Environmental emergency response incidents require special attention. What should you expect when the unexpected happens? Here are some best practices for claims professionals handling the aftermath.
Environmental emergency responses (EER) come in all shapes and sizes. There are two distinct categories of EER claims: those that have been completed and those that remain active. In this blog, we will discuss the first category. Part 2 will address best practices when managing active EER claims and proactive measures that can be implemented before an EER claim incident occurs.
About Inactive EER Claims
Compared to active emergency response activities, claims for completed pollution cleanups generally do not involve catastrophic losses and are usually less significant from a financial perspective. This is primarily because catastrophic losses can take days or weeks to address and as such they are reported to insurance carriers before they have reached resolution. For the most part, you can handle the adjustment of these claims in the same manner as typical environmental claims, but with some caveats.
Best Practice #1: Conduct Due Diligence
Investigate the incident. Determine what happened, when it happened, who or what was responsible for it, and to what extent the impacts occurred. It’s also important to determine if or when the incident transitioned to a routine cleanup, since this can impact coverage. Generally, I define the end of an EER as the point when 24/7 work and/or weekend work is no longer performed. With less scrupulous EER contractors it may be necessary to investigate at what point 24/7 response should or could have stopped.
Best Practice #2: Understand the Cause and Origin
Develop a detailed understanding of the cause and origin of the pollution. This is often critical in pursuing effective subrogation. Generally, causes of EER incidents involve an abrupt failure due to personnel, equipment, severe weather, or some combination thereof. If the failure was due to personnel, collect what evidence you can and determine whether this person was an employee of the insured or a contractor. For example, I handled a claim where the insured hired an engineering firm to design a retro fit of a 1920s era aboveground storage tank to hold liquid fertilizer (UAN) instead of fuel oil. Because UAN is denser than petroleum, they needed to reinforce the tank. The tank failed and released two million gallons of concentrated liquid fertilizer. The investigation found fault with the company that performed the welding necessary for the retro fit. Ultimately, the welding company and the engineering company responsible for inspecting the weld quality were both found to be partly accountable for the damages.
If the incident was due to equipment failure it’s almost always a best practice to preserve the equipment for future failure analysis. Depending on the severity of the loss, it may make sense to have an expert inspect the equipment. I was involved in an $8M loss where a pipe valve at a chemical plant failed. An inspection of the valve revealed it was not compatible with the chemical it was conveying. This was a new chemical plant and ultimately the loss was the responsibility of the contractor who built the plant. It’s important where possible to define why, where, when, and how an incident occurred as part of the cause and origin assessment.
Best Practice #3: Communicate Proactively with All Parties
Speak with not only your insured, but also several of the entities involved with the incident and the cleanup response. This includes the response contractor, environmental consultant (if applicable), and regulatory representative. These conversations should help you gauge the scope of the response, impacted media, and allocation of cleanup resources (i.e., off-site vs. on-site, cleanup of environment vs. cleanup of property, etc.). It helps establish whether contractors followed regulatory requirements and industry best practices. Finally, you can determine if everyone involved is being truthful about the incident and resulting cleanup.
Best Practice #4: Look for Hidden Costs
Have an experienced adjuster assess the reasonableness of the work. This will ensure accurate payment of necessary costs. EER is not like standard contracting: you are paying a contractor to respond at a moment’s notice and work for 24 hours, 7 days a week as necessary. It’s reasonable to expect an increased cost for this type of work compared to planned environmental cleanup activities. Financial expenses stemming from EER can run the gamut from costs incurred below the Self-Insured Retention to a limits loss. The ability to control costs depends largely on when you become involved to assess reasonable and necessary costs. Having reliable, current information about an incident and the steps taken to respond is key.
Review Rate Schedules and Markups
As soon as possible, review a copy of the contract between the insured and the EER contractor, as well as their labor and equipment rates. Inform the contractor of any issues the insurer may have. These typically include excessive markup on expenses, rental equipment, and subcontracted services. I’ve seen markups as high as 45% in cleanup contracts. It’s difficult to negotiate a reasonable markup (such as around 10%) on subcontracted services and equipment after it has been invoiced. However, if you can achieve a negotiated markup of 15% to 20%, I’d consider that a win.
