Pay the piper: as the Superfund Trust fund runs out of money, will the U.S. Environmental Protection Agency become more aggressive in pursuing the insurers of bankrupt polluters to pay the hefty expense of cleaning up toxic waste sites?

Peter J. Mintzer, a Seattle-based attorney with Cozen O'Connor, expects to stay busy in 2005.

Mintzer, who specializes in resolving environmental insurance claims, foresees an increase of lawsuits on the horizon, especially now as the U.S. government's budget to clean up contaminated sites is tighter.

The U.S. Environmental Protection Agency's Superfund program, which oversees the cleanup of toxic waste sites, has relied on a trust fund to pay for so-called "orphan" sites--places where the parties potentially responsible for the pollution have gone out of business or no longer exist. The fund, created in 1980, was originally fueled by a tax on chemical and oil companies, which generated between $1.5 billion and $2 billion annually for remediation of contaminated sites. The tax expired in 1995, however, and Congress has not reinstated it. In the ensuing years, the money in the Superfund Trust dwindled, and the EPA has been forced to rely more on taxpayer dollars from general revenues to pay for the program.

The Superfund relied on the trust fund supported by the oil and chemical tax to provide $1.57 billion in funding in 1990, with no money coming from the federal government's general revenues. In 2003, the trust fund was tapped for $632 million--only half of its budget--with the federal government putting in another $632 million from general revenues.

With less funding, fewer projects have been remediated. During the final four years of the Clinton administration, an average of 85 contaminated sites were cleaned up annually. That number has fallen to an average of about 40 sites under the Bush administration.

"With the depletion of Superfund money--and with more and more companies going out of business, bankrupt, or sold to another company that says they bought the assets, not the liabilities--the EPA is taking a much harder look at what insurance is available [to pay for cleaning up sites]" Mintzer said. "EPA lawyers are much more savvy about insurance than they were five or 10 years ago."

It's not unusual to spend $50 million to $100 million to clean a polluted site. For fiscal year 2004, more than 52% of Superfund obligations went to clean up just nine sites. About 85% of all Superfund sites involve groundwater contamination, according to Green Scissors, a coalition of more than 40 environmental, taxpayer, public health and consumer interest organizations.

In addition to cleanup costs, there's a growing trend among the EPA and other governmental agencies to pursue "Natural Resource Damage" claims, which can double remediation costs. Under the Superfund act, "even after you clean up the site, a potentially responsible party is still liable for damage to wildlife, natural resources and habitat," Mintzer said. "NRD liability for injuries to natural resources, habitat restoration costs, mitigation and loss-of-use claims for these resources can at times equal or exceed the cost of actually investigating and cleaning up the site."

States also are involved in the remediation of toxic waste sites. New Jersey's Department of Environmental Protection announced an initiative in 2004 to seek some 4,000 NRD claims. Industry experts are watching to see if other states follow New Jersey's lead.

While experts disagree on whether insurers' environmental burdens will increase in the near term, with more than a thousand contaminated sites on the EPA's list, there's no doubt that Superfund liabilities will continue to dog the insurance industry.

A Big Problem

The term "Superfund" is often used as a nickname for the Comprehensive Environmental Response, Compensation and Liability Act, which established both a law regarding polluted sites and a trust fund to clean up sites when the polluter is not a viable source of money.

CERCLA established prohibitions and requirements for closed and abandoned hazardous waste sites and provided for the liability of persons or companies responsible for the pollution at these sites. The idea of the law was to make those responsible for polluting pay to clean up the pollution. When that wasn't possible because the polluting company had gone out of business, CERCLA provided for a trust fund to pay for these orphan sites to be cleaned.

Under CERCLA, two kinds of response actions are authorized: short-term actions to address releases or threatened releases of pollutants requiring prompt response and long-term remedial response actions, which permanently and significantly reduce dangers related to hazardous substances that are serious, but not immediately life threatening. The long-term sites are limited to those listed on a National Priorities List, which includes 1,529 sites.

From 2004 to 2033, the EPA expects to see a total of 294,000 sites that need to be cleaned, which will require an estimated total cleanup cost of $209 billion. In addition to Superfund sites, the contaminated sites include those under the supervision of other federal agencies, such as the defense and energy departments and state and civil agencies, as well as brownfield sites and underground storage tanks.

"Most of this cost will be borne by the owners of the properties (private and public entities) and those potentially responsible for the contamination," the EPA said in a 2004 report.

Also, it's not always easy to identify responsible parties. Often more than one company was active on a given contaminated site, so more than one company is liable for the remediation.

Under a recent Supreme Court ruling, Cooper Industries Inc. vs. Aviall Services Inc. ,companies who voluntarily clean up a toxic waste site cannot then sue another company as a potentially responsible party unless the first company is the subject themselves of a lawsuit.

"In other words, it would seem the only way the Environmental Protection Agency can coerce participation in waste site cleanup is through lawsuits," equity analyst William Witt of Morgan Stanley wrote in December.

While pressure on environmental liability payments from insurers may lessen in the near term, the situation may not play out well for insurers over time, Witt said. Litigation among private parties and the EPA may increase, there might be a greater allocation of remediation costs to private parties, and the government may be forced to step in with a statutory fix if "the situation becomes unworkable," Witt wrote.

Insurers are likely to face higher costs to defend lawsuits, plus see more pressure to settle with the EPA in lieu of a settlement with the insured, or even in addition to settling with a different insured at the same time, Mintzer said.

