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A report submitted to the Honorable Mike Synar, Chairman of the Subcommittee on Environment, Energy, and Natural Resources Committee on Government Operations in the House of Representatives. The report discusses the availability and cost of pollution liability insurance for owners and operators of hazardous waste facilities from 1982 to 1987. It also examines the position of insurance companies on underwriting pollution insurance and the reasons for the decrease in the number of insurers writing this type of insurance.
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United States General Accounting Office
October 1988
RESTRICTED--Not to be rdeased outside the Gene& Accounting Of&e except on the basis of the specific approval by the office of CongressionalRelations.
Regulations issued under the Resource Conservation and Recovery Act of 1976, as amended, require owners and operators of facilities manag- ing hazardous waste to demonstrate their financial ability to compen- sate a third party for property damage or bodily injury. The most frequently used mechanism to demonstrate financial responsibility has been pollution liability insurance. Yet this form of insurance coverage has reportedly become very difficult to obtain and, when available at all, much more costly. Owners and operators of hazardous waste facili- ties who can no longer meet the financial responsibility requirements cannot legally continue in operation. The Congress has therefore become concerned that the nation’s ability to manage and safely dispose of its hazardous waste could be seriously jeopardized if appropriate insurance is unavailable. For this reason, the Subcommittee on Environment, Energy, and Natural Resources of the House Committee on Government Operations requested GAOto assess the availability and cost of the liabil- ity insurance used to fulfill the requirements of the act and to answer the following questions:
. How has the use of the different financial mechanisms allowable under the act changed since 1982? l How has the number of insurance companies writing pollution liability insurance changed during the same period? l How does the insurance industry determine risk and set rates for pollu- tion liability insurance and how sound are its methods?
Approximately 100,000 companies in the United States generate some form of hazardous waste-that is, a waste material that, by definition of the Environmental Protection Agency (EPA), is ignitable, corrosive, reactive, or toxic or has been identified and listed by EPAas hazardous. Most hazardous waste materials come from industrial processes in the chemical and petroleum industries. The intent of the 1976 act and its subsequent amendments was to reduce the generation of hazardous waste and to ensure that the present and future threat posed to human health or the environment by the continuing generation be minimized.
EPA'Sregulations, promulgated under the act, required that all facilities ’ that treat, store, or dispose of hazardous waste demonstrate liability coverage for bodily injury and property damage to third parties. EPAdis- tinguished between two types of potential pollution events: sudden and accidental occurrences, such as an explosion or a tank rupture, and “nonsudden” occurrences, such as gradual seepage of hazardous wastes from a landfill. EPArequired that all such facilities demonstrate coverage
Page 2 GAO/PEMDJ39-6 Ihzardou~ Waste: Pollution Insurance
J%xecutive Summary
for sudden and accidental pollution of at least $1 million per occurrence with a $2 million annual aggregate coverage. Land disposal facilities (primarily landfills and surface impoundments) were required to main- tain additional coverage for gradual pollution of $3 million per occur- rence with a $6 million annual aggregate. This coverage could be demonstrated through a set of procedures designed to test the adequacy of the operation’s assets to pay for any damages, through liability insur- ance, or, since 1986, the guarantee of a parent company. In September 1988, EPAaccepted the use of four other financial mechanisms: letters of credit, surety bonds, trust funds, and guarantees by nonparent companies.
In 1984, the Congress provided that hazardous waste facilities in exis- tence on November 19, 1980, could continue operating under interim status so long as they applied for an EPApermit and complied with existing regulations, including financial responsibility requirements, until EPAcould complete final permits. However, the Congress also imposed a timetable on EPAfor granting permits to all facilities and man- dated the closing of all land disposal facilities that failed to meet liabil- ity coverage requirements by November 8, 1985.
In its interviews with representatives of the insurance industry, GAO was unable to identify industrywide insurance data on pollution liability coverage and its costs. Therefore, this information had to be collected directly from hazardous waste facility operators. GAOmailed question- naires to all facilities that had registered with EPAas land disposal facili- ties and that were therefore required to demonstrate coverage for both sudden and gradual pollution. The questionnaire requested information on pollution liability coverage for 1982 through 1986, including the identity of the insurer, if any, and the extent and cost of coverage.
much more heavily on their own assets to pay for damages arising from their operations and less heavily on insurance than previously. The number of insurers writing pollution insurance, the number of policies written, and the total pollution liability coverage have decreased dra- ’ matically from a 1984 peak. Simultaneously, the average premium for this insurance increased to as much as 11 times its 1982 level. Insurance contracts became more limited in their coverage and in some cases pro- vided no real protection to operators from financial losses arising from pollution damage. Without additional data on actual losses sustained by the insurance companies, GAOcannot assess the reasonableness of the
Page 3 GAO/PlCMBW8 Haza~Iou~ Waste:Pollution Insurance
Executive Summary
as the reason for charging dramatically higher premiums or withdraw- ing completely from writing pollution insurance. GAObelieves that the industry’s declining profitability during the first half of this decade also contributed to the industry’s dropping this line of insurance, which it viewed as more speculative and risky.