Another negotiation tactic is to agree to a higher markup during the EER phase and a lower rate once it is no longer considered an emergency. If the response takes more than five days to complete, request the contractor use a weekly rate for equipment used every day. Hourly rates on equipment are only acceptable when a response lasts a day or less.
As for labor rates, they can vary greatly across the country. I focus on rates for response technicians, equipment operators, and supervisors/response coordinators. These are typically the individuals doing most of the work. I compare those to average rates for that geographic region. It’s typical to charge 1.5 times the labor rate for overtime work after eight hours, and two times the labor rate for work on Sundays and holidays.
Negotiate Recovery/Energy Fees
EER contractors also charge recovery fees, or energy fees, usually applied to the entire invoice amount. They supposedly account for fluctuations in fuel cost, insurance surcharges, and security costs. Realistically, the contract should build these into the unit costs, especially since contractors performing non-emergency response cleanup do not assess these charges. When negotiating, I suggest a compromise of only allowing a fuel surcharge on equipment that use fuel and not on the entire cost of the invoice. As an example, I was involved in an airplane crash claim involving remediation in a remote area. The EER contractor charged a 13.5% fuel surcharge on the entire invoice, even though the site was only accessible by pack mule and equipment consisted of hand tools.
Know What Taxes are Applicable
Sales tax rules on EERs can vary from state to state. Generally, taxes are not charged on environmental cleanups because the work is required by law, not voluntary. Governments do not want to penalize companies for doing the right thing. Tax law is not always clear in this area, so it may be necessary to consult a professional to determine if the EER contractor should collect sales tax. On large losses, sales taxes can be significant, costing tens or hundreds of thousands of dollars.
Tie Daily Work to Invoiced Amounts
It’s important to understand and compare the work contractors completed each day against invoiced personnel and equipment. You can do this by reviewing invoices, daily reports, and related backup. This can also help in determining whether any personnel or equipment were idle or underutilized. I’ve found significant errors where labor and equipment charges on the invoice were higher than what timesheets reflected. In those situations, it’s difficult for the contractor to justify the higher rate on the invoice.
Identify Unnecessary Delays
Make note of any delays or circumstances that the EER contractor should have avoided. A prolonged cleanup will cost more through increased labor, equipment, and rental charges. Pay attention to how quickly (or slowly) the EER contractor coordinated the disposal of collected wastes. I was involved in a claim that generated over one-hundred 20,000-gallon frac tanks full of contaminated water. The EER contractor had no disposal arrangements and was happy to keep collecting rent on the containers as the months dragged on. Obviously, being involved in the response early on makes it easier to identify these costs as unreasonable. Doing so after receiving the invoice is more difficult. In these situations, the contactor may argue they had to hold the waste until they could find an appropriate facility, which is harder to defend.
Review Disposal Fees and Facilities
Historically, disposal fees are an area where some EER contractors take advantage of insureds. This is less common now, but it does still happen. Request a copy of both the disposal manifests and the disposal facility’s invoice. This is very important because it will verify the amount of material being disposed and the mark-up percentage. Documenting the proper disposal facility is also critical. I’m aware of a scheme conducted by a cleanup contractor in New York City. The contractor would steal tanker trucks, fill them with petroleum waste from storage tank projects, and then abandon the trucks in one of the five boroughs. Waste disposal is a black box; the more you can do to make the process transparent the better off you and your insured will be.
Environmental emergency response claims can be difficult to navigate. They can present many nuances, complex origins, and hidden costs. We hope these best practices prepare you for your next EER claim, and we’re always here to help if you have any questions!
Don’t forget to check back in for Part 2 of this series, where we’ll discuss best practices when managing active EER claims and recommend proactive measure to put in place before an EER claim incident occurs.