With $8 billion in net income last year, General Electric was the nation's most profitable corporation. And it is considered one of the best managed as well. Under CEO Jack Welch, GE has cultivated the kind of tough-minded bottom-line shareholder culture that has taken Corporate America by storm in the 1990s.
But mighty GE may have an Achilles' heel. It has the environmental liabilities that stem from the PCBs (polychlorinated biphenyls) that the company's onetime manufacturing facilities leaked into several rivers decades ago--long before the fire-retardant and insulator chemicals were discovered to be probable carcinogens. The most significant of these problems involves a 200-mile stretch of New York's Hudson River, from GE's former Hudson Falls plant to Battery Park, in Manhattan. In 1983, this area of the river was declared a Superfund site because of GE's massive dumping of PCBs. Under the Superfund law, the government can mandate a cleanup, then sue for treble damages, any party that is even partially liable. Environmentalists and the Environmental Protection Agency estimate that cleaning up the Hudson now could cost from $500 million to $2 billion. GE says any estimates are pure speculation. Still, that river is just the start of Superfund issues for GE. In all, the company is either responsible for, or involved in, more than 80 Superfund sites, according to John Cronin, of Hudson Riverkeeper Inc., a nonprofit environmental group that has been fighting GE for more two decades.
Most companies' don't have to deal with nine- figure payments for cleanups from long-ago river pollution, of course. They are more likely to be socked far smaller amounts for purifying contaminated groundwater systems, for example, says Greg Roberts, a specialist in environmental insurance with Aon Risk Services.
A Long Liability Tail
But such problems can still represent a huge liability relative to corporate assets--and one that is much harder to insure against than, say, the possibility of future pollution by the company. Further, the "tail" of old environmental problems can be very long. Even when a buyer agrees to clean up a property as part of the purchase price, the original owner retains future liabilities stemming from past problems. That's one reason why GE and others sometimes play hardball with regulators, battling to resolve these special environmental cases as cheaply as possibly, critics say.
Like GE, other companies pressed on environmental matters often find there are few ways to avoid costs totally once regulators get involved. Typically, they decide instead to settle, at least capping their exposure at some percentage of the potential total liability.
No matter how GE eventually works things out with regulators to attack the Hudson pollution, though, it is clear from this case that profitability and power don't exempt a company from being stymied by old environmental liabilities. And any hefty settlement in the Hudson River case could send tremors through the corporate world because such environmental problems can crop up anywhere--and because companies so threatened are difficult to indemnify.
Some forms of environmental liability insurance are available to many companies, of course. One may well be able to buy a policy covering various contingencies "if you have a relatively innocuous type of operation," says Roberts of Aon. But in most cases when discovery of severe environmental damage is a real possibility, and estimates already exist, insurance can't be found to cover that exposure.
"In the case where you have high suspicions that a cleanup action is going to be taken, the insurance company is not going to put an insurance policy on that," Roberts says. And if a problem is known, but no final regulatory decision has been reached, he still believes insurers are unlikely to step into a company- EPA political battle. Further, when the EPA wins and requires a cleanup, even if "you know it's going to cost a million dollars, there's not an insurance vehicle that would cover that known payout."
The current soft insurance market and insurers' greater familiarity with environmental situations is increasing the coverage now available, experts say. But Sam Babington, a regional vice president for Arthur J. Gallagher & Co., in White Plains, New York, notes that insurers still generally start their coverage only where the best estimates of the exposure end. So, if a $1 million settlement with the EPA is arranged, "your premium will be expensive," he says. Beyond that, a company "can buy a policy that can provide up to $50 million for 10 years to cap the cost at $1 million."
When a company does get coverage for unknown exposures, the premium is assessed on the basis both of its industry's and the company's track record with environmental problems, as well as any studies undertaken. "If the company is deemed fairly risky, the insurer will either price the coverage high, or assign a high deductible," says Babington.
