Environmental impairment loss exposures are inherent in the operation of a
farm, and these loss exposures cannot be avoided in the business of farming.
Recent court rulings have shown that farmers face pollution-related loss
exposures, most notably from drinking water supply contamination and odors. On
top of that, farm package insurance programs commonly sold to farmers do not
provide any effective coverage for claims arising from gradual contamination of
soil and water or from odors.
Acknowledgment
The author would like to acknowledge and thank
coauthor Aaron Millonzi, American Risk Management Resources Network, for
his contributions to this commentary.
However, the good news is that specialized environmental impairment
insurance for farms is available through thousands of insurance agents and
brokers across the nation.
Increasing Litigation
Across the country, lawsuits are increasing along with the growing size of
farming operations. The alleged damages being sought by the plaintiffs in some
of these lawsuits are in amounts never seen in the agricultural economy.
In a recent example of surprising environmental damage claims being made in
farming country, the city of Des Moines, Iowa, sued the County Board of
Supervisors in three counties northwest of the city for over $180 million. The
city did so to recover its anticipated costs to construct and operate a new
water treatment plant needed to treat the drinking water supply serving over
600,000 residents. The cost to build and operate the water treatment plant was
estimated to be as high as $183,500,000.
The plant was required to remove dangerously high levels of nitrates from
the water flowing in the Des Moines River and the Raccoon River. These
waterways are the city's main sources of drinking water, and both are
contaminated with nitrates primarily from farm fields leaching excessive
amounts of applied fertilizers into drainage ditches and from the surface
runoff from fertilized fields. The County Board of Supervisors was targeted as
a defendant in the lawsuit because its members served on the water drainage
districts, which are the local bodies who govern the constructed drains to
remove excess water from their farmland. Testing showed these water drainage
districts through their governance had contributed to the high nitrate levels
flowing into the two rivers.
An Iowa Supreme Court decision ruled that the water drainage districts are
protected under governmental immunity granted under state law. That probably
came as a big source of relief to the folks sitting on the water drainage
districts' boards of directors. With that avenue of recovery eliminated,
the city still had a $180 million problem that it did not cause that it was
looking to collect on. The logical progression for cost recovery of the $180
million dollars is for the city to sue the actual parties responsible for
producing the dangerously high nitrate levels in the rivers and doing so under
federal environmental protection laws. Logically, those responsible parties are
the individual farms in the three counties upstream of Des Moines along with
other stakeholders involved in the fertilizer business, which include the
fertilizer suppliers, applicators, and consultants.
The lawmakers in Iowa passed laws that essentially enabled the farms in the
state to contaminate drinking water supplies with impunity to protect the
agricultural economy. Sleights of hand like that usually do not hold up when
the voters figure out what was done. Eventually, the concept of protecting the
environment and making the polluter pay will prevail with voters.
In another example, environmental protection groups in Yakima, Washington,
successfully sued three industrial-sized dairy farms for groundwater
contamination of the drinking water wells serving over 24,000 residents. This
provides at least one example of citizens using federal environmental
protection laws to overcome state laws protecting farming operations from
nuisance lawsuits. The plaintiffs utilized the Safe Drinking Water Act and
Resource Conservation and Recovery Act (RCRA) to get the case in front of a
federal court. The lawsuit alleged that manure in the amounts being applied to
the fields should be a regulated solid waste rather than a beneficial
fertilizer product. The plaintiffs argued that the improper management of
manure by the farms was equivalent to operating a solid waste disposal
operation without an RCRA waste disposal permit, and the federal court agreed
with their argument.
In a settlement, the farms were ordered by the court to provide bottled
drinking water to all residents for at least 2 years or until nitrate levels in
the groundwater returned to safe levels. In addition, the farms were
responsible for the replacement, cleanup, and monitoring costs of their manure
storage structures and compost areas from the time of the settlement and into
the future. The legal matter is likely to take decades to resolve and will be
measured in eight figures if any groundwater remediation is needed. What's
interesting is the farms were not fined $50,000 a day per violation for
operating a solid waste disposal site without a permit, which is the fine for
doing so under the RCRA.
