Can the insurance industry sustain PFAS?
McGill and Partners’ Casey Petersen examines the potential risks the insurance industry faces from per-and polyfluoroalkyl substances (PFAS), how insurance carriers have been responding to the rise of litigation, and what clients should be doing to manage carrier response and exposure.
Per-and polyfluoroalkyl substances include over 12,000 fluorinated chemicals that are used in thousands of industrial and consumer products, primarily due to their oil and water repellency. Since the 1940s, they have had a wide variety of applications including in fabrics, carpeting, cleaning products, paints and fire-fighting foams.
Currently, the Food and Drug Administration authorises limited use in certain goods such as cookware, food packaging and food processing equipment.
The emerging risk
Scientists are still learning about the potential risks of PFAS exposure. There is some evidence that exposure to certain PFAS can lead to numerous health problems, including reproductive effects, developmental effects and cancer.
It is estimated that as many as 97 percent of humans have some level of PFAS within their bloodstream, which has caused a rise in concern regarding concentrations of this substance and the body’s inability to decompose the strong chemical bond.
While long-chain chemical substances, such as perfluorooctanoic acid and perfluorooctane sulfonate, have been phased out of manufacturing, there remain thousands of PFAS (C6) chemicals used globally.
Testing and regulatory guidance from the Environmental Protection Agency has been a moving target for concentration levels in ground water and drinking water. Various advocacy groups estimate an environmental cleanup cost as high as $16trn.
This contamination extends over decades and is an important factor when determining the potential insurable loss. Some models suggest the insurable loss arising from contaminated sites and drinking water in the US is nearly $400bn.
The rise of PFAS litigation
Today, lawsuits largely hinge on environmental clean-up, with payouts in the billions, and thousands of cases are still pending. With DuPont, Chemours, Corteva and 3M paying nearly $11.5bn between them in damages for PFAS contamination this year, the total damages from PFAS could rise further, potentially exceeding the $200bn-plus paid by Big Tobacco in the 1990s.
With over 6,000 PFAS-related claims filed from July 2005 to March 2022, courts are prioritising multi-district litigation cases before focusing on individual or class bodily injury from product exposure.
Recently, we have seen an increase in claims against downstream manufacturers, including product packaging. And although we anticipate more consumer product cases arising from goods such as food, cosmetics and clothing will emerge in the near future, to date, failure to disclose PFAS within packaging has been largely dismissed by the courts (e.g. Richburg vs. Conagra).
While PFAS has been referenced as the potential ‘next asbestos’, to date, no signatory disease has been directly linked, unlike mesothelioma. The lack of a ‘smoking gun’ for product liability is another reason the plaintiff bar has focused on environmental clean-up. However, the bar continues to manoeuvre and test various jurisdictions with heavy investment to target causation.
Can the insurance industry sustain PFAS?
The (re)insurance industry is healthy, with over $950bn of policyholder surplus available, and is able to sustain some form of large-scale event.
Since asbestos, carriers have developed sophisticated ERM plans as well as facultative and treaty reinsurance plans to diversify the risk across a broad spectrum of carriers. The first wave of litigation focuses on environmental clean-up and evokes the most litigated endorsement in an insurance policy, the pollution exclusion.
Already, states have various interpretations of the endorsement. In Wolverine World Wide Inc vs. American Insurance Co, a Michigan federal court cited the carrier had a duty to defend, as “sudden and accidental” was a possibility, and therefore had such duty. Conversely, New York went in the opposite direction in Tonoga, Inc vs. New Hampshire Insurance Co, suggesting dumping occurred over many years. While smaller in sample size, the same state-by-state interpretations are seen in bodily injury cases.
Addressing the exposure
While the (re)insurance industry response to PFAS has been varied, underwriters remain diligent in reviewing environmental, product and consumer exposures. Requests for detailed exposure information are commonplace, including requests for safety data sheets and product questionnaires as carriers attempt to quantify the exposure.
While some industries are seeing go-forward exclusions, capacity and surplus are available. Detailed product information and mitigation plans for even the smallest amount of exposure is needed to maintain coverage within the industry.
Case law and environmental regulations must also be monitored for compliance, as both continue to evolve at a rapid pace.