What scares insurers more than the specter of another Hurricane Andrew? To any insurance executive, the answer is easy: Superfund claims. Natural disasters get most of the publicity. But claims stemming from environmental cleanups mandated by the 1980 Superfund Act pose a huge threat to industry earnings--and perhaps even to the solvency of some companies.
Pollution claims have been dogging the industry for years, and many major insurers have paid out or put into reserves hundreds of millions of dollars. But the hit, it's becoming clear, could be much higher than nearly everyone in the industry expected. Insurers could end up paying more than $1 trillion for Superfund claims over the next 50 years, according to Tillinghast, the New York-based actuarial consulting arm of Towers Perrin. That's the equivalent of about 60 Hurricane Andrews.
Despite the millions put aside, insurance companies are seriously underreserved, say analysts. "If Superfund was to get very aggressive in cleaning up sites,it could potentially jeopardizeor impair some of the big household names," says John H. Snyder, a senior vice-president at A.M. Best Co., the ratings agency.
The size of the hit is not yet appreciated by most investors. Says one major institutional investor: "Environmental claims aren't in their stock prices." Snyder predicts that Superfund claims will have more of an effect on stock prices in the next couple of years, when Superfund costs begin mounting into billions of dollars for certain companies.
"DEEP POCKETS." The main cause for the surge of claims is that courts are increasingly ruling that insurers' liability policies cover pollution costs, even though insurers maintain that policies never envisioned such exposure. The industry is working feverishly to draft reforms to Superfund, which must be reauthorized by Sept. 30, 1994.
With a total of $160 billion in surplus held against future claims, both natural and manmade, insurers have long complained that they've been targeted as the best available "deep pockets" to pick up the cleanup tab. "If we have to use our $160 billion in surplus to pay for Superfund, we're out of business," says Donald R. Frahm, ITT Hartford Insurance Group's chief executive officer, who is leading the industry's reform drive.
The industry's vulnerability to pollution claims derives from court interpretations of a clause in most liability policies that requires insurers to shell out for "sudden and accidental" events. That language was supposed to exclude paying for cleanups unless, for example, a bulldozer ran over 20 barrels of toxic waste. But U.S. courts have been ruling that "sudden and accidental" includes chemicals slowly dripping out of containers for more than a decade. "Clearly, one of the major threats to the solvency of property and casualty insurers is the risk of contract reinterpretation that could impose enormous unforeseen environmental cleanup costs," Securities & Exchange Commission member Richard Y. Roberts said in an April speech. Recent court cases have not heartened insurers, many of whom had expected 50-50 odds. Instead, they're now losing about 70% of the time.
INDUSTRY BAILOUT? Insurers and rating agencies are struggling to get a handle on the industry's eventual exposure. To assemble a data base, A.M. Best is requiring insurers to provide exposure information. And the SEC is intensifying its effort to require companies to make greater disclosure of environmental claims, taking an especially hard look at the potential environmental liabilities of insurers. Yet on the other hand, some companies are afraid to set aside large reserves, fearing that could be used against them as an admission of guilt in court. And because reserves are charged against pretax earnings and reduce tax liability, the Internal Revenue Service takes a dim view of insurers setting aside money to cover pollution cleanups unless the need can be documented.
Just about everyone agrees that the Superfund law needs to be modified. Of the $15 billion that has already been spent on Superfund cleanups, roughly 75% has gone to legal fees and related costs. And fewer than 200 of the 1,300 sites have been cleaned. "If the money was going to cleanups, we'd have no problem," says C. David Sullivan, senior vice-president for claims at Kemper National Insurance Cos.
After failing miserably in an attempt to get Superfund changed in 1986, insurers are taking another tack in their recent campaign. This time, they're enlisting the help of other business groups. "This can't be viewed as an insurance industry solution," says Frahm. As chairman of the American Insurance Assn.'s Committee on Superfund, he is pushing for a broad-based fund to pay for pollution cleanups, an idea first espoused by American International Group Inc.'s chief executive officer, Maurice R. Greenberg. It would be funded by businesses, insurers, and government and would spread the brunt of cleanup costs. Why should noninsurers help out? If the law isn't changed, Frahm warns, liability coverage will be more expensive and harder to get.
The proposal has its critics. Eugene R. Anderson, partner at Anderson Kill Olick & Oshinsky, which often represents policyholders in suits against insurers, refers to the trust-fund proposal as "the insurance industry bailout." While he believes that the Superfund law has to be changed, he fears that, since "the rest of American industry is not organized and doesn't have the clout that the insurance industry has," the proposal will favor insurers. Greenberg says such criticism is unfair: "Why is it an insurance industry bailout? Why isn't it a bailout of manufacturers or whoever else? We didn't pollute any sites."
RARE VICTORY. One challenge for insurers is getting the attention of Congress while health-care reform is on the agenda. The Clinton Administration held its first high-level meeting on Superfund reform on July 9. And The White House Office on Environmental Policy has set up an interagency task force to overhaul the program. The goal for a legislative package: Nov. 30. "That means Congress will be on a tight and difficult schedule," says Dennis Fitzgibbons, a spokesperson for Representative John Dingell (D-Mich.), who sent a letter to the Environmental Protection Agency asking for the Administration's Superfund proposal by Labor Day. Yet there are no easy, inexpensive solutions to the problem, and many insurers fear Superfund just won't get fixed.
Insurers did have something to cheer about recently. Twenty-three insurers, including Aetna, Continental, and CIGNA, won an appeal of a case that could have forced them to pay $750 million to clean up a 9,500-mile pipeline from Texas to New York. But such victories have been few and far between. Predicts Frahm: "We'll be fighting this litigation for the rest of my life."
SUPERFUND CLAIMS: THE COST KEEPS RISING AETNA Added $202 million to reserves for environmental liability claims in 1992. Reserve now totals $231 million, up from $34 million in 1990. CIGNA Environmental pollution reserves have more than doubled, from $55 million in 1990 to $123 million at the end of 1992. ITT HARTFORD Moved $165 million into reserves in 1992 to pay for expected legal costs associated with environment-related claims. TRAVELERS Has paid out $127 million since 1990 for environmental claims. Keeps adding to reserves, which now total $194 million. DATA: COMPANY REPORTS