By Jack Willis of Aon Risk Solutions
What are Civil Fines and Penalties? How does the EPA implement them?
Civil fines and civil penalties are one of available financial sanctions that can be imposed on violators of certain environmental regulations or statutes. The Environmental Protection Agency (EPA) uses these and other measures to bring polluters back in compliance as well as to deter future polluting conduct. The major environmental laws that regulate pollution include the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act and the Safe Drinking Water Act all of which provide authority for the imposition of such enforcement actions. The United States EPA has three goals in mind when administering these fines and penalties: deterrence, fair and equitable treatment of the regulated community, and swift resolution of environmental problems.1
These penalties were instituted to deter violators from falling out of compliance again as well as to discourage potential future violators. With regard to pollution, one of the reasons why a company or individual may not comply with environmental regulations is because of the economic benefit they gain via non-compliance. Often, in some industries it is more economically efficient to pollute or to be out of compliance than to install pollution controls or be in compliance. In order to deter this action, the EPA has an economic benefit component of its penalty policy that assesses the economic advantage received by the violator from being out of compliance. The EPA also factors in the seriousness or magnitude of the violation when deliberating the amount of a fine or penalty. This is called the gravity component. Combining the benefit and gravity components as well as the number of days out of compliance is how the EPA comes to a preliminary amount for the fine or penalty.
Are these types of penalties covered? Are they insurable? How is coverage triggered on an Environmental Insurance Policy?
Within the environmental insurance marketplace, many carriers offer coverage for civil fines and penalties. Universally, all policies specifically exclude coverage for criminal fines, criminal penalties and criminal assessments. The coverage for civil fines and penalties is often found within the policy’s definition of loss or damages, or alternatively as an exception to the policy’s fines and penalties exclusion. Usually the language is qualified such that the grant will only operate where “allowable” or “insurable” by law, as is also the case with punitive damages coverage. Whether or not civil fines and civil penalties, as well as punitive damages, are “allowable” or “insurable”, is left to the each of the individual states to determine, often based upon an analysis of whether insuring them would violate public policy. To date, a majority of states allow directly assessed punitive damages to be insured, so, by extension, one could expect that in those same jurisdictions, civil fines and penalties that are imposed – often without regard to fault, would likewise be insurable. In addition, by that same reasoning, even in those states that do not permit insurance for punitive damages may nevertheless allow insurance for civil penalties – inasmuch as the penalty is often imposed irrespective of whether there was any intentional wrongdoing on the part of the polluter. But, unlike punitive damages, there is a lack of cases addressed to the insurability of civil fines and penalties so this remains an unsettled issue particularly especially in those states that do not permit insurance for punitive damages.
Furthermore, most carriers’ wording also states that such fines and penalties must arise in connection with a claim for bodily injury or property damage. So in order for there to be coverage for a civil fine or penalty, such fine or penalty must be associated with a specific bodily injury or property damage claim. For example, a civil penalty imposed as part of a notice of violation for storm water discharges in excess of a permit would not, absent a parallel claim for bodily injury or property damage, trigger coverage, even if there were an obligation on the part of the insured to perform some cleanup activities. That said, some carriers may be willing to amend their wording to include civil fines and penalties arising out of remediation or clean-up costs.
Trends in the EPA’s administering of Civil Fines and Penalties, and an outlook on the future.
In each of the past five years the EPA has issued an increased value of civil fines and penalties. However in that same timeframe, the number of cases that they have investigated has decreased. This inverse correlation suggests that the EPA is focusing its resources on more serious violations with the greatest impact on public health and safety.
Indeed, the aftermath of the Deepwater Horizon Oil Spill is a good example of this trend. In 2013, Transocean was fined $1 billion, which accounted for the majority of that year’s civil fines and penalties value. Earlier this month, on September 4th, a federal judge ruled that BP was guilty of gross negligence in the 2010 disaster. As a result, BP could face a fine of up to $18 billion, which is almost five times the maximum under the Clean Water Act.
The severity of these recent outcomes should serve as a reminder to all businesses that have the potential to cause negative environmental impact, that in addition to other enforcement powers that the EPA and other regulatory authorities have including criminal prosecution, there can be severe economic consequences as well. The EPA has shown its commitment to protecting the environment and will continue to issue civil fines and penalties to enforce compliance. Therefore, it is critical that we educate our clients on this topic and ensure that they understand the possibly limited coverage for civil fines and penalties afforded in their environmental policies.
1 See “A Framework For Statute-Specific Approaches To Penalty Assessments: Implementing EPA’s Policy on Civil Penalties”, effective 2/16/1984, available at: http://www2.epa.gov/sites/production/files/documents/penasm-civpen-mem.pdf