The Road to Insurance Recovery

Sarah Lintecum recently spoke at the Risk Management Society’s (“RIMS”) 2022 RISKWORLD conference with Lori Siwik of SandRun Risk about insurance coverage for PFAS liabilities. The following summarizes their presentation.

What are PFAS?

Lately, it feels like the term “PFAS” has been everywhere. But what exactly are PFAS and why should you care?

PFAS is the acronym for perfluoroalkyl and polyfluoroalkyl substances, a group of over 5,000 man-made chemicals. They are particularly useful because they are resistant to water, oil, and heat. Since the 1940’s, many products commonly used by consumers and industry have been manufactured with or from PFAS. Common products include non-stick cookware, waterproof or stain-resistant fabrics, fast food wrappers, personal care products (such as shampoo and dental floss), and cosmetics (such as nail polish and eye makeup). In short, they are all around us.

People are exposed to PFAS in a variety of ways, including by drinking contaminated municipal or private well water; eating food grown or raised near places that made or used PFAS, eating fish from water contaminated by PFAS, eating food packaged in material that contains PFAS; and using certain consumer products such as stain resistant carpeting and water repellent clothing. Research suggests that exposure to PFAS from today’s consumer products is usually low, especially when compared to exposures to contaminated drinking water.

PFAS do not break down easily, a quality that has earned them the nickname “forever chemicals.” Consequently, they linger in the environment and bioaccumulate in the human body and animals. They can also travel far from the original site of contamination. Scientists continue to research the impact exposure to PFAS has on human health. To date, research suggests exposure to high levels of certain PFAS compounds may lead to increased cholesterol, changes in liver enzymes, increased risk of high blood pressure or pre-eclampsia in pregnant women, and an increased risk of kidney or testicular cancer.      

Current Regulatory Environment

When it comes to PFAS, the regulatory environment is constantly changing. At the federal level, EPA continues to push to list PFOA and PFOS, two types of PFAS, as hazardous substances under CERCLA. This could happen as early as next year. Such a listing would give EPA authority to order the investigation and remediation of PFOA and PFOS at EPA sites and reopen closed sites where there are PFOA and PFOS impacts. It would also greatly increase litigation over who must bear the cost of remediating the contamination and require parties to investigate PFOA and PFOS as part of Phase I Environmental Assessments in order to satisfy certain aspects of the “All Appropriate Inquiries Rule.”    

In June 2022, EPA announced new drinking water health advisories for four PFAS compounds: PFOA, PFOS, GenX, and PFBS. Notably, EPA significantly lowered health advisory levels set in 2016 for PFOA and PFOS. The interim PFOA and PFOS health advisories effectively mean that any PFOA or PFOS in drinking water will exceed the health advisories.  

Health advisory levels are non-enforceable, non-regulatory drinking water standards for contaminants that are not subject to a National Primary Drinking Water Regulation (NPDWR) under the Safe Drinking Water Act. They identify the concentration of a contaminant in drinking water at or below which adverse health effects are not anticipated to occur over specific exposure durations (e.g., 1 day, 10 days, a lifetime). All four of these health advisories consider lifetime exposure. Despite not being enforceable, these health advisory levels are an interim step in the larger process of regulating PFOA and PFOS under the Safe Drinking Water Act. Later this year, EPA plans to propose national drinking water regulations for PFOA and PFOS, with a final rule regulating the contaminants under the Safe Drinking Water Act expected in 2023.

Under the Clean Water Act, EPA continues to work to restrict PFAS discharges from certain industrial sources through its Effluent Limitations Guidelines (ELGs) program. EPA has initially focused on restricting PFAS discharges from facilities that manufacture PFAS and facilities with chromium plating operations. Meanwhile, it continues to study other industries to understand their current PFAS discharges with an eye towards restricting those discharges in the future. EPA also plans to leverage federally-issued National Pollutant Discharge Elimination System (NPDES) permits to reduce PFAS discharges.

Finally, several states have gone much farther than EPA in regulating PFAS because EPA has been somewhat slow to act. State actions include promulgating more stringent enforceable drinking water and wastewater limits. States that based their enforceable drinking water standards on EPA’s 2016 health advisory levels for PFOA and PFOS will now have to decide whether to adopt the 2022 health advisory levels for those contaminants. All said, the various actions at the state and federal level have created a patchwork approach to regulation that is difficult for companies to monitor.     

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 include:

1. Is this a first-party loss, a third-party loss, or both?
2. Which policies apply? Do not forget that more than one type of policy could apply, including environmental, property, general liability, D&O, etc.
3. How far back does the claim reach? Long-tail claims often span multiple years.
4. Are predecessors’ policies relevant?
5. Does the company have any additional insured coverage?

Most PFAS claims will likely involve general liability policies, which provide insurance coverage for claims because of “bodily injury” and/or “property damage” to third parties. Be aware 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 because of pollution or PFAS-specific exclusions. Consequently, historic policies—meaning those issued before the broad form pollution exclusion was introduced in the mid-1980s—will be key. If a company knows it could face PFAS-related liability, it should start looking for its historic policies now, before a claim is asserted.

If a company does not know what its historic insurance program looked like, it should consider hiring an insurance archeology firm to search for historic policies and secondary evidence of policies to prove the existence and terms of coverage. Possible places to look include:

• Risk Management records
• Accounting records
• Business contracts
• Board meeting minutes
• Former employees
• Outside defense counsel
• Incident reports
• Broker records
• Insurers’ records
• Litigation files (internal and external)

The policyholder bears 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 also must prove the existence and material terms and conditions of the policy (policy period, type of coverage, named insured, limits). Keep in mind that because general liability policies usually employ standard language, expert opinion can be used to establish what the terms and conditions of the policy would have been. Thus, finding secondary evidence of historic policies will be helpful.    

After locating their historic insurance policies, companies should place their insurance carriers on notice of the claim. Any insurer with potential coverage should be sent a notice letter without delay. Many insurance policies require notice “as soon as practicable.” If a company has a claims-made policy, do not wait until the end of the claims-made policy period to provide notice. If a company is an additional insured on a policy, it should not rely on the named insured to give notice. Note that it is preferable to provide notice before any costs are incurred to avoid a fight over whether those costs are covered. Finally, the notice letter should incorporate all known and unknown policies as well as “all potentially applicable policies.” 

Once notice is provided, the insurance carriers should acknowledge receipt of the claim. Often, an insurance carrier says it needs more information and begins to request data. A company should respond strategically, keeping in mind privilege issues. If the insurance carrier sends a reservation of rights letter, companies should respond to all reservations of right and continue to preserve all rights to coverage. The same is true if a denial letter is received. As companies work toward resolution of the claim with its insurance carriers, they should keep in mind there could be contractual or statutory time limitations within which they must assert breach of contract, bad faith, and/or vexatious refusal to pay claims. These time considerations vary from jurisdiction to jurisdiction.  

As noted above, the policyholder bears 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 will arise in the context of a PFAS claim 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? 
• Allocation of damages

The outcome of each of these issues varies by jurisdiction.

Conclusion

PFAS claims will undoubtedly increase over the next several years. Companies that have a history of using PFAS in their operations should begin searching for historic insurance policies now, rather than waiting until a claim is made. Not only will this help insureds avoid any late notice arguments, but it will better position the insured to be strategic about obtaining coverage for PFAS claims.