Expert Commentary

Insuring Farmers for Environmental Damage Claims

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.


Environmental
March 2018
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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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