I recently spoke at the RIMS 2022 conference with Sarah Lincecum of Lathrop GPM about insurance coverage for PFAS liabilities. The following summarizes our presentation.
PFAS is the acronym for perfluoroalkyl and polyfluoroalkyl substances, a group of approximately 5,000 man-made chemicals. Since the 1940s, many products commonly used by consumers and industry have been manufactured with or from PFAS including nonstick cookware, waterproof or stain resistant fabrics, and firefighting foam. PFAS are persistent and resistant to environmental degradation. They are everywhere.
People are exposed to PFAS from many different sources (food, water, consumer use, occupation exposure), increasing cumulative risk. According to US EPA, certain PFAS can accumulate in the human body for extended periods. Adverse health effects include:
- Liver effects (e.g., higher cholesterol)
- Immunological effects (e.g., decreased vaccination response, asthma)
- Developmental effects (e.g., birth weight)
- Endocrine effects (e.g., thyroid disease)
- Reproductive effects (e.g., lower fertility)
- Cardiovascular effects (e.g., pregnancy induced hypertension)
- Cancer (e.g., testicular, kidney – documented PFOA only)
Over the last several years, the environmental regulations for PFAS have changed. In 2016, the EPA issued Drinking Water Health Advisory for PFOA & PFOS only. While it is non-enforceable, the standard set was 70 ppt for PFOS & PFOA ppt combined. In March 2021, the EPA published a final determination to regulate PFOS & PFOA in drinking water. It is now developing an enforceable National Primary Drinking Water Regulation and expects to issue a proposed regulation in Fall 2022 with a final Rule expected by Fall 2023. In December 2021, the EPA finalized the Fifth Unregulated Contaminant Monitoring Rule (UMCR 5) to establish nationwide monitoring for 29 PFAS and lithium in drinking water.
Under the Clean Water Act, the EPA is looking to restrict PFAS discharges from certain industrial sources through Effluent Limitations Guidelines (ELG) program. The current industries of focus are organic chemicals, plastics, and synthetic fibers (proposed rule expected Summer 2023) and metal finishing and electroplating (proposed rule expected Summer 2024). The EPA will continue studying other industries to understand current PFAS discharges including the National Pollutant Discharge Elimination System (“NPDES”) permitting to reduce PFAS discharges to waterways.
While PFAS is not currently regulated under CERCLA, the EPA is working on a Proposed Rule designating PFAS as hazardous substances. The Proposed Rule is expected Spring 2022 with the Final Rule expected in Summer 2023. The Advanced Notice of Proposed Rulemaking to seek public comment on designating other PFAS as hazardous substances was issued in Spring 2022. Its impacts include:
- Mandatory reporting of releases above reportable quantities
- Downstream effects on businesses that used PFAS in products
- Downstream effects on businesses that own property where PFAS was used in the past
- Re-opening of closed Superfund sites
- Cost recovery and contribution litigation
Is there insurance coverage for PFAS?
If a company is faced with a PFAS claim, it should evaluate whether it has any insurance coverage to address the claim. Issues to consider are: (1) Is this first-party loss or a third-party liability, or both? (2) Any number of policies could apply – environmental policies, property policies, CGL, D&O, etc.; (3) How far back does the claim reach? (4) Oftentimes long-tail claims span multiple years; (5) Are predecessor’s policies relevant? and (6) Any additional insured coverage? Most PFAS claims likely will involve general liability policies which provide insurance coverage for claims because of bodily injury and property damage to third parties. Keep in mind that groundwater pollution is covered third party property damage because no one owns the groundwater.
Current insurance policies do not provide coverage for PFAS claims. Historic policies, those issued before the broad form pollution exclusion was added, are key. If a company does not know what its historic insurance program looked like, it may need to hire an insurance archaeologist firm, like SandRun Risk, to search for the historic policies and secondary evidence of polices to prove the existence and terms of coverage. Places to look include, but are not limited to:
- Risk Management records
- Accounting records
- Business contracts
- Board meeting minutes
- Former employees
- Outside defense counsel
- Incident reports
- Broker(s) records
- Insurer(s) records
- Litigation files (internal and external)
The Policyholder carries the burden of establishing that: (1) it conducted a diligent search for the policies; (2) the policy was lost or destroyed; and (3) the loss or destruction was not the result of bad faith. The Policyholder must prove the existence and material terms and conditions of the policy (policy period, type of coverage, named insured, limits). After locating its historic insurance policies, the Company should place the insurance carriers on notice of the claim. Any insurer with potential coverage should be sent a notice letter. Many insurance policies require notice “as soon as practicable.” Don’t delay. Get the notice letter out as soon as possible, preferably before any costs are incurred. If a company has a claims-made policy, don’t wait until the end of the claims-made policy period. A company can supplement notice as needed. The notice letter should incorporate all known and unknown policies as well as “all potentially applicable policies.” If a company is an additional insured on a policy, don’t rely on the named insured to give notice.
Once notice is provided, the insurance carriers should acknowledge receipt of the claim. Often, the insurance carrier says they need more information and begin requesting data. A company should respond strategically. If the insurance carrier sends a reservation of rights letter, Companies should respond to all reservation of right and denial letters and continue to preserve all rights to coverage. As companies work toward resolution of the claim with its insurance carriers, they should keep in mind any time considerations including: (1) whether there is a contractual limitation period; (2) where there are any statutory limitations for breach of contract, bad faith, vexatious refusal to pay. These time considerations vary from jurisdiction to jurisdiction.
While negotiating coverage, a company may consider entering into Confidentiality, Standstill and Tolling Agreements with its insurance carriers. The insured has the initial burden to prove that a claim falls within coverage. If met, the burden then shifts to the insurance company to prove that an exclusion applies to bar coverage. Common coverage issues that arise are:
- Pollution Exclusions
- Known Loss Doctrine
- What constitutes a “suit?”
- What law governs?
- Whether there is an occurrence (“expected or intended”)
- How many occurrences are there?
- Allocating damages
PFAS claims are likely to increase over the next several years. If companies have a history of using PFAS in their operations, they should begin to look for their historic insurance policies now and not wait until a claim is made. This avoids the delay of presenting notice of the claim to the insurance carrier and the carrier arguing that notice was late or that any costs incurred prior to notice are not recoverable.