Modeling from risk analytics firm Verisk estimates that US insurers may take on anywhere from $40bn to nearly $180bn in ground-up losses due to PFAS litigation, according to Verisk’s liability analytics leader, Eric Gesick, who spoke as one of four panelists on a recent webinar on the so-called “forever chemical” hosted by Insider Engage.
Just days following the webinar, manufacturing giant 3M agreed to pay $10.3bn to public water suppliers in order to settle claims of PFAS contamination. Weeks prior, paint manufacturer Dupont and its spin-offs, The Chemours Co and Corteva, inked a $1.18bn settlement to resolve similar claims.
PFAS are a class of chemicals popular in manufacturing for their durable and resistant qualities. But it’s those same qualities that make PFAS problematic, as they take decades to break down and can accumulate in animals, humans and the environment. Current research suggests that exposure to certain PFAS may lead to adverse health outcomes.
Affected classes
The panelists agreed that the bulk of PFAS-related losses come from environmental and drinking water contamination, and that coverages currently at the forefront of litigation are commercial general liability for property damage and bodily injury, as well as product liability and environmental liability.
That’s a sea change from the early 2000s, when PFAS claims largely revolved around environmental cleanup.
“We are in quite novel territory, when we're looking at the liability of manufacturers for environmental harm. There haven't been that many precedents,” said Neil Beresford, a partner at law firm Clyde & Co, who represents insurers.
Some insurers are finding themselves on the back foot when it comes to navigating this shifting risk profile.
“Our market has been underwriting [PFAS] risk for 20 or years or more, so we know the industries and the types of sites that have the most pronounced PFAS exposure,” said panelist Jim Finnamore, SVP and global head of environmental liability at Mosaic Insurance. “[But] the risk is evolving at an unprecedented, accelerated pace now, so our experiences are becoming less and less reliable.”
Regulatory impact
Finnamore cited new and sharpening regulations from the Environmental Protection Agency (EPA) and state agencies as environmental awareness grows. Among the policies that underwriters are contending with are a proposal to limit PFAS in drinking water to four parts per trillion, and clean-up standards that Finnamore thinks are likely to broaden as the underpinning science changes.
“What could cause PFAS to be like asbestos, in my opinion, is the property environmental cleanup component,” said Raji Bhagavatula, a principal with consulting firm Milliman. “If the EPA is successful in their proposal [to curb PFAS concentrations in drinking water], or in designating cleanup of these PFAS under Superfund sites, then under joint and several liability, you could have an expansion of the pool and insurers could get implicated."
“So there are a lot of things at play here that have to happen. Does it have the potential? Yes. Is it likely? Too early to tell.”
Losses
Gesick echoed Bhagavatula, cautioning that the severity of the burden on insurers relies on several nebulous assumptions including a very favorable plaintiff litigation environment and findings of contaminated sites across the board geographically. Personal injury claims for drinking water contamination, which are only beginning to gain traction, would also have to ultimately be successful despite the tenuous causality of PFAS-linked diseases.
“A reasonable best-case estimate would indicate about $40bn of potentially insured ground-up losses,” said Gesick. “I would say that’s still a significant event, but it doesn't rise to rise [to the level of] the next asbestos.”
For his part, Finnamore said his team at Mosaic has continued to underwrite PFAS on a case-by-case basis, and that their reinsurers have supported that approach. Other insurers he’s talked with have taken a more blanket approach to exclusions when it comes to PFAS.
Modeling and reserving
Bhagavatula said she hasn’t seen major activity in insurance companies with respect to setting dedicated liabilities for PFAS, as the modeling is highly speculative, though there’s no harm in trying nonetheless.
Pricing is a different story.
“Whether it’s PFAS or other mass torts, I think it’s critical that you explicitly build a load for it,” she urged. “Just because you remove unusual circumstances [like asbestos, silica or PFAS pollution] from the data, it does not mean they're not going to happen in the future. So you really need to try and have a provision for these unknown unknowns.”
As legal activity around PFAS escalates, insurers could see loss ratios jump by three to ten points, said Bhagavatula.
Inside P&C reported in mid 2022 that PFAS-related claims could rival asbestos in terms of costliness, and that cleanup liabilities could be in the $400bn range.
