A Toxic Spill
Coverage issues for the Animas River contamination.
On Aug. 5, 2015, the Environmental Protection Agency (EPA) acknowledged in a press release that, in the course of examining a gold mine that has been shuttered since 1923, it “unexpectedly triggered a large release of mine waste water into the upper portions of Cement Creek.” Cement Creek is a tributary of the Animas River, which is a popular recreation spot.
While the toxic nature of the waste water is currently unknown, what is known is that the downstream waters turned an unnatural bright orange immediately after the spill.
Early analysis, as announced by the EPA, indicates that the metals and other substances that made the river run orange may not pose a dire threat to aquatic life. Still, very serious questions exist about the short- and long-term impact of the very large amount of metals that were released into the environment.
Among other things, the health risks from the spill related to municipal and agricultural users of the river’s waters have caused authorities to issue “do not use” orders up and down the river. Even after the obvious orange plume abates and passes downstream, the metals will have settled into the sediment at the bottom of the river. As a practical matter, metals on the riverbed may be no healthier for river users than metals that flow freely through the surface waters. They can have negative impacts on the life cycle of the rivers; they can get stirred up by future weather events, such as heavy rains or spring snow melt; and future overflows may transport the sediment—and the heavy metals with it—to properties far beyond the natural borders of the riverbed.
As a result, many businesses may face losses either now or in the future. As the discolored waters move toward New Mexico, Utah, and Arizona, this is the time for all businesses that are potentially directly or indirectly affected to pull out their insurance policies, review their notice provisions, and give notice immediately of potential future claims.
What Types of Losses May Be Covered?
Business interruption is one type of loss that businesses may suffer in this unusual situation. The spill is deadly for the tourist industry, especially since it occurred near the peak of vacation season. Its impact may extend for hundreds of miles, including the San Juan River in New Mexico and the massive recreational center of Lake Powell, which borders Utah and Arizona. Up and down the river, agriculture and livestock businesses are at risk.
Another type of loss that may take place is property damage. Growing crops that would ordinarily be harvested in the future may end up being destroyed due to their exposure to the unknown substances. The potential for future property damage caused by heavy metals distributed during future river activity or flooding also looms. Some local entities, such as the Navajo Nation, already have announced their intentions to sue the EPA as well as the owners of the Gold King Mine near Silverton, Colo., which is the shuttered mine that was breached by the EPA inspectors. Other defendants may end up being added to that list.
First-party property and business interruption insurance should provide coverage for many of these losses. Liability insurance—both general liability and pollution liability policies—should provide defense and indemnity for any entities that find themselves embroiled in litigation, which can be expensive even if it turns out that the lawsuits were misdirected and baseless. Still further, if there are derivative lawsuits against directors and officers, D&O insurance may provide protection against them, as well.
First-Party Property and Business Interruption Losses
The massive spill may cause extensive property losses, business interruption losses, and contingent business interruption to entities all along the affected watercourses. Such businesses could range from motels and hotels to recreational outlets to standard residential and business operations.
In addition to coverage for damage to tangible property, business owners should look to the business interruption coverage included in most commercial property insurance policies. Business interruption or contingent business interruption coverage is designed to protect businesses from losses stemming from unavoidable interruptions in their daily operations. Business interruption coverage may apply in a variety of circumstances, such as a forced shutdown, a downturn in business due to the damage from the spill, or a substantial impairment of access to products, services, or a business’ physical plant or premises.
In the event that the economic effects of the spill stretch from Cement Creek in Colorado all the way to Lake Powell in Arizona (if not beyond), businesses that service the directly affected businesses also may be eligible to file contingent business interruption claims. Contingent business interruption is a standard coverage grant in many property insurance policies, though many small businesses are not aware of it.
Contingent business interruption covers policyholders that did not suffer physical damage, but still lost revenue after a property loss crippled a major supplier or customer. For example, a food wholesaler or kayak manufacturer located elsewhere in the country may be safe from the waters of the spill, but nevertheless may suffer losses because of a decrease in business income.
The Navajo Nation’s announcement of its intention to sue indicates that allegations of liability will come into play. Companies facing liabilities arising from the spill can look for defense and indemnity from their liability insurance coverage policies. Both general liability insurance policies and pollution liability insurance policies may respond to claims. In this unusual situation in which fault appears to rest squarely on the EPA, the principal benefit of such insurance may come from its dual purpose as “litigation insurance.” Liability policies should enable businesses to avoid bearing the defense costs that are involved in getting baseless lawsuits dismissed.
Additionally, although derivative actions are hard to imagine in this unusual situation, stranger things have happened. Since it is always better to be safe than sorry, any business that is potentially at risk of being targeted by angry residents and/or visitors to the region should take the precaution of identifying and reviewing their D&O policies now. D&O insurance may be available to provide defense and indemnity of directors and officers who are wrongfully tagged with baseless claims.
EPA Claims Process
The EPA has published a document entitled, “Emergency Response to the Gold Mine Release,” which provides instruction for those who have suffered personal injury or property damage on how to file a claim under the Federal Tort Claims Act (FTCA) using Standard Form 95. FTCA claims must be filed within two years of the time that the claim accrues, and must include a description of the personal injury or property damage “sum certain,” reflecting the damage that occurred. Because of the potential for future damage triggered by future high-flow or flooding events, it may not be possible to file a ripe claim under the FTCA at this time. However, FTCA regulations provide that a claimant may amend their claims form at any time prior to reaching a settlement with the EPA or before filing a lawsuit under the FTCA.
With that said, the ability to pursue some recovery directly from the EPA does not relieve an insurance company from its promise to pay under an insurance contract issued prior to the spill. The potential recovery from the EPA is comparable to a contribution or subrogation claim, which are common in the third- and first-party insurance context. Filing an FTCA claim should not prevent policyholders from providing prompt notice to all insurance companies that have issued potentially responsive policies.
It is not possible to know, at this early stage, which, if any, losses will fall under the responsibility of insurance policies and which, if any, of them ultimately will be compensated by the EPA. Just as with any potential subrogation claim, it is best for policyholders to act reasonably to keep options open regarding future contribution or subrogation claims.