Some companies try to win coverage under the older policies that they have in force. It was only after 1973 that property/casualty insurance specifically began to exclude pollution problems. And some so-called insurance archaeologists representing companies have researched policies older than 26 years, and managed to convince the insurance companies to pay up. The rules on such old policies differ by state. And while some of the policies might pay for cleanup, others may cover only the cost of legally defending against litigation. Roberts says for every company that's succeeded in getting the insurer to pay in these old-policy cases, another has failed. Success, he notes, depends on the contract wording, specifically in how a company is notified by regulators that there is a problem.
Insurance can come into play in marginal ways. "Finite risk" insurance, for example, allows the company to pay for the liability by putting the cash into an insurance vehicle-- more of an assurance to aggrieved parties that money is available for payment. Another type, "contractor's pollution legal liability," will cover any liabilities incurred during a cleanup, including some cases involving river dredging. But even that insurance is quite limited in its coverage, and is expensive.
Selling Doesn't Help
When insurability is a problem, some companies have looked at selling contaminated properties. But that generally won't absolve them of responsibility. The problem is that the Comprehensive Environmental Response Compensation and Liability Act of 1980, as the Superfund law is known, imposes "joint, several, and retroactive liability." That means that any corporation that owned a site at one time can be held liable for the cleanup and damages to individuals affected by the pollution--forever. While Congress authorizes money to clean up the Superfund sites, the EPA is required to force those responsible to pay for it.
For the most part, GE has had a hard time with the EPA. In the late 1980s, the agency turned GE down on the company's offer to perform the scientific study for the reassessment. In hiring a consultant to do the work, the agency acknowledged the possibility that the public might not accept a GE study as unbiased.
When the evaluation was released this past summer by the New York regional EPA, it indicated that high levels of PCB contamination continue to plague the river-- contrary to the position espoused by GE that PCBs are breaking down naturally.
GE has countered that the report is flawed, and has asked the EPA to submit the study to an independent review. It says it has spent more than $150 million in research and cleanup of the river and old plant sites over the past 20 years. "We have complied with every government order and met every regulatory commitment," says GE spokesperson David Warshaw.
Some think the environmental tide is turning against GE. It recently settled a case involving cleanup of the Housatonic River near its former Pittsfield, Massachusetts, plant. There, GE estimates it will spend $150 million. The company declines to discuss its insurance coverage. New York Gov. George Pataki, among politicians of both parties, has asked the company to recognize its responsibility to clean up the Hudson. Some shareholders have offered a resolution demanding a GE cleanup, and the New York State pension fund has endorsed it.
GE's efforts in Washington, D.C., where the company has a powerful lobbying presence, may have peaked, too. After first failing to convince legislators to transfer all liability to the government, say critics, GE tried to cap the amount any corporation could be forced to pay in such a case. That legislation is now stuck in committee, although some think it is unlikely Congress would act to limit liability for environmental harm that a company causes.
GE spokesperson Warshaw defends the company's lobbying efforts. "The issue is one that that everybody has an interest in," he says. "Expressing those views is as appropriate for a company as it is for environmentalists and others."
Other companies that have major environmental problems connected with certain facilities have simply boarded them up to avoid hassles-- although rivers don't qualify for that treatment. And, recently, some companies have managed to sell "brownfield" sites, which have problems below the hazard levels of Superfund areas. "The key to those sales has a lot to do with indemnification of the buyer," says Michael Katz, a senior partner in the consulting firm of Corporate Asset Advisors, which helps companies sell hazardous sites. To facilitate such sales of former industrial properties, many states are considering creating brownfield legislation, lowering the environmental standards below those that prevail for residential sites. Because this would lower the cost of cleanup, the buyer may well be willing to take on the project.
The original owners that generate the environmental problems are "never off the hook unless they're no longer in business and have no assets," says Aon's Roberts. For those original owners, the easiest way to reduce an environmental liability may be the most obvious. "You can voluntarily offer to clean it up," he says, just "because you have a good environmental citizen's attitude."