Needed: A Fee on Commercial and Industrial Insurance to Finance Hazardous Waste Cleanup

Maurice R. Greenberg

Mr. Greenberg is President and Chief Executive Officer of American International Group, Inc., the largest underwriter of commercial and industrial insurance in America.

[19 ELR 10254]

One of the most crucial public policy problems facing America today is the lack of progress in dealing with hazardous waste. At the root of this inaction is an overriding issue: How do we pay the immense cost of correcting the damage done by past waste handling practices?

At American International Group, we have given extensive thought to this question and have developed the outlines of what we believe can become an effective answer. The timing is right for such an initiative. In 1991, Congress must reconsider key environmental cleanup legislation, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). The debate leading up to CERCLA reauthorization has already begun.

To put our proposal and the problem it addresses into perspective, it is necessary to review the status of America's effort to clean up its hazardous waste sites. A good way to start is to recognize past pollution for what it largely is: the residue of progress.

America's industrial expansion in the post-war era, as well as in prior periods, created jobs and generated other wide-ranging economic benefits. But as our industries grew, the by-products they discharged created polluted sites that dot our national landscape. Now, it is imperative to eliminate these accumulations.

Cleanup Will Be Expensive

It is difficult to overstate the scope of this challenge. Government studies show that as many as 425,000 potentially hazardous waste sites may need to be investigated. Not all of these, of course, will require action.

While it is not possible at this point to determine the exact cost of cleaning up the sites requiring correction, it is obvious that the expense will be enormous. The estimates generally vary from $ 150 to $ 700 billion, depending upon the number of sites and other factors used in the estimates. We do know that at least $ 25 billion will be required just to correct the approximately 1,000 waste sites that have been identified as requiring urgent action.

Superfund Is Not Working

Against this backdrop, one thing is clear: the response to the U.S. pollution crisis has been ineffective. In a recent report, the U.S. General Accounting Office concluded that it is doubtful that the Superfund program, as currently operated, will ever achieve the cleanup of all hazardous waste sites.

A major problem is that instead of restoring the environment, the Superfund effort has deteriorated into legal warfare. Remarkably, studies indicate that of the total funds spent since 1980 on environmental matters, something between 30 and 60 percent has gone for legal expenses. With the clarity of hindsight, we can see that this situation is the inevitable consequence of four basic factors.

First, Superfund's ability to assess and collect funds for environmental cleanup is founded on the principle of strict retroactive liability. This means that companies are now being held responsible for environmental damage that occurred 20 or 30 years ago — or even longer.

This liability is being imposed even when companies did not violate any laws when disposing of their wastes. Moreover, in the majority of cases, these companies were not acting in a deliberate or irresponsible way. It is therefore understandable when there is resistance to attempts to fix liability for something that was not illegal or irresponsible.

The second factor obstructing the Superfund effort is the extreme difficulty of finding out who is responsible for pollution. In most cases, the damage occurred over several decades. Compounding the difficulty is the fact that many of the hazardous waste sites on the priority cleanup list are common dumping areas. Consequently, governments at all levels are spending huge sums in a largely unsuccessful attempt to find polluters and fix liability.

The third factor reducing the effectiveness of the current approach to pollution is the sheer magnitude of the costs involved. With the price of cleaning up a hazardous waste site ranging from several million to several billion dollars, a simple fact emerges: no one party, either in the private or public sector, can be expected to bear the entire brunt of the environmental cleanup job.

The fourth factor inhibiting our environmental program is one already alluded to: the legal storm that has whipped up around the pollution problem. Government is suing business. So are those adversely affected by pollution, as well as environmental groups. Business, in turn, is suing its insurers.

Who Bears the Cost?

If this sounds like a debacle — it is. The battle involves such arcane but legally significant issues as whether the pollution is gradual or sudden in nature — and how you define "gradual" and "sudden."

The genuine problem, however, is that in writing general liability policies in the past, insurers did not assess any risks related to gradual pollution, nor did they include in the overall premium any charge for such risks. The reason is simple: in prior periods, there were few, if any, laws to define pollution or to make it a violation. Therefore, no coverage was needed.

Sensing the public policy void created by the maelstrom of environmental litigation, the courts often have taken it upon themselves to make environmental law where none exists. The tendency in many cases has been to view the insurance industry as a sort of public treasury when there is no other source of funds to pay for rectifying environmental damage.

But that is no solution. This becomes evident when you [19 ELR 10255] recognize that the cost to correct our environmental damage exceeds the total surplus of the entire U.S. insurance industry.

This brings us to the central question: if individual businesses, government, or the insurance industry are not in a position to pay for cleaning up pollution, who is? One thing is certain: an answer to that question will remain elusive if we continue to address this issue as we have in the past.

In short, the attempts to fix blame must be replaced by a sense of shared purpose among those involved in the pollution question: government, private industry, insurers, and environmental groups.

Toward a National Environmental Trust Fund

The key to achieving this kind of consensus is to recognize the premise already stated: the pollution damage of today is the residue of progress made in a past era. Viewed in this perspective, it is reasonable to conclude that since society as a whole benefited from our prior progress, society as a whole should assume the burden of cleaning up the by-product of that progress. If we can agree on that, we can replace the current inaction on pollution with a system that is effective, economically sound, and politically acceptable.

The basic elements necessary to do this are already in place. The system that we at American International Group propose is based on the concept of a National Environmental Trust Fund. This dedicated fund would be used only to clean up existing hazardous waste sites created by past pollution. It would not apply to any environmental damage occurring henceforth or caused by deliberate, conscious acts of pollution.

A Fee on Commercial and Industrial Insurance

Here is how the Trust Fund could work: a separate, earmarked fee could be added to all of the commercial and industrial property-casualty insurance premiums paid in the United States. In addition, some method of payment could be established for those corporations that are self-insured.

Based on our research, even a modest premium-based fee — say on the order of two percent and the equivalent for self-insureds — could raise an average of $ 3 billion annually over ten years. That would be enough to capitalize the Trust Fund at $ 40 billion over the next decade.

This amount is sufficient to clean up the first 1,000 known priority hazardous waste sites, with enough left over for the additional sites that are expected to be identified over the next ten years.

These funds would be collected by insurance companies and remitted to the U.S. Environmental Protection Agency, which would be responsible for administering the program. Significantly, this plan does not require a new tax. Instead, it would substitute a flat fee for the current method of environmental taxation under Superfund. The Trust Fund thus would give the Superfund program a new and more effective way to finance its mission.

The flat fee approach avoids the need for court decisions or regulatory agencies to assign degrees of responsibility according to how much a class of business or industry has contributed to past pollution. This would stop much of the endless litigation and wasted time and money that has stalled America's effort to deal with its hazardous waste sites.

This is the broad outline of a new direction we can take to solve a problem that, until now, has defied solution. We are presenting the proposal in a general form to stimulate a discussion on a new way to restore the environment. We now encourage reaction and suggestions from all parties concerned with hazardous waste, with the objective of evolving a broad consensus around a more detailed approach.

We hope that this dialogue will focus on this fundamental aspect of the National Environmental Trust Fund: it would make more money available for the assault on pollution, while removing the major obstacles to Americanhs program to restore the environment.