The Importance of Environmental Risk Protection

Ethanol is an environmentally friendly fuel, especially compared with petroleum-based fuels, but that doesn't mean there are no environmental risks involved in the production process. For a variety of reasons, environmental insurance should be considered when determining how best to protect a company's investment.
By Kris Bevill | February 04, 2009
Risk is inherent in any business and the ethanol industry is no exception. Producers constantly deal with volatile corn prices and ethanol prices, skewed public perception and governmental whims. This industry, perhaps better than many others understands the concept of risk protection. After working so hard to get a foothold in the nation's fuel supply, producers take the idea of guarding what they have built seriously. Surprisingly, few have considered protecting themselves from risks posed to the environment during the production and transportation of their fuel.

Many global insurers offer environmental policies. Some of the major companies include American International Group Inc., Zurich Financial Services Group and Liberty International Underwriters. In addition, Aon Corp., a large insurance/risk management company, has an environmental services group that specializes in providing environmental insurance to ethanol and other chemical companies. "The ones who know about it, like it," says Ken Ayers, managing director of the environmental services group. Few ethanol producers, however, are informed about environmental coverage and the industry overall is not educated as to the benefits this type of insurance can offer, he says.

Environmental insurance developed in the late 1970s to fill the gap created when insurance underwriters began excluding pollution events from their liability policies. "The market as we know it today has been around since the late 1980s," Ayers says, adding that even after nearly two decades many ethanol producers still don't know about this type of coverage. That may be due partly the lack of new ethanol projects currently under development.

Kenn Anderson, a director within Aon's environmental services group, deals directly with customers and says that insurance sales in general were down in 2008, including environmental policies. He attributes lackluster sales to economic issues, adding that fewer environmental policies are being sold to ethanol companies because fewer plants are being built and fewer new companies are being formed. The handful of new projects being developed are more likely to be aware of environmental insurance than those plants already operating because banks are beginning to require environmental protection policies, and it's being recommended by some legal councils. Insurance companies are adapting to the changing ethanol industry and are focusing on selling policies to pre-existing plants and companies that are in the process of making new acquisitions, Anderson says. It might be a tough sell when producers are watching every penny, but insurance professionals like Anderson and Ayers believe the benefits make it worth their while.

Coverage Considerations
So why should ethanol producers purchase environmental insurance? Neil Davis, president of Houston-based Petro-Chem Insurance Group Inc., says a look back at methyl tertiary butyl ether (MTBE) manufacturers offers a perfect example of how environmental insurance can pay for itself. "Environmental hazards caught up with the industry, resulting in very large lawsuits," he says. "Those who had environmental insurance were able to deal with the problems. Those who didn't "

Davis is not directly comparing MTBE production with ethanol production, but traditional ethanol plants emit some pollutants and anything is possible. Protection against lawsuits is the No. 1 reason to retain an environmental policy, Ayers says. "If you're brought into litigation over an environmental release, meaning that you've released something into the air or the soil or the water and people take you to court over it, it will pay the legal defense for that. That's really one of the big advantages," he says.

As with any type of insurance coverage, there are many policy variations, and it's important to work with an insurance representative to determine which best suits the company's needs and risks. Aside from litigation protection, environmental policies offer protection against emissions violations, clean-up costs, third-party bodily injury, start-up technology flaws and costs incurred through carbon credit discrepancies. Unless they're building on a greenfield site, developers of new projects should be aware that a prior company could have done some environmental damage that could surface during construction, Ayers says. There are environmental policies to protect against those expenses. A growing number of existing plants are looking into carbon credit generation as a form of future revenue. Ayers anticipates that there will be environmental policies that pay for a company to buy credits if the company isn't able to generate them as promised. That could be big in the next couple of years and is something producers should consider now.

"A good policy needs to protect you from a couple of different things," Anderson says. Pre-existing conditions are the No. 1 issue for new plants. An ethanol company also needs to be insured for the waste stream that it generates, he says. Transportation is another major part of ethanol production and companies need to protect against possible spills or other environmental hazards that could happen while their product is being moved, he adds. Aon has a number of clients with large rail contracts, and because anything that happens during rail transport of the product is the ethanol producer's responsibility, having an environmental policy is an important piece of insurance for them, Anderson says.

Money Well Spent
The good news for producers trying to make ends meet during challenging economic times is that environmental insurance policies are not expensive. Davis's advice: Buy now and lock in a policy for many years. "It doesn't cost anything to look into it," he adds. Ayers stresses that many of the environmental risks are the same for operating plants as they are for new facilities. He suggests the company owners and decision makers evaluate their facilities and look at their risk appetite. Is there is a real possibility your plant may emit or dump something that it shouldn't? If the possibility is there, an environmental policy could make a big difference, he says. If you plan to rely on carbon credits as a revenue source, the chance that you wind up in a situation where you can't deliver credits as promised could put the company in a bind. Environmental insurance could prove to be a wise investment in that instance. Premiums haven't increased since the 1990s and Ayers doesn't foresee any changes in policy pricing anytime soon. However, the soft market means low prices and easily obtained premiums for producers, so buying now wouldn't require a large investment, he adds.

It's also possible that some producers are shying away from environmental protection because they are afraid it might damage their image. When producers have already had to struggle with misconceptions that the production process is environmentally unsound, they could be hesitant to admit that they need to protect against environmental issues. That is a poor excuse, according to those who deal with environmental policies. The fact is, signing up for environmental insurance doesn't mean you are a dirty, polluting company. It simply serves as a safeguard should something environmentally detrimental occur as a result of an activity that stems from your facility. Environmental insurance has been around for 25 years and although its customers have primarily been chemical and petroleum companies, ethanol producers are on the list of potential clients. When questioned about the possible image projected by ethanol producers acquiring environmental insurance Anderson gives it to them straight. "Our answer is, look, you do create pollution," he says. "Purchasing a policy doesn't admit anything, it protects you."

Kris Bevill is an Ethanol Producer Magazine staff writer. Reach her at or (701) 373-8044.