Fricker Co. Was ‘Going Bare’ : Toxic Fire Puts Spotlight on Insurance Difficulties
The embers were still hot at the Anaheim pesticide warehouse that burned for four days last week when a $100-million negligence lawsuit was filed by famed San Francisco attorney Melvin Belli. And that was just the first lawsuit.
The following day, a $500-million case was filed on behalf of four more of the 7,500 Orange County residents forced to evacuate the area because of noxious fumes created by the burning pesticides and fertilizers.
The fact is, however, that when fire engulfed the Larry Fricker Co. pesticide warehouse last Saturday night, the company was completely uninsured for its losses or the losses of anyone affected by the fire.
“Going bare,” as doing without insurance coverage is called, is perhaps the most extreme response of corporate America to the growing difficulty in obtaining liability insurance, particularly pollution liability coverage. But as problems in the “environmental impairment liability” field have grown more dramatic, so have the methods of coping.
Because of increasing toxic accident judgments and claims against hazardous material handlers, the pollution liability insurance field has virtually shut down over the past year. At last count, fewer than five of the more than 3,400 insurance companies in the nation offered such policies, down from the 14 companies in that type of business just 18 months ago, according to insurance industry executives. And premium rates for the few policies available have increased as much as 200%.
Hardest hit, insurance executives say, are mid-sized companies, whose activities are large enough to do some serious damage in the event of an accident but too small to have the cash reserves needed for self insurance or bonding.
“The major oil and chemical companies, like Exxon and DuPont can take care of themselves fairly well and a mom-and-pop dry cleaners can still find insurance coverage,” explains Richard Kropp, a vice president at Shand Morahan & Co., the Evanston, Ill., insurer that dropped pollution coverage last January. “It’s the guys in the middle that are feeling the worst of it.’
Adds Matthew Lenz, a private risk management consultant in Brooklyn and the former dean of academic affairs at the College of Insurance: “A lot of companies are ‘going bare’ and hoping that nothing happens, or, if something does happen, that someway they’ll find a way to handle it. They pray and light candles.”
Victims, too, might be reduced to seeking divine intervention. Without insurance to tap, the only way victims have of winning compensation for their injuries and losses is attaching a company’s assets. And, as asbestos manufacturer Manville Corp. demonstrated in 1982, one way to avoid such moves is filing for protection under Chapter 11 of the U.S. Bankruptcy Code, an action the Larry Fricker Co. said it is considering.
Although pollution liability insurance is a trifling part of the $110-billion annual property and casualty industry, claims pending in the courts already exceed the estimated $100 million collected in related premiums over the last six years, according to Leslie Cheek, a vice president at Crum & Forster Insurance Cos., one of the insurers that has also fled the pollution field. Furthermore, the market is disintegrating at a time of increased awareness and concern about the dangers posed by the handling and storage of waste materials.
Lenz and other industry executives predict that the problem is only going to get worse.
Under a set of proposed guidelines from the Insurance Services Office, the industry’s major trade association, all pollution liability coverage would be grouped together in a single policy. The plan, scheduled to become effective in January, would wipe out the current distinction between gradual pollution, caused, perhaps, by slowly leaking waste at a local dump, and sudden accidents, such as explosions and fires.
Until now, only coverage for gradual pollution has been hurt by the insurance crunch, with so-called “sudden and accidental” pollution coverage still available as a part of a comprehensive liability package. The proposed guidelines put both types of coverage in equal jeopardy.
“All pollution will be grouped together, but it’s problematical whether there’ll be any insurance for it,” says Cheek
With no insurance company willing to underwrite pollution insurance, Cheek adds, government regulations requiring minimum liability coverage would appear silly. Currently, the Environmental Protection Agency requires hazardous waste handlers to show evidence of their ability to cover claims of up to $6 million in any one year, a requirement that can be met by outside insurance as well as self-coverage, bonding and cash reserves.
California Laws Confusing
California laws, a confusing patchwork of overlapping legislation, additionally require pesticide users, such as pest control operators and crop dusters, to carry liability insurance but apparently do not cover companies such as Larry Fricker that store and sell pesticides.
Legal requirements aside, companies handling toxic materials often find such insurance a prudent protection in an increasing lawsuit-happy society. But insurers, already burned by liability losses in other areas, can see what lies ahead.
“There’s no winning in these things,” says Shand Morahan’s Kropp. “Even if our legal defense wins a case, the legal fees are going to be staggering and we wind up paying out millions either way.”
Insurance companies have another reason for their skittishness. Over the last several years, they have paid out billions more for all types of liability claims than they have collected in premiums. In 1984, for the first time since the 1906 earthquake and fire in San Francisco, the entire insurance industry lost money. Even after adding in its $17 billion in investment income, the industry lost a whopping $4 billion.
Money to Be Made
The losses have forced them to increase premiums for most types of liability insurance at least 50% and drop some of their more hazardous lines.
Yet, at least American International Group, one of the few remaining pollution insurers, contends that there’s money to be made insuring toxic waste. But there’s a trick, explains John Amore, an AIG vice president: “You have to pick your clients carefully.”
According to Amore, toxic waste handlers can expect to wait at least three months to complete an AIG application. And even then, there’s no assurance that they’ll qualify. “We’re in a position to be choosy,” Amore says, “and to minimize our exposure, we choose only the best customers.”