as the Clean Water Act,
Clean Air Act, RCRA and Superfund, are the
most notable. There are increasing pressures
on the Securities and Exchange Commission
(SEC) to adapt more stringent rules and procedures when publicly held companies evaluate and disclose their environmental liabilities and exposures to climate change.
Accounting rules are also evolving related
to the measurement and disclosure of environmental liabilities. The Financial Accounting Standards Board (FASB) issued
Interpretation Number 47 (FIN 47) in March
of 2005, which changed the way organizations must report environmental liabilities
related to an asset’s ultimate end life, signaling a possible end of an organization’s traditional ‘don’t ask/don’t tell’ approach to potential environmental problems. FASB also
issued FAS 141R, which will go into effect
December 15, 2008. FAS 141R requires a
buyer of business assets, or a party acquiring
a controlling interest in business assets, to
recognize and/or disclose the fair value of
contingent assets and liabilities acquired or
assumed in a business combination. FAS
141R presents an opportunity for environmental risk management techniques and
environmental insurance to be effectively
used to mitigate environmental liability risk
exposures related to business combinations,
particularly mergers and acquisitions.
How can business risk managers make sure
they have their bases covered?
Environmental risk management is not just
about pre-loss environmental loss control.
Risk managers need to focus on how their
organization controls the loss post-loss from
a severity standpoint, and then how it will
pay for the loss when it occurs. They must
also be actively involved in, and the organization must have a procedure for, disclosing
environmental losses. Environmental risk
management is particularly effective when
multiple disciplines work together in the
organization (risk management, operations,
environmental management, legal and
finance) and when a business utilizes environmental insurance, which mitigates financial effects. Environmental liability insurance
products are the best tools an organization
can use to mitigate the potentially devastating financial consequences that occur
because of an environmental problem.
BRIAN SLIFE is a vice president and account executive with Aon Risk Services Inc. (www.aon.com), a risk management, human
capital and reinsurance consulting firm based in Cleveland. Reach him at (216) 623-4112 or [email protected].