GAOwas unable to find adequate data from which to develop an actua- rial basis for judging the soundness of the industry’s ratesetting for pol- lution insurance. Such data do not currently exist for the industry as a whole, since insurers are not required to file loss information separately for pollution insurance, and individual insurers are reluctant to share the financial details of their own experience with this line.
In a recent report, GAOsuggested that the Congress consider requiring that insurers or responsible parties, as appropriate, report to EPAthe amounts of indemnity payments made to cover pollution cleanups and related third-party bodily injury and property damage (Hazardous Waste: Issues Surrounding Insurance Availability, GAO~RCED-88-2,October 16, 1987). In addition, GAOsuggests that the Congress consider authoriz- ing EPAto collect the information necessary to assess the reasonableness of the costs of insurance to meet EPA'Sliability coverage requirements.
GAOrecommends that EPAcarefully monitor how its recent expansion of the number of allowable financial assurance mechanisms affects the number and size of operations using noninsurance alternatives in order to determine if this additional flexibility achieves its stated intent to reduce the problem created by the constrained insurance market.
At the request of the committee, formal agency comments were not requested for this report. However, GAOdiscussed its findings informally with EPAofficials and included their views in this report where appropriate.
Page 6 GA0/PEMD-8!%43 Hazardous Waste: Pollution Insurance
Liability Coverage Requirements for Hazardous Waste 9 Operators Objectives, Scope, and Methodology 10
The Respondent Population Financial Assurance Mechanisms Used
Number of Policies Written Amount of Coverage Cost of Coverage Other Changes Company Size and Insurance Availability Conclusions
Risk Determination for Ratemaw! Proces=s
Statistical or Actuarial Analysis
Underwriting Analysis Judgment Data Availability
Matters for Congressional Consideration Recommendation
and Surface Impoundment Facilities
Appendix II: Reasons Companies Cease Operations Appendix III: Difficulty of Obtaining Pollution Liability Insurance
Page 6 GAO/PEMD896 Hazardous Waste Pollution Insurance
Reports of potentially disastrous accidents involving hazardous waste generators and handlers have become commonplace within recent years. Sudden threats to health have been caused by accidental release of poi- sonous gases such as occurred in Institute, West Virginia, or Springfield, Massachusetts, or by the gradual, but perhaps equally deadly, damage from seepage of toxic chemicals into groundwater at Love Canal, New York, or Woburn, Massachusetts. These incidents appear to have their daily, if less catastrophic, counterparts.
In one part of a multipronged approach to reducing the threats to human health and the environment posed by toxic substances, the Con- gress enacted the Resource Conservation and Recovery Act of 1976 with the objective, among others, of “regulating the treatment, storage, trans- portation, and disposal of hazardous wastes.” The act defined hazard- ous waste as
“a solid waste, or combination of solid wastes, which because of its quantity, con- centration, or physical, chemical, or infectious characteristics may.. cause, or sig- nificantly contribute to an increase in mortality or an increase in serious irreversible, or incapacitating reversible, illness;. or pose a substantial present or potential hazard to human health or the environment when improperly treated, stored, transported, or disposed of, or otherwise managed.”
In order to ensure compensation for any damage resulting from the treatment, storage, and disposal of such waste, the Congress directed EPA to issue regulations regarding the financial responsibility of treat- ment, storage, and disposal facilities as EPA might find to be necessary or desirable. To comply with the regulations, these facilities have relied heavily on liability insurance coverage. However, coverage for damage caused by hazardous waste has reportedly become very difficult to obtain and, when available at all, extremely costly. A hazardous waste handler who cannot demonstrate adequate liability coverage cannot legally continue to operate. In the absence of any insurance source, the nation’s ability to manage and safely dispose of its hazardous waste under the present regulatory system could be seriously jeopardized.
This report was requested by the Subcommittee on Environment, I Energy, and Natural Resources of the House Committee on Government Operations. It examines the extent to which pollution liability insurance has become less available and more costly and discusses the availability of data to assess the reasonableness of the insurance industry’s rate- setting for such insurance.
