Controlling your environmental risk

Modern Casting, May, 2008 by Joseph Kulak

In 1992, the U.S. Environmental Protection Agency (EPA) ranked metalcasting as one of the 10 most polluting industries. Since then, the industry has come under increased scrutiny over operational practices and pollution legacy issues. Metalcasters should tread lightly, because they can become ensnared in the web of litigation that is the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, a.k.a.Superfund) and other federal and state laws.

The following are answers to frequently asked questions regarding environmental liabilities.

Question: What is pollution liability, and what kinds of companies could be at risk?

Answer: All companies in the U.S. have pollution liability exposures. From construction to oil and gas exploration to banking, the potential for a pollution issue to impact a company's bottom line is significant. Metalcasting operations have on-site operational exposures surrounding:

* handling and treating large volumes of wastewater;

* waste-stream management;

* metal working fluids;

* above and underground storage tanks;

* air emissions;

* historical pollution impacts to soil and groundwater resources.

Question: How should a company approach and assess a property transaction with regard to environmental liabilities?

Answer: Transaction insurance coverage can promote the sale, investment, and redevelopment of higher risk property by transferring the environmental risks away from owners and purchasers to an insurance policy. Real estate transaction coverage is becoming common and cost effective for all types of industrial properties. It most often is utilized with transactions involving properties that have a higher risk of environmental exposure. Properties with elevated risk include those located in areas of former and existing commercial and industrial development, such as service stations, dry cleaners, manufacturers, warehouses, mines, transportation corridors, petroleum and chemical storage facilities, and metalcasters. A Phase I environmental investigation provides a glimpse into the history of a property and offers no protection.

Question: How do new regulations from FASB, SEC and EPA affect certain accounting practices?

Answer: In the wake of numerous corporate financial scandals, Congress has begun to question the adequacy of existing U.S. Securties and Exchange Commission (SEC) rules and policies. Corporations are under ever-increasing pressure to properly disclose their liabilities and establish protocols for identifying, tracking, estimating and judging the extent of environmental matters. The Sarbanes-Oxley Act (Public Company Accounting Reform and Investor Protection Act of 2002) requires CEOs and CFOs to submit written certifications of their company's quarterly and annual SEC reports and procedures for preparing and disclosing the required information. The Finanacial Accounting Standards Board (FASB) financial accounting standard 143 clarifies the need to recognize environmental related asset retirement obligations. Investors need and deserve increased transparency.

Clarifying environmental liability and risk may be a complex task, but it is worth the effort. What is at stake?

* Shareholder suits

* Personal liability of directors and officers

* Financial re-statements

* SEC investigation

* Violation of debt covenants

Companies can begin to address their environmental liabilities and fiduciary obligations by developing defensible plans for liability assumptions, quantifying their known environmental liabilities, and using environmental insurance to help manage known and unknown risks.

Congress and the SEC will continue to develop rules explicitly requiring implementation, evaluation and certification of effective internal systems of disclosure controls. As the regulatory regime continues to hold companies accountable for adequate financial reporting, accurate and timely disclosure of environmental costs and liabilities are in order.

Question: What is the most economical method for controlling environmental risk?

Answer: Strong in-house environmental management is the most prudent system for controlling environmental risk. Continued emphasis on chemical database management, adopting of "greener" processes, ISO 14000 compliance and standardized operation procedures should enable the metalcasting industry to improve environmental management. Further, the industry will benefit from economies of scale by speeding adoption of emerging technologies that will reduce waste and costs for environmental compliance and energy.

Joseph Kulak, HRH, Chicago

Joseph Kulak is the managing director of HRH's National Environmental Practice. HRH is the eighth largest insurance and risk management intermediary in the U.S. and tenth largest in the world.