Insurance Coverage for Environmental Claims
Given these examples that exhibit pollution-related loss exposures for farms
are on the rise, it's important to note that a standard farm package
insurance policy would provide no coverage for any part of these lawsuits or
the legal costs incurred by the farms. If the city of Des Moines pursues the
individual farms in the three counties upstream of Des Moines, along with other
stakeholders involved in the fertilizer business, most of these folks will be
uninsured for the alleged damages and the magnitude of defense costs that will
come along with the suit. That is, of course, unless they have purchased
customized environmental impairment insurance that specifically covers
preexisting nitrate contamination, which most stakeholders have not done.
For the few that have purchased environmental insurance, only a small subset
of those purchased insurance policies will provide coverage for preexisting
nitrate contamination. The takeaway here is that virtually all of the
stakeholders in farming are uninsured or severely underinsured for
environmental damage claims, and they need specialized environmental impairment
insurance to provide coverage for their pollution-related loss exposures.
An argument against the need for farms and farming-related practices to have
in place environmental insurance centers around how state right-to-farm laws
provide immunity for liability from traditional farming operations. However,
these statutes do not grant farmers the right to pollute. Many of these laws
were written before the development of factory-sized farms and confined animal
feeding operations, and the environmental protections laws have not kept up
with changes in the farming community and common practices.
Society no longer accepts the "it is just a consequence of
farming" excuse for soil and water contamination that is now being
exemplified on an unprecedented scale. Citizen action committees are pursuing
farms for natural resource contamination much the same way that they went after
manufacturers and chemical companies for industrial-based pollution in the
1980s. Don't count on state right-to-farm laws to override federal
environmental protection laws when the cleanup of an aquifer becomes necessary
because of high nitrate levels.
So, that goes back to farms and related stakeholders needing customized
environmental impairment insurance for the environmental loss exposures they
face. Just for reference and to offer some perspective, the following is a list
of a few of the common environmental loss exposures associated with
farming.
- Surface water contamination
- Crop overspray*
- Odors
- Reduction of neighboring property values
- Public nuisance
- Trespass
- Operating or participating in manure digesters
- Damage to natural resources
- Bodily injury from exposure to bacteria
- Groundwater contamination and remediation
- Fuel storage tanks
- Fertilizer spills/releases
- Custom farming operations
- Transportation risks (e.g., manure hauling)
- Storage and application of pesticides and herbicides
*Insured under the average farm package insurance policy
As mentioned earlier, the liability insurance provided in the standard farm
package insurance policy does not provide coverage when it comes to
environmental-related loss exposures faced by farms but works fine for the
nonenvironmental, everyday operations of a farm. The most common loss on the
general liability insurance policies sold to farms is a collision between a car
and a tractor; usually, it's a car hitting a tractor, as tractors hitting
cars is infrequent. In either case, the damages from these collisions are
rarely, if ever, measured in the tens of millions of dollars. In contrast,
environmental damage to an aquifer is routinely measured in the tens of
millions of dollars in the industrial sector even for nonhazardous
contaminants.
Farm insurance policies were not designed to deal with environmental losses;
in fact, farm package insurance policies will totally exclude any claim
involving damages from contamination of any kind with the single exception of
crop overspray. As with all other standard liability and property insurance
policies, the insurance policies sold to farms contain at least one pollution
exclusion. The most common pollution exclusion eliminates coverage for
"bodily injury or property damage arising out of the actual, alleged or
threatened discharge, dispersal, seepage, migration, release or escape of
pollutants." "Pollutants" is defined as "any solid, liquid,
gaseous or thermal irritant or contaminant, including smoke, vapor, soot,
fumes, acids, alkalis, chemicals, and waste." "Waste" includes
materials to be recycled, reconditioned, or reclaimed.
