Risk management

Much has changed in oil spill management since

the Torrey Canyon, with learnings applied to other spills, including

Exxon Valdez (inset) in 1989.

Mitigating ESG risks with spill response

Pollution incidents often go beyond environmental impact, damaging corporate reputations and inflating claim costs. This reality makes proper response a vital part of marine risk management, writes Kip Radigan, Group Chief Executive Officer of Global Risk Solutions Group, the provider of property and casualty claims adjusting, complex/ large loss and environmental risk management solutions

Marine industry professionals and their partners in the global insurance industry know that as ship traffic and transportation of oil increase, so does the risk of oil spills. When a spill occurs, losses often begin mounting immediately, impairing marine ecosystems, harming wildlife, disrupting coastal communities, and inviting litigation.

Spill prevention is of course the preferred method to mitigate these losses, but when accidents happen – and all of us know they will – the next best action is an effective response.

From the perspective of the marine insurance community – including hull and cargo underwriters, P&I clubs, brokers, surveyors and claims firms – spill mitigation is a critical element in marine risk management. But mitigating spills also is required under various pollution regulatory frameworks, and it therefore plays an important role in environmental, social and governance (ESG) programs.

ESG is much more than a nice-to-say set of principles. Growing numbers of corporations of all sizes, in countries around the world, see ESG programs as strategically important to their growth and resilience. It’s also worth noting that growing numbers of regulators, investors and consumers see ESG in the same light. On a planet that is 71% covered by water, applying ESG values to marine activities is imperative.

RESPONSE REGULATIONS GROWING

In the past 50 or so years, the management of environmental incidents such as spills of oil and other hazardous substances has become more and more regulated throughout the world.

One of the signal events that led to major improvements in spill response was the wreck of the supertanker Torrey Canyon, which hit a reef off the coast of Cornwall in March 1967 and lost its entire cargo of crude oil.

It spilled more than 100,000 tonnes, about 37 million gallons,

fouling shores in Cornwall, Guernsey and Brittany, across the English Channel. The incident killed an immense amount of marine life and caused damage to local communities that lasted years.

The Torrey Canyon tragedy inspired the US in 1968 to create the National Oil and Hazardous Substances Pollution Contingency Plan, or the National Contingency Plan (NCP) for short. The NCP was among the first to devise standards for spill reporting, containment and cleanup. It also implemented precursor organizations to the National Response Team and Regional Response Teams that oversee spill response efforts today.

In 2004, inspired by prior decades of work to improve collaboration among local, state and federal agencies, the Federal Emergency Management Agency (FEMA) introduced the National Incident Management System (NIMS).

NIMS established an integrated, nationwide incident management approach based on standard structures, terminology, processes and resources. Similar systems exist elsewhere in the world. All of them continue to evolve and make use of advances in technology, which in turn can make incident response even more effective.

LESSONS FROM MARINE CLAIMS

Much has changed in oil spill management since the Torrey Canyon, as evident in more recent spills, including the Exxon Valdez in 1989 and the Deepwater Horizon in 2010. Each of those events ultimately led to additional pollution regulations, including the Oil Pollution Act of 1990, and improved spill management techniques.

One of the key lessons the marine insurance industry has taken from these unfortunate events is the importance of response planning and preparation.

The most effective spill responses are conducted through a cohesive, integrated management structure comprising command, operations, planning, logistics and finance, as prescribed by NIMS. Each of these functions has a defined role and tasks that facilitate incident response.

Experience has shown that it is easy to overlook the tasks of validating and containing costs of the response and management of third-party claims. Left unmonitored, incident response costs can easily multiply, and third-party claims can quickly turn into class-action litigation.

In addition to the direct costs of defending lawsuits, responsible parties can be exposed to reputational damage, loss of customer confidence, reduced employee engagement and productivity, and loss of goodwill with their communities. Taken individually and together, these consequences touch

“ESG is much more than a nice-to-say set of principles.

Growing numbers of corporations of all sizes, in

countries around the world, see ESG programs as

strategically important to their growth and resilience.

On a planet that is 71% covered by water, applying ESG

values to marine activities is imperative.’’

Kip Radigan, Global Risk Solutions Group

environmental, social and governance issues.

Ineffective response increases the risks for all stakeholders, not just responsible parties. To manage the risks, it is important to consider the following questions, ideally before a pollution event arises: • How will the spill be cleaned up and at what cost? • What are the current and potential claim exposures and legal liabilities? • What is the company’s financial exposure in the short term and long term? • Is there insurance in place for such an event and when is coverage triggered? • How will costs be incurred? • Are resources being tracked and estimated in a timely way? • What is the third-party claim exposure? How will claims be initiated, tracked, handled, processed and paid? • How will the company communicate with local authorities and the public?

Because marine pollution incidents do not recognize borders, an international response plan is needed that takes into account local laws, customs and languages. Working with knowledgeable and experienced adjusters, legal representatives and other partners can make a huge difference in effecting claim settlements locally.

Good risk management and incident response plans also consider technology resources that can support collaboration and communication. Cloud- and web-based tools exist that simplify documentation and accounting for the people, equipment, vendors and expenses related to the response. When these technology resources are secure, accessible and backed up, they can provide an important component of legal defenses in the event of litigation.

Just as risk management programs must evolve to meet changing risks, so too should incident response plans. Marine incident response plans or strategies should be a living document that responsible parties can review and revise often, as circumstances warrant. A strong risk management program is rooted in effective governance, not just in identifying, evaluating and mitigating risk, but also in reporting. This enables an organization’s leadership to make informed decisions, enhance preparedness and improve resilience.