Page 8 GAO/PEMD89-6 Hazardous Waste: Pollution Insurance
Chapter 1 Introduction
When the Congress enacted the Resource Conservation and Recovery Act in 1976, it required that the Environmental Protection Agency include in its requirements for hazardous waste treatment, storage, and disposal facilities “such additional qualifications as to... financial responsibility as may be necessary or desirable.” Under 40 C.F.R. 264.147 and 265.147, these requirements were defined as liability cover- age for bodily injury and property damage to third parties resulting from sudden accidental occurrences from a facility’s operations. Under regulations promulgated in 1982, this coverage could take the form of a liability insurance policy, a demonstration of assets adequate to provide EPA with assurance of financial responsibility (financial test), or a com- bination of the two. In 1986, EPA added a third method: a corporate guarantee by a parent company that can be combined with insurance. In September 1988, EPA once more expanded the range of financial options by accepting letters of credit, surety bonds, trust funds, and guarantees provided by firms that are not the direct parents of the owners or operators.
Under EPA regulations, owners or operators of hazardous waste treat- ment, storage, and disposal facilities were required to demonstrate- firm by firm-liability coverage for sudden and accidental pollution incidents (such as a tank rupture or explosion) of at least $1 million per occurrence, with an annual aggregate of $2 million. In addition, owners or operators of land disposal facilities-that is, landfills, surface impoundments, and land treatment facilities-were required to demon- strate coverage for gradual pollution incidents (for example, long-term seepage into a drinking water supply) of at least $3 million per occur- rence, with an annual aggregate of $6 million. The amounts of coverage required apply to the owners or operators for all facilities, not sepa- rately to each facility. EPA phased in these requirements for land dis- posal facilities, establishing a January 1983 deadline for owners and operators with annual sales or revenues of $10 million or more, a Janu- ary 1984 deadline for companies in the $5 million to $10 million range, and a January 1985 deadline for all others.
The 1976 act allowed facilities that were in existence on or before November 19,1980, to continue operating under interim status as long as they remained in compliance with EPA’S regulations until they received final operating permits. With the passage of the Hazardous and Solid Waste Amendments in 1984, the Congress established a timetable for granting permits to land disposal facilities. They were required to submit a permit application and to certify that they were in compliance
Page (^9) GAO/PEMD-998 Hazardous Waste Pollution Insurance
Chapter 1 Introduction
required to demonstrate these coverages. In addition, the committee’s concern about pollution insurance was largely prompted by reports from some land disposal facilities that they could not obtain the required cov- erage and would be consequently forced to close down their facilities under the mandated phase-in of certification requirements.
We received responses from approximately three fourths of the facili- ties.’ While a higher response rate would be preferable, we found this acceptable and reasonable in view of the complexity of the information requested and its potentially sensitive nature. In the course of develop- ing and pretesting the questionnaire, we had determined that it was preferable to guarantee anonymity to respondents in order to alleviate their fears that the information might somehow be used against them in an enforcement action.
The responses to our questionnaire formed the basis for answering the first two questions posed by the committee. An analysis of the question- naire results together with a more extensive discussion of the qualifica- tions necessary in interpreting them is presented in chapter 2. Chapter 3 addresses the committee’s third question. Our questionnaire is reprinted in appendix I. This review was performed in accordance with generally accepted government auditing standards.
‘The characteristics of these respondents are more fully discused in the following chapter.
Page 11 GAO/PEMD-89-6 Hazardous Waste: Pollution Insurance
Chapter 2
In this chapter, we discuss the information we obtained from our survey of land disposal facilities regarding the committee’s first two questions about changes since 1982 in two areas: the use of pollution liability insurance by hazardous waste operators to satisfy the 1976 statutory requirements and changes in the number of insurers providing this insurance. We also review changes to other indicators of insurance availability, including the number of policies written, the total liability coverage, the period of coverage, the cost of insurance, and the relation- ship between company size and insurance availability.
Certain cautions must be borne in mind in interpreting the responses to our questionnaire. As we discussed in the previous chapter, we provided anonymity to respondents. Therefore, we had no means of verifying the accuracy of their responses or clarifying ambiguous responses. Sec- ondly, we asked respondents to distinguish, if possible, between sudden and accidental coverage and nonsudden coverage and to report pollution insurance separately from other forms of commercial liability insurance.
Some respondents were unable to report premiums separately for the different types of coverage, and it is possible that a few who reported combined figures also included some nonpollution-related costs. For this reason, we developed and reported our summary results separately for sudden and accidental, nonsudden, and combined coverage to corre- spond to the manner in which they were reported to us. Finally, while we report wherever possible information concerning insurance policies written for 1987, data for this year are incomplete, since our data were collected in mid-1987. For completeness, we have included the 1987 data, where available, in the following presentation. Contrasts in cost and availability of insurance between earlier and more recent years are more properly made by using data from 1986, the most current year for which we have complete data.
While these factors may have somewhat diminished the accuracy of the summary data drawn from the questionnaires, we believe that the gen- eral trends uncovered in our analysis are so consistent and unambiguous as to ensure that they present a realistic portrait of the availability and ’ cost of pollution liability insurance since 1982.