Environmental Exposures Are Real
To most, this may not seem like a big deal for farms. Farms don't handle
"pollutants"; a pollutant is hazardous waste, right? That assumption
is totally wrong. The restrictive coverage in farm liability insurance policies
was exemplified in December 2014 when the Wisconsin Supreme Court ruled that
the bacteria found in cow manure is a "pollutant." The case,
Wilson Mut. Ins. Co. v. Falk, Nos. 2013AP691, 2013AP776, 2014 Wisc.
LEXIS 1256 (Apr. 17, 2014), involved the Falk dairy farm, and the
Falks, like every other dairy farmer, used manure to fertilize their fields.
Neighboring property owners sued the Falks, alleging that the application of
manure to their farm fields had polluted a local aquifer and contaminated water
wells. Ultimately, the neighbor's child ended up in the hospital from
drinking bacteria-contaminated groundwater, so the neighbors sued the Falks for
the damages they suffered from the bacteria in their well.
Upon receipt of the suit, the Falks filed a claim on their farm liability
insurance policy with Wilson Mutual Insurance Company, which was denied. Wilson
Mutual claimed that the cow manure was a "pollutant" excluded from
coverage by the farm policy's pollution exclusion. After multiple appeals,
leading to the case being presented to the Wisconsin Supreme Court, the court
upheld that cow manure is a "pollutant" because of the bacteria it
contained that resulted in contamination of the well. Coverage for the claim
was precluded by the pollution exclusion because the well was
"contaminated."
The Wisconsin Supreme Court ruled that, while a reasonable insured may not
consider manure safely applied to a field to be a "pollutant," a
reasonable insured would consider bacteria contamination in a well to be a
"pollutant." Now, even the Wisconsin Supreme Court has created
precedence that standard farm liability insurance policies do not cover
contamination losses, specifically those involving bacteria contamination of an
aquifer. One Wisconsin Supreme Court justice went as far as to call standard
farm liability insurance policies "useless insurance" for a dairy.
Other states are likely to follow suit, making this a nationwide issue.
Modified Environmental Impairment Liability Policies
So, it's clear that farms need specialized environmental impairment
liability insurance to provide coverage for their environmental loss exposure,
but what is the solution to the cover gaps created by the pollution exclusions
in farm policies? The solution to pollution exclusions is specialized
environmental impairment liability insurance products that are specifically
designed to fill the gaps created by the pollution exclusions on standard farm
package insurance policies.
The following facts are clear.
- Farms have environmental and pollution-related exposures, most notably
related to groundwater contamination from applying manure and fertilizers,
and these exposures cannot be avoided. Lawsuits alleging that farms have
polluted the environment like the ones in Des Moines, Iowa, and the one in
Yakima Valley, Washington, are prime examples of the environmental loss
exposures that farms face.
- Standard farm package insurance policies sold to farmers do not provide
coverage for losses arising from contamination or pollution. The pollution
exclusions in these policies leave farmers uninsured for environmental
contamination claims. Basically, only crop overspray of herbicides is covered
under the typical farm package insurance policy. Some totally uninformed
insurance agents errantly refer to the overspray coverage as
"environmental insurance." They are dead wrong.
It should be noted that endorsements added to a general liability or
standard farm insurance policy that make exceptions to the "absolute"
pollution exclusions in those policies do not equate to true environmental
insurance coverage. These endorsements commonly provide very restrictive
coverage for pollution events; for example, they may restrict coverage only to
pollution incidents involving farm chemicals, or the coverage will only be
offered for contamination events occurring in time frames measured in hours.
The most detrimental environmental loss exposures for a farm are the ones that
occur over an extended period of time (i.e., gradually) and involve substances
such as manure that are not considered "farm chemicals."
Given this reality, farms need to purchase a specialized environmental
insurance policy to pick up coverage for their pollution-related loss
exposures. Specially modified environmental insurance policies are designed to
fill the gap in coverage created by pollution exclusions on the standard farm
liability and property insurance packages. Genuine environmental insurance
policies are readily available for all types of farms today. Specially modified
farm environmental insurance policies are needed to fill the insurance coverage
gaps for the environmental loss exposures that all farms risk facing. Minimum
premiums are below $4,000 for a $1,000,000 limit of liability as of this
writing.