Forever chemicals bring new risks for insurers

Nearly everyone on the planet is now thought to be carrying around a number of barely understood human-made organic chemicals called PFAS (per- and polyfluoroalkyl substances). First invented by chance in the 1930s, and prized for decades due to their innovative properties, PFAS were the primary ingredients in the then revolutionary products like non-stick cookware (Teflon) and waterproof coatings (Scotchguard).

Today, this class of more than 14,000 chemicals (according to the United States Environmental Protection Agency’s (EPA) toxicity database, DSSTox) are typically used to make thousands of industrial and consumer products that repel stains, heat, and water. These PFAS substances are used for numerous different purposes, for example in textiles, packaging materials, cosmetics, lubricants, coolants, electronics, and construction.

They include products as varied as firefighting foam, construction coatings, carpeting, food packaging, paints, toilet paper, adhesives, water-resistant clothing like Gore-Tex and even disposable pizza boxes. Additionally, PFAS are often used as lubricants in the manufacturing process of products and some of the chemicals are left in or on the consumer goods.

Understanding the F-C

At their heart, PFAS chemicals all share a powerful fluorine-carbon bond, one of the strongest chemical bonds in organic chemistry, and it led Joseph Allen, a Harvard Public Health Professor to coin the term ‘forever chemicals’ in 2018 in reference to the persistent “F-C” bond. The coining of this term led to a rapid increase in public awareness of the chemicals. In addition, it has also led to a more intense focus on understanding these compounds from a human and environmental perspective in recent years.

To that end, government environmental agencies and private-sector laboratories are now beginning to view these PFAS as a threat and highlight the risks that these man-made compounds are causing to both human and environmental health, the lack of degradation of the synthetic chemicals across hundreds (or possibly even thousands) of years, as well as the increasing global ubiquity of these compounds.

It is becoming increasingly clear that if emissions are not minimised, these harmful fluorine compounds will continue to accumulate in the environment, drinking water and food. And while the scientific understanding about the health risks of PFAS is still evolving, several global studies have suggested that PFAS compounds can be toxic to reproduction, cause cancer or disrupt the human endocrine function (a complex system of glands and organs), amongst a number of other heightened risks.

The forever pollution project

In early 2023, a months-long investigation from 18 European newsrooms (including YLE in Finland) titled “The Forever Pollution Project” revealed that more than 17,000 sites all over Europe are now contaminated by these forever chemicals. Furthermore, the investigation also indicated that there are an additional 21,000 presumptive contamination sites due to current or past industrial activity. The contamination, revealed by this project, has spread across the entirety of Europe. The data in the project’s map data was collected from 18 scientific studies and 137 authorities, including the European and Finnish Environment Institutes.

The project also highlighted that there are 20 manufacturing facilities producing PFAS chemicals in the EU and more than 2,100 sites in Europe that can now be considered as PFAS hotspots – locations where contamination has reached levels considered to be hazardous to the health of exposed people. Of these, PFAS have been detected at high concentrations of more than 1,000 nanograms a litre of water at about 640 sites, and above 10,000ng/l at 300 locations, including some in the Nordics.

The project, however, has made clear that it will be extremely expensive to remove these chemicals from the environment and estimates the cost to likely reach into the tens of billions of euros. The report has also noted that in several locations, local authorities have already abandoned efforts to remove the chemicals and have simply decided to keep the PFAS in the ground, due to the prohibitive clean-up costs.

The rapidly evolving legislative environment

In 2023, concrete actions to begin to mitigate the negative impact of PFAS began to take shape in the US and EU, surrounding this group of chemicals that have gone largely unregulated for many decades.

It is now estimated that around 99% of the American population has a detectable level of PFAS in their blood. As a result, in 2023, the Biden administration proposed new legislation to rapidly counter the increasing threat that these man-made compounds are causing. In March 2023, the US Environment Protection Agency (EPA) took a notable first step forward by proposing limits on drinking water exposure to PFOA and PFOS, two members of this large group of PFAS. In addition, class-action lawsuits focusing on the PFAS manufacturers Dupont and 3M (makers of the aforementioned Teflon and Scotchguard products) are currently ongoing.

Excluding the three PFAS that are listed as Persistent Organic Pollutants on the Stockholm Convention, PFAS emissions are not regulated in the EU yet. To date, only a few Member States have adopted limits. But the cost to health in the EU is already being quantified. A 2019 report by the Nordic Council of Ministers*, focusing on the socioeconomic analysis of environmental and health impacts linked to exposure to PFAS, estimated that these forever chemicals are now putting an additional EUR 52-84 billion of financial stress on European health systems each year.

In the EU, there is a recent proposal to regulate PFAS as one class, rather than to attempt to deal with each substance independently. To that end, the restrictions on the manufacture, placing on the market and use of per- and polyfluorinated alkyl compounds in the European Union would be largely phased out under a proposal issued in February 2023 by the European Chemicals Agency (ECHA). The agency has estimated that about 4.4 million tonnes of PFAS will end up in the environment over the next 30 years unless action is taken. The proposal has been drawn up in cooperation between Denmark, Germany, the Netherlands, Norway, and Sweden.

The restriction would apply to approximately 10,000 PFAS substances as such - as ingredients, mixtures, or objects - and will impact multiple economic sectors and leave companies searching for likely more expensive and arguably less-effective alternatives for their products and production processes. The ban will also potentially extend to imports to the EU of products containing PFAS.

According to the current proposal, the PFAS prohibition would be phased in through the