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Chemical Spill in West Virginia: Where Does Liability Stop When Contamination Rolls Downhill?

Rodney Taylor | March 28, 2014

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Oil spill from a ship

According to the National Oceanographic and Atmospheric Administration, there are 14,000 chemical and oil spills a year in the United States, ranging from a few gallons to thousands of barrels. These spills take place at fixed sites, from pipelines, and from other modes of transportation including trucks and railcars. Given that there are about 40 spills a day, it is only a matter of time until a release takes place that has truly catastrophic consequences. 1

The recent contamination of the water supply system in Charleston, West Virginia, and the 9 counties surrounding it disrupted the lives of 300,000 people for more than 5 days. Fortunately, the amount of chemicals spilled into the water supply was relatively small.

Incidents like this raise questions about the hazards of storing, using, and transporting toxic materials in urban areas and the vulnerability of contaminating water supplies in US cities through accidental releases of pollutants.

The West Virginia Chemical Spill

In January 2014, Charleston residents reported an unusual odor and taste in their drinking water supply to the State Environmental Protection Agency, which led to the discovery of a leaking chemical storage tank at Freedom Industries' Etowah Terminal. Freedom Industries reported the spill as involving 5,000 gallons of 4-methylcyclohexane methanol, a greasy liquid used to wash coal.

The 35,000-gallon tank that leaked was constructed in the 1950s to store gasoline at what was then a petroleum refinery. There was a breach in the secondary containment that had not been repaired. Almost 3 weeks after the contamination was discovered, Freedom reported that the leaking tank contained a second chemical or a mixture of polyglycol ethers and that it might have leaked 10,000 gallons. The spill was contained in the Elk River with absorbent booms. Soil around the tank was cleaned up and the water system piping was decontaminated. Within 10 days of the discovery of the spill, levels of contaminants in the Charleston water system tested far lower than the Center for Disease Control's (CDC's) safe concentrations. Therefore, the water was declared to be safe for all uses, including bathing and drinking. Many residents continued drinking bottled water and claimed they could taste the contaminants in the public supply.

Impact of the Contamination on Charleston Residents

Food services, restaurants, and schools were impacted by the tainted water. Schools were closed and people were forced to use water trucked in by local governments and the National Guard. Industrial companies that depended on water for manufacturing or cooling were not able to operate during the period that the water supply was shut down. While no one was seriously injured by the contaminated water, the incident disrupted the lives of 300,000 people living in the nine-county area surrounding Charleston.

Charleston residents still seem unsure of the information being provided by the Environmental Protection Agency (EPA), CDC, and local authorities. Dozens of lawsuits have been filed against Freedom Industries, American Water, and the manufacturers of the materials that were released. The EPA ordered Freedom Industries to move the materials from the leaking tank and then from all of the tanks at the terminal.

Legal Ramifications

Within weeks after the spill, Freedom Industries sought protection under bankruptcy laws, asserting that claims from third parties, if successful, would exceed its assets. American Water, the private operator of the Charleston water system, is also named in the legal actions by Charleston area residents and businesses for its alleged negligence in not testing for contamination of its water and not closing down the system fast enough when the problem was first reported. Beyond Freedom and the water company, lawyers have also looked at the manufacturers of the chemicals, transportation companies that pumped them into the leaking tanks, and entities that owned and operated the Etowah Terminal facility before its sale to Freedom.

The amount of damages that will ultimately be assessed as a result of the contamination of the Charleston water system is difficult to predict. Business interruption losses suffered when operations were suspended seem to be the most straightforward type of damages. Even those are subject to significant variations that will require speculative evaluations. Bodily injury claims by people who were sickened by drinking contaminated water will have to be resolved at trial or via settlement.

Cleanup costs for this release were relatively modest in comparison to other cases where chemicals escaped into rivers. The most expensive part of the process was the decontamination of the pipes in the water supply network, and that took less than 5 days. No additional remediation of remaining pollutants has been ordered by state or federal governments at this time.

Insurance for Contamination Claims

Even if Freedom Industries has no assets, it may still have insurance policies that may respond to third-party claims for bodily injury and property damage as a result of the contamination of water supplies in West Virginia. Commercial general liability (CGL) and excess liability insurance policies typically purchased by industrial corporations contain pollution exclusions that are likely to preclude coverage for the water contamination incident. If the claims are clearly not covered, these policies may not pay defense costs.

If the company has purchased environmental liability insurance, that policy may respond to the pollution claims for bodily injury and property damage. It might also pay for remediation costs incurred to clean up the Elk River, the water supply pipes, and the area around the tank at the Etowah Terminal. Not all chemical distributors buy pollution insurance, and those that do might not have procured enough limits to pay all of the incurred damages and cleanup costs.

American Water may have insurance for its operations, which could include protection for the claims filed against it for its alleged negligence in distributing contaminated water. This could come from CGL and excess liability policies or from products liability insurance if purchased separately. Plaintiffs seeking recoveries in court will have to prove that negligence of the company was responsible for the bodily injury or property damage they suffered. They will also have to prove the amount they are owed for damages.

If a court determines that the chemical company that allowed the release into the river, and not American Water, is responsible for the majority of the losses, plaintiffs may not be fully compensated for all damages once the liability is apportioned among responsible parties. The same factors that are applied to the potential liability of American Water will also be applied to other defendants that are named in individual and class action lawsuits.

Lessons Learned

By the time the lawsuits are settled, millions of dollars will have been spent to pay for bodily injury, property damage, and cleanup claims. One of the complaints about the Charleston incident was the lack of control regulators had over the operations of Freedom Industries. It is alleged that its facilities were not inspected by any state or federal agency in more than 2 decades, and it was not required to demonstrate financial responsibility before it stored millions of gallons of hazardous chemicals within 200 feet of a river that supplies water to a city and 9 counties.

The Charleston water contamination incident also demonstrates the vulnerability of water supplies in the United States to disruption even where the quantities of chemicals spilled are small and the material not highly toxic. This incident makes us aware that chemicals could be released into rivers intentionally by vandals or terrorists. While the security of water supplies and chemical plants was a national concern after the terrorist attacks of September 11, 2001, little has been done in the intervening years to actually improve the safety or security of either. The involuntary distribution of the costs of pollution events to parties that were not primarily responsible for the losses or damage is also a wake-up call for people who have considered insurance for environmental risks unnecessary.

Parties that have not purchased environmental liability insurance should evaluate their exposure. An assessment of these risks and an evaluation of the protection available is not just a good idea but may be essential to the survival of entities that are exposed to either direct or indirect losses from chemical and oil spills.

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1 The information contained in this article is for general informational purposes only and is not intended to provide individualized business or legal advice. The information contained herein was compiled from sources that Aon considers to be reliable; however, Aon does not warrant the accuracy or completeness of any information herein. Should you have any questions regarding how the subject matter of this article may impact you, please contact your appropriate legal or business advisers.