Risk Managers Under Pressure to Tighten Exposure Valves

Risk Managers Under Pressure to Tighten Exposure Valves

Source: http://www.riskandinsurance.com, January 4, 2011

As the pressure on maintaining clean drinking water supplies mount, risk managers are advised to review their coverage.

By CYRIL TUOHY, managing editor of Risk & Insurance®

Life for risk managers of public water supplies has never been easy, and it’s expected to become more complicated still as the cost of water-related exposures soar into the hundreds of millions of dollars.

Consider the following examples of recent incurred losses, according to a report issued by Marsh Risk Consulting last month:

  • Water-related shutdowns of high-tech firms like Intel, which use ultraclean water in the manufacture of silicon chips, can cost an estimated $100 million to $200 million per quarter.
  • Coca-Cola and PepsiCo bottlers lost their operating licenses in parts of India due to water shortages, and the companies are now facing opposition to new bottling plants and to buying bottled drinking water.
  • Nestle Waters has been fighting for five years to build the largest U.S. bottling plant in McCloud, Calif.
  • In 2007, a drought forced the Tennessee Valley Authority to cut hydroelectric power generation by nearly one-third, resulting in approximately $300 million in losses.
  • Contamination of water supplies owned by Sydney Water Corp. forced it to issue a boiling advisory and sustain $50 million in direct costs related to the contamination.
  • Lebanon, N.H., settled allegations of illegally discharging raw sewage into nearby streams with the U.S. Environmental Protection Agency by agreeing to upgrade its wastewater treatment plants at a cost of $30.2 million.
  • In 2003, the Los Angele Department of Water and Power was required to control dust coming off the dry Owens Lake bed after the utility diverted tributary streams from the lake to the Los Angele Aqueduct. The remediation measure resulted in more than $105 million in costs.

For risk managers, the message is clear: You can’t take clean water for granted anymore, particularly with the pollution exclusions contained in the plain-vanilla property and general liability policies, according to the Marsh report titled “A Review of Water-Related Opportunities and Threats.”

“When coverage for environmental damage is granted in these forms, it is frequently very restrictive–for instance it may only address sudden and accidental exposure,” the authors of the report state.

Risk managers, therefore, need to pay particular attention to the definition of “waste,” according to the authors, Ariela Abecassis and Aisha Tittle, both Montreal-based consultants for Marsh Risk Consulting, and Jan Molina, vice president for Marsh Canada Ltd. in Edmonton, Alberta,

Even with pollution coverage mentioned in a property or general liability policy, waste can be excluded. As a result, risk managers should cover waste on a pollution-specific policy, the authors said, and risk managers should pay close attention to the time of the reporting window under which they must alert a carrier to sudden and accidental events.

While environmental insurance is available for operators of water systems and owners of these systems, risk managers need to look closely at first-party cleanup costs and third-party claims, said Abecassis, Tittle and Molina.

As water-related risks attract more attention from regulators and investors, the exposures have implications for directors’ and officers’ liability insurance as well, the authors said.

“Water availability, quality and safety are significant emerging global risks,” the authors conclude in the nine-page report. “Organizations, if they haven’t already, must begin to account for it in their strategic and operational planning.”

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