Much discussion of casualty catastrophe is consumed with talk of the “next asbestos,” the $100 billion insurance loss caused by a ubiquitous mineral used for insulation and other products that is now known to cause cancer. The asbestos example is important to understand because it created precedents that tend to reappear in mass litigation, but it is only one example of a casualty catastrophe.
Executive SummaryThe unique properties of the chemical bond that make PFAS compounds commercially useful also render them resistant to degradation in the environment, earning them the nickname “forever chemicals.” Here, scientists from Praedicat examine whether PFAS is the next MTBE, explaining that there are more ingredients for drinking water litigation and potential liability insurance claims around PFAS than there were for MTBE—including scientific evidence linking PFAS to infertility, cancer, obesity and developmental issues; growing public awareness; exposure to dozens of industries; and polluting activities that date back 70 years.
Another important example is MTBE (methyl tert-butyl ether), and the precedent of MTBE may be more important now than ever.
For decades, drinking water in the United States was the envy of much of the world—plentiful and clean. However, the use of MTBE as a gasoline additive in the 1980s and 1990s led to its contaminating drinking water supplies around the country from a combination of gasoline spills and leaky underground storage tanks. It also led to mass litigation in which municipal water suppliers sued gas stations and oil companies to remove MTBE from the soil and groundwater. The net result was billions of dollars in cleanup costs, almost entirely borne by the oil and gas industry.
Casualty catastrophe events don’t repeat themselves. They can’t. MTBE has already been removed from the water, and asbestos is no longer added to insulation. Instead, casualty catastrophes tend to fundamentally alter the legal and cultural landscape, making the next one a variation on the theme because of new legal precedents established during the previous event. Past casualty cat events create templates for future events.
Is there a next MTBE looming?
Another water contaminant has been gaining attention over the last several years for its widespread presence in drinking water and its potential health effects: per- and polyfluoroalkyl substances, also known as PFAS. PFAS are a group of man-made chemicals that have been manufactured and used since the 1950s. PFAS are the rare type of compound that can confer both water- and oil-repellent properties to materials, which is why they are used in many applications, including nonstick cookware, food packaging, carpets, stain- and water-resistant clothes, and firefighting foams. The unique properties of the carbon-fluorine chemical bond that make these compounds commercially useful also render PFAS extremely resistant to degradation in the environment. They are extremely persistent in the environment—so much so that they’ve earned the nickname “forever chemicals.”
Their environmental persistence is a strong parallel to MTBE’s problems, but that is just the first problem associated with PFAS. Unlike MTBE, over the last decade scientific evidence has accumulated showing that PFAS are endocrine disruptors and are linked to a wide variety of human harms: infertility, cancer, obesity and developmental issues.
Public awareness of PFAS has grown considerably in the last several years. This has been driven by numerous exposés related to a single PFAS, perfluorooctanoic acid (PFOA), that was used to make Teflon. (If nothing else, the “PFOA Free” claims on nonstick cookware raise awareness of PFAS.) The controversy it engendered was the subject of two films: “The Devil We Know” and “Dark Waters,” both of which examined PFOA contamination and the resulting lawsuits in Parkersburg, West Va. PFAS contamination from industrial dumping has also been the subject of lawsuits in the Cape Fear River basin in North Carolina and Minneapolis-St. Paul, Minn., the latter resulting in a settlement for $850 million to remediate the drinking water in the affected parts of the region.
The increasing awareness of both the potential for bodily injury, along with the recognition that PFAS don’t break down in the environment, has led to a separate wave of litigation to clean up PFAS contamination at military bases where firefighting foam is frequently used to suppress oil-based fires. As the foam, which contains 3-6 percent PFAS, is sprayed on a fire or for training, it inevitably runs off into the ground, contaminating surface and groundwater.
The other effect of increased awareness of PFAS’s potential dangers is that the risk to human and environmental health is becoming too large to ignore. That has led various governments around the world to start restricting their manufacture and use while they explore setting limits on PFAS levels in drinking water. In 2016, the U.S. Environmental Protection Agency established a non-enforceable health advisory level for two of the most common contaminants (PFOA and PFOS) at 70 parts per trillion (ppt), and EPA is also working to establish binding maximum contaminant levels for PFAS individually and as a group. Individual states have established their own PFAS limits, often stricter than the current EPA’s health advisory. At the other end of the spectrum, the Environmental Working Group has proposed a drinking water PFAS limit as low as 1 ppt, claiming that only levels this low will fully protect children assuming a lifetime of drinking contaminated water.
These developments set the stage for a new wave of PFAS litigation where both public and private water systems look back to the examples and precedents set by the MTBE litigation and sue to cover the costs of removing PFAS from drinking water. Indeed, earlier this year Michigan sued major PFAS producers and users for widespread fluorochemical pollution in the state. They are demanding sufficient money to remediate PFAS both in drinking water and the environment.
At Praedicat, we are following the science and have created scenarios to explore the ways a “next MTBE” can unfold. In this case, we have assumed that prudent water districts will remove enough PFAS from their water supplies to bring the contamination down to levels that may be required by new regulations, which we estimate as likely to be between 7 and 70 ppt. Under these assumptions, we’ve estimated that between 118 and 284 million Americans’ drinking water would need to be remediated at a total cost of $170-$410 billion over the next 20 years.
While those numbers are quite big—perhaps astoundingly so—that’s only the first part of the story, and it’s where PFAS’s similarity with MTBE ends. First, the burden to remediate PFAS does not fall solely on one industry. Instead, because of the widespread nature of PFAS, we expect to see hundreds or thousands of companies across dozens of industries become involved. This greatly increases the risk that this becomes a large-scale insurance event with clash across multiple policies.
Furthermore, MTBE was used for a short period of time and its high mobility in groundwater meant that it was detected early in its use. PFAS pollution, on the other hand, has been accruing since 3M started manufacturing them in the 1940s, and the “forever” nature of fluorochemicals means that some of today’s pollution burden can be attributed to activities from more than 70 years ago. When building scenarios to understand how PFAS litigation will be different from the MTBE precedent, we also need to describe the way that these burdens will accrue to policy periods across the entire 70 years. In general liability, pollution from 50 years ago that needs to be cleaned up today can be deemed to be covered on policies from 50 years ago and made to pay out today. Unfortunately, this means not only is PFAS the forever chemical, it may be the forever occurrence risk.
Of course, in the intervening years, there were many changes to standard policy wording. Pollution exclusions on standard general liability policies became commonplace during the 1980s while environmental impairment liability policies were introduced to take their place. The Bermuda insurance market did not exist when PFAS were initially created, but today many of the large companies that have made PFAS in the past will find themselves working with their carriers to figure out which portions of their liabilities (if not excluded entirely) would potentially be included or excluded due to the inception and retroactive dates of their policies.
PFAS has the potential to become the next MTBE, albeit with significant differences that we can explore using scenario modeling approaches that bring the lessons of MTBE litigation into a broader model of mass litigation. These models are an invaluable tool for risk managers to evaluate their exposure to PFAS litigation and to look for ways to mitigate their company’s risk of a time- and industry-based clash event.
As one of Praedicat’s top emerging risks for 2021, PFAS litigation should be on everybody’s emerging risk radar.
(Praedicat executives Robert Reville and Adam Grossman discussed prospects of litigation related to PFAS, take-home COVID-19 and 5G exposures in a Carrier Management Exec Talk, available on Insurance Journal TV on the Big-Re channel.)