We mailed our questionnaire to the 1,667 nonfederal facilities that, according to EPArecords, had registered as land disposal facilities. We received responses from 1,268 facilities (76.1 percent). Of these, 644
Page 12 GAO/PEMD-89-6 Hazardous Wastez Pollution Insurance
Chapter 2 Changes in Availability and Cost of Insurance
summarizes this information. From 1982 to 1984, approximately two thirds of the companies used liability insurance or a combination of insurance and financial test. By 1986, only 42 percent of the companies were using liability insurance either alone or together with a financial test to meet the 1976 act’s financial responsibility requirements.
Figure 2.2: Use of Insurance and Financial Test by Hazardous Waste Land Disposal Facilities 1982-86 500 Number of Companies 450 400
1982 1983 1984 1985 1986
Financial Test
Table 2.1 summarizes a number of other indicators of change in the availability and cost of pollution liability insurance from 1982 to 1987, including the number of insurance companies underwriting this line of insurance, the number of policies written and their total coverage, and the costs for this coverage. In the following pages, we examine each aspect individually.
Page 14 GAO/PEMlM9-6 Hazardous Waste: Pollution Insurance
Chapter 2 Changes in Availability and Cost of Insurance
Table 2.1: Number of Pollution Insurers and Policies Reported, Total Reported Annual Aggregate Coverage, and Median Cost Number of insurers Number of policies^ Total coverage^ ($ Million)^ Cost per $1, Sudden Gradual Combined Sudden Gradual Combined Sudden Gradual Combined Sudden Gradual Combined 1982 35 7 22 120 14 34 $2,871 $232 $519 $3.33 $1.20 $5. (^1983 37 19 28 154 54 59) 4,006 896 1,253 3.80 2.50 1. 1984 42 19 33 180 76 70 5,044 1,394 978 2.60 2.70 3. 1985 38 16 23 146 54 73 3,444 766 825 6.80 7.50 6. 1986 31 12 17 70 17 57 1,355 212 1,008 20.50 13.17 19. 1 987a (^8 6 8 16 8 20 679 51 149) 25.00 12.50 19. aPartlal data
To obtain one indicator of the changing availability of pollution liability insurance, we computed the total number of insurers for the years 1982 to 1987.’ Figure 2.3 displays the changes by year. The number of insur- ers providing sudden and accidental coverage rose from 35 in 1982 to 42 in 1984 and then declined to 31 in 1986. Similarly, gradual pollution cov- erage was provided by 7 insurers in 1982, 19 in 1984, and 12 in 1986.
‘We counted wholly owned subsidiaries of the same insurance group as single insurers. Data for 1987 are only partial, as respondents were only requested to provide information about insurance policies that became effective from 1982 to 1986. We analyzed data by “policy year”; that is, we assigned each policy to the calendar year that most closely coincided with its term. Therefore, 1987 reports represent policies effective after June 30, 1986.
Page (^15) GAO/PEMD-%M Hazardous Waste: Pollution Insurance
chapter Cban@s in Availability and Cost of Insurance
year, but by 1984 policies increased more than fivefold. However, only 17 policies were reported for 1986.
Figure 2.4: Pollution Liability Policies Reported 1982-87’
Sudden and Accidental Pollution Coverage Gradual Pollution Coverage m Combined Coverage^ a1987 = partial data
Figure 2.5 shows the sum of all the pollution-related coverage. This sta- tistic represents the total of the annual aggregate coverage reported by all our respondents for each year. Slightly less than $3 billion of sudden and accidental coverage was reported for policy year 1982, more than $5 billion coverage for 1984. For 1986, less than $1.4 billion was reported.
Page (^17) GAO/PEMD-894 Hazardone Wash Pollution Insurance
chapter 2 Cbangee in Availability and Cost of Insurance
Figure 2.5: Total Annual Aggregate Pollution Coverage Reported 1982-87’ 6 $ Billion
1962 Policy Year
1964 1965 1966 1967
1 1 Sudden and Accidental Pollution Coverage Gradual Pollution Coverage Combined Coverage a1987 = partial data
Gradual pollution coverage had a similar history. Only $232 million was reported for 1982: nearly $1.4 billion was reported for 1984. This fell back to $212 million in 1986.
We standardized the amount insurers charged for pollution liability insurance by computing the premium paid per $1,000 of coverage reported by our respondents.4 Figure 2.6 shows the median value of this statistic as computed for annual aggregate coverage for 1982 to 1987.
40f necessity, these computations do not include policies reported only as retrospectively rated.
Page 18 GAO/PEMD-898 Hazardous Waste Pollution Insurance
