Natural Resource Damages: The Evolving Risk of Environmental Impairment Liability

By Donnellon, Tim; Rusk, George | Risk Management, January 2005 | Go to article overview

Natural Resource Damages: The Evolving Risk of Environmental Impairment Liability


Donnellon, Tim, Rusk, George, Risk Management


Risk managers and insurance and reinsurance company executives who deal with environmental liability claims in the United States may have another tiger by the tail. The potential future impact of claims relating to natural resource damages (NRD) has become an area of great concern. Recent aggressive state government enforcement initiatives should inspire insurers and risk managers to scrutinize their exposure to this established source of environmental liability and carefully evaluate the potential impact of these claims on their existing environmental loss reserves. The nexus of increasing NRD compensation claims and increasing corporate governance responsibilities (particularly with regard to reporting of environmental liabilities) creates a significant risk management dilemma requiring all involved to access new resources for help in managing this growing environmental risk.

The regulatory framework for NRD claims is by no means new, tracing its origins to the original Superfund (CERCLA) statute of 1980 as well as the Oil Pollution Act (OPA) of 1990. However, the issue has made its way to the top of the enforcement pile in the past few years as a result of aggressive collection initiatives led by "trustees" seeking recovery based on liability schemes first established in these statutes.

Understanding NRD

The term "natural resource damages" has a legislative definition which favors the generally understood meaning of these terms. Both CERCLA and OPA define natural resources as "land, fish, wildlife, biota, air, water, ground water, drinking water supplies and other such resources belonging to, managed by, held in trust by, appertaining to, or otherwise controlled by the United States." The NRD section of each statute creates a framework for "trustees" to be compensated for "damages for injury to, destruction of, and loss of natural resources." Trustees are defined as "federal, state, Indian tribe and foreign officials." Additionally, OPA specifically provides that local officials may participate if they are designated as natural resource trustees by the governor of the state where the resource in question is located.

Perhaps the most important concept for the risk manager to understand regarding the NRD definition is what NRD costs are not. Simply put, NRD costs are not the same as the more familiar costs associated with response and clean-up provisions of CERCLA. Response and clean-up costs are an entirely separate part of the statute intended to protect human health and the environment from damages caused by pollution. NRD cost compensation is intended to be an additional form of recovery under the statutes. The intent of the NRD provisions are to restore damaged resources to their original condition and compensate trustees for the value of the lost use of the resource (a "time element" concept which should be familiar to insurance professionals.) Thus, NRD compensation claims can be viewed as a "reopener" type of environmental claim issue.

While some of the larger CERCLA cleanups have addressed the NRD provision in the settlement, many more have not. Based on the numbers referenced in the New Jersey Department of Environmental Protection (NJDEP) NRD directive, described below, it is reasonable to assume that for the vast majority of open and closed site remediation claims, the NRD topic remains an unsettled issue.

NRD costs have two components, primary and compensatory, defined as follows.

* Primary: Cost to restore premises near site including remediation

* Compensatory: Cost for value of "lost use"/restoration activity including "acquisition of equivalent" (e.g., wetland mitigation bank)

NRD and Regulation

NRD provisions of CERCLA and OPA have been in existence since the inception of these statutes, for 24 and 14 years, respectively. The general unfamiliarity with NRD is most likely due to a historical regulatory tendency to focus on the immediacy of protecting human health in directing site remediations. …

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