February 13, 2020--Responding to regulatory uncertainty, insurers have begun excluding coverage for both actual and potential contamination stemming from per- and polyfluoroalkyl substances (PFAS), a move that is killing transactions and can affect a wide array of industry sectors, according to an attorney who spoke at a recent environmental legal forum.

Alexandra Farmer, a partner with the law firm Kirkland and Ellis, told the American Law Institute-Continuing Legal Education environmental law conference in Washington, D.C., Feb. 7 that significant regulatory uncertainty as well as litigation risks and the difficulty in remediating sites are prompting uncertainty in transactions related to properties linked to PFAS.

"We've seen more deals die because of PFAS than I've seen otherwise die because of an environmental issue in my entire career," Farmer said, noting that she had seen between four and six deals crater over the past year due to lack of insurance coverage of PFAS. "That's huge," she added.

"PFAS is not unique in that insurers are excluding known PFAS risks," she said. "What is unique is that because there is no well-recognized standard, you're not able to walk the insurers back from their exclusions in many cases."

While Farmer stopped short of calling for EPA and other regulators to set standards, her comments underscore wide-ranging concerns from public officials that the Trump administration is moving too slowly to address the class of thousands of non-stick, persistent chemicals that is posing health concerns in communities across the country.

Earlier this week, Sen. Tom Carper (D-DE), the top Democrat on the Senate environment committee, blasted EPA for its slow pace implementing its broad PFAS Action Plan, giving the agency a D- grade for completion.

In a Feb. 10 statement, Carper said the plan Administrator Andrew Wheeler unveiled in February 2019 outlining a series of steps to be taken by each of the agency's offices, has "gone largely unfulfilled."

Carper called out for particular concern EPA's failure to decide whether to regulate two PFAS, perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), in drinking water; its failure to issue Superfund regulations for PFAS; its delays on PFAS toxicity studies and its failure to finalize Toxic Substances Control Act (TSCA) rules limiting uses of PFAS.

Slow regulatory action from EPA has resulted in some states taking the lead to regulate the substances in a patchwork of advisories and varied and emerging regulation. That is expected to continue particularly as Congress, while it passed some legislation in December to require PFAS toxic release reporting and other requirements on industry and others, failed to push through legislation that would have forced EPA regulation of the chemicals under federal drinking water, hazardous waste and clean water laws.

At the same time, PFAS concerns and a lack of regulatory action have spurred tort litigation, with plaintiffs and states suing manufacturers of PFAS-containing firefighting foam as well as PFAS manufacturers themselves.

The costs of addressing such contamination is expected to be huge as environmentalists have found more than 1,400 communities with PFAS contamination and 300 military bases identified as having such contamination.

Commercial Impacts

While businesses and other potentially liable entities may not be clamoring for EPA to set strict standards, they too are feeling the commercial effects of public concern over PFAS.

Chemical manufacturing giant 3M announced last month that it took a $214 million pre-tax charge in the prior quarter stemming from litigation over its production of the chemicals, at a cost of 29 cents per share, according to a Jan. 28 press release.

The charge comes as the company faces a host of PFAS-related litigation. For example, the company is a defendant in consolidated multidistrict litigation alleging personal injury, groundwater contamination and other claims due to PFAS use in firefighting foam. It is similarly facing a landmark class action lawsuit, Kevin Hardwick v. 3M Company, et al., that is pursuing industry-funded, independent nationwide health studies and testing to determine the health effects of numerous PFAS found in the blood of nearly all Americans.

It is also defending against natural resource damage litigation filed by New Jersey last year over PFAS contamination.

Farmer, the Kirkland and Ellis lawyer, said the PFAS exclusions insurers are writing stand apart from other chemical exclusions in that PFAS is not tied to a discrete industry sector, but a wide variety of sectors. The potential contamination that is being flagged by insurers, lenders and, her clients -- purchasers -- stems from a variety of industries.

She said while it is common for insurers to write exclusions for chemicals when there is known contamination, what is unique now is "we're also seeing a lot of insurance exclusions for PFAS, even when it's a potential PFAS risk."

According to a set of slides Farmer presented, industries and properties at higher risk of having PFAS contamination include military bases; airports; and other firefighting training areas; wastewater treatment plants; landfills; chrome plating, electronics manufacturing, and oil recovery facilities; and manufacturers of certain consumer products such as stain- and water-repellent fabrics, nonstick products such as Teflon products; polishes; waxes; paints; cleaning products; food packaging and firefighting foams.

She explained that in other situations, for instance, where there is petroleum contamination, insurance coverage can be obtained if the petroleum contamination does not exceed the regulatory standard. But the lack of both regulatory and litigation uncertainty prevents parties from convincing insurers to "walk back from those exclusions," she said.

She cited one case where she was able to get insurers to pull back from PFAS exclusions. In that case, she said, she was able to find old patent records showing a paint manufacturer had used brominated chemicals, rather than fluorinated chemicals, in manufacturing paint. She said this takes one "down a road" that parties rarely have to go down with other chemicals.

Her slides list three examples of insurance exclusions due to potential PFAS liabilities or contamination. The first of these is: "site pollution policy excludes cleanup costs and bodily injury/property damage on a site-wide basis because site operations formerly included fire retardant chemical manufacturing."

A second example of an exclusion, she found, is: "Contractor pollution policy excludes coverage for any losses arising from PFAS pollution caused by a company's application of municipal biosolids at agricultural fields but historical occurrence-based policies may provide coverage."

A third example of insurers excluding PFAS relates to a representations and warranties insurance policy, which "excludes any losses arising from or relating to PFAS for a carpet chemical blending operation, even though such exclusion is not present in underlying pollution policy."

Asked whether PFAS, currently not listed as a "hazardous substance" under federal law, should be part of phase 1 property investigations and due diligence, Farmer said over the past six months, she has seen consultants flag it regardless of whether she has made such a request, because the consultants' reputations are on the line if they do not. -- Suzanne Yohannan (syohannan@iwpnews.com)