By David Dybdahl
2015 will mark the year that brought the need for genuine environmental insurance squarely into the farming business sector.
More changed in the environmental risk management picture of farms in the past 12 months than over the past 30 years. In essence farms face a rapidly expanding scope of liability for damage to the environment at the same time their liability insurance protection is being systematically reduced for environmental damages.
The macro changes in the risk management picture of farms in 2015 were driven by three interrelated factors.
First in the state of Washington a dairy farmer who over applied manure to a field was successfully held responsible under the Resource Conservation and Recovery Act for operating a solid waste disposal operation without a permit. Historically protected by Right To Farm laws in all 50 states, farmers have been largely immune from liability associated with normal farming practices. However Right to Farm Laws are not right to pollute laws and federal environmental protection laws will trump Right to Farm laws when they come into conflict. The utilization of federal waste disposal regulations for the normal farming practice of applying manure to soil changed the environmental risk picture for day to day farming activities involving livestock.
Second, in another precedent setting case also involving the over application of fertilizers on fields, in Iowa the city of Des Moines is suing the Water Drainage Districts in three counties for the costs associated with building a $100,000,000 drinking water treatment plant. The city alleges that farmers upstream from Des Moines have put so much fertilizer on the ground over the years that the city now needs a water treatment plant to remove nitrates from the rivers that provide the city with its drinking water supply.
The third factor to change in the environmental risk picture of farms is a reduction in insurance coverage for losses arising from contamination in the package insurance policies sold to farmers. Moving one state to the east of Iowa, in Wisconsin the State Supreme court ruled in December 2014 that contaminated ground water was an excluded pollution cause of loss under a farmer’s liability insurance policy. The Wisconsin case like the one in Washington state involved polluting ground water as the result of applying manure to fields.
Noteworthy in the Wisconsin litigated insurance coverage case, one State Supreme court justice wondered how it came about that insurance companies would sell liability insurance to farmers that excluded claims arising from an unavoidable day to day activity in dairy farming. In the justice’s opinion the Farm Package insurance policy provided “useless insurance” for losses arising from spreading manure on a field.
The same Justice questioned what insurance agents had been telling farmers about the liability insurance policies they agents were selling. This last comment was a thinly veiled warning to insurance agents in Wisconsin at least not to leave their customer’s ignorantly uninsured for spreading manure on a field.
The need for insurance agents and brokers to offer genuine environmental insurance to farms has never been greater. However, there are significant barriers for insurance agents and brokers in accomplishing what would on the surface to appear to be a pretty simple task.
The first obstacle insurance agents and brokers face is it is very likely they do not understand pollution exclusions well enough to advise their customer base on the effects of pollution exclusions and the need for genuine environmental insurance. Pollution exclusions are difficult to understand because judges and lawyers basically are forced to simply make stuff up following the rule of law in order to resolve litigated pollution insurance coverage lawsuits. As a result, there is very little consistency within the state case law on what losses pollution exclusions exclude. Although with slang names like a “Total Pollution Exclusion” it should not be that difficult to understand the pollution exclusions exclude pollution causes of loss. That would be the case if well-intentioned but usually misguided insurance underwriters did not mess up the thinking.
The inconsistency in how pollution exclusions work in practice is complicated by insurance companies who basically dance around pollution exclusions by excluding and then partially covering losses arising from narrowly defined contamination events. This is the type of pollution exclusion coverage extension that the Wisconsin Supreme Court Justice was so upset about in the above discussion. The dancing pollution coverage extensions in Farm Package policies cannot be relied upon to insure farms for environmental damage claims. Genuine environmental insurance is clearly needed on farms.
Insurance agents and brokers are faced with an overwhelming choice of environmental insurance products. There are over 140 different environmental insurance policies available which are designed to fill the insurance coverage gaps created by pollution exclusions. Environmental Liability insurance policies do not follow any generally accepted industry coverage design standards nor are they regulated by insurance commissioners. As a result, environmental insurance policies can vary a great deal in what they cover and exclude. The most expensive environmental polices do not necessarily insure against the most risk, in fact the opposite is often true.
With so many different insurance policies available it is extremely easy for insurance agents and brokers to sell fundamentally flawed environmental insurance policies. In some classes of business, over 90% of the insurance buyers are sold pollution insurance policies that are not fit for the purposes for which they are intended. For example, selling environmental insurance to a farm without specific coverage for odor or nitrates as specifically defined “pollutants” is a very common mistake made by insurance agents and brokers.
Genuine environmental insurance, custom design for the unique environmental risk of farms is available today for as little as $2500 for a $500,000 policy limit. A top quality environmental insurance policy on a farm with a $1,000,000 limit of liability can cost as little as $3500.
Selling fundamentally flawed environmental insurance coverage is unfortunately a very common mistake made by insurance agents and brokers. But not as common as completely ignoring the environmental risk in the farming business.
By seeking out subject matter expertise in environmental risk management and insurance, insurance agents can serve the needs of their customers better, avoid potential malpractice allegations for unintentionally uninsured contamination losses, and produce some new business. For information on environmental risk management readers are encouraged to sign up for communications on related topics provided by the Society of Environmental Insurance Professionals at
www.SEIPro.org.
David Dybdahl, CPCU, ARM, MBA is president of American Risk Management Resources Network, LLC (ARMR) in Middleton, Wisconsin—a wholesale insurance brokerage, MGA, expert witness and insurance firm that specializes exclusively in environmental insurance products. He can be reached at [email protected] or 608 836 9590.