"I don't see Superfund liability going away any time soon," Mintzer said.

Complicated Picture

In many states, government agencies only can chase after insurers if the potentially responsible party signs over its policies to them, said Rob Graff, an attorney with Meagher & Geer. The laws that allow that vary from state to state.

For example, under the Minnesota Landfill Clean Up Act, the state can step in and pay for a landfill to be cleaned up, and grant the responsible party immunity from civil actions if the party signs over its insurance policy to the state.

But still, insurers have valid defenses, Graff said.

"Insurers need to be very aware of looking at how the government is purporting to gain rights in private insurance contracts and the process in which they do that," Graff said.

But some experts said it doesn't matter who sues insurers--the government or policyholders--because insurers can only be liable for a certain amount.

Amy Bouska, a managing principal for the Tillinghast business of Towers Perrin, and Chris Lattin, consulting actuary of the Tillinghast business, said they don't think that the Superfund trust's depletion will impact insurers significantly.

First, they noted that in spite of the depletion of the trust fund sources, the Superfund appropriation has remained fairly constant over the past few years--although the funding is not as dependable as when there was a dedicated tax to support it.

"It's hard to predict what's going to happen [to future funding]," Bouska said. "On one side, if there aren't EPA funds available for managing cleanup, the cleanups will proceed more slowly, so among known responsible parties, there will be less call for cleanup."

Plus, it doesn't matter if the government pursues insurers directly, she said.

"That doesn't increase the amount the insurers would have to pay because the responsible party would have made the claim anyway," Bouska said.

She said Natural Resource Damages "are a real wild card. We haven't been able to confirm a substantial uptick in NRD. There's always been activity, especially the threat of activity. But NRDs are mostly used as clubs against potential responsible parties to settle the remainder of the cleanup."

New Jersey is leading the fight to collect NRDs, Lattin said, but that may not impact insurers.

In many cases, New Jersey is seeking NRDs from companies that have already cleaned up a site. Often, companies have settled with their insurance companies and agreed to issue an "environmental release," which gives the insured an environmental settlement from the insurance company in return for releasing the insurer from all future environmental claims on the site.

"I think in many cases that would prevent insurance companies from having to pay more in those situations," Lattin said.

Also, Bouska said that insurers traditionally have paid a hefty share of the cleanup bill. "It's not like the government has been paying 50% of the cost, and is now withdrawing to put more pressure on private parties," Bouska said.

"The bulk of what the EPA or Superfund is paying in remediation costs is for polluters who no longer exist or who are unable to pay," Lattin said.

He said the Superfund Trust pays for the remediation of orphan sites, and also, if there's a site with several responsible parties, the Superfund Trust would pay for the portion of any party that's not able to pay.

"According to the EPA, about 70% of the cleanup costs have been borne by the potential responsible parties at the site, and 30% by Superfund," Lattin said.

CERCLA also provides that the law is "joint, several and retroactive"--legal language that means in theory, the smallest responsible party could be forced to clean up the entire site.

"But historically, the EPA has not done that," Bouska said.

Adequate Reserves

While several insurers in recent years have taken hefty reserve charges to beef up asbestos reserves, there hasn't been much talk by insurers about environmental reserves.

A.M. Best Co. said it believes current environmental liability is $56 billion, and that the industry is underreserved by $24 billion. "Environmental losses are expected to grow as more states push to collect natural resource damages and especially if the federal EPA takes a more aggressive stance to pursue insurers of bankrupt potentially responsible parties more aggressively," A.M. Best Co. said in a December 2004 special report, "Asbestos Wave Continues to Crest; Can Environmental Be Far Behind?"

"Another area of concern is the growing trend within the judicial branch to rationalize or otherwise find coverage for environmental losses despite the presence of the absolute pollution exclusions," A.M. Best said in its report.

Tillinghast estimates the total environmental liability is $35 billion, and that the industry is just $4 billion underreserved.

"There may be a lot more sites out there that have to be cleaned up and they haven't come to the surface yet, or haven't been addressed at all," said Tillinghast's Lattin. "Both of those things I characterize as possibilities down the road, but not anything supported by the activity we've seen."

Key Points

* Since the tax on chemical and oil companies expired in 1995, the Superfund has had to rely more on general fund tax dollars.

* Fifty-two percent of the Superfund appropriations in Fiscal Year 2004 went to pay for the cleanup of just nine sites.

* A.M. Best Co. estimates the insurance industry's ultimate environmental liability will be $56 billion, and estimates the industry is underreserved by $24 billion.

Estimated Industry Environmental Funded Liabilities--1993-2003

A.M. Best believes current ultimate environmental liability is $56 billion.

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Superfund By The Numbers

The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), more commonly known as Superfund, was enacted by Congress in 1980. The original law created a tax on the chemical and petroleum industries and provided broad federal authority to respond directly to releases or threatened releases of hazardous substances that may endanger public health or the environment.

19

The number of sites that were ready for remediation but were not funded in 2004 because of budget constraints 

85%

The percentage of all Superfund sites with groundwater contamination

1 in 4

The number of Americans who live within a mile of a Superfund site

40

The number of sites nationwide that were completely cleaned up in 2004

926

The grand total of sites cleaned up since Superfund's inception

$597 Million

The amount Superfund spent in 2004 to perform construction and post-construction activities and to conduct and oversee emergency response actions

Source: U.S. Environmental Protection Agency; Green Scissors