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@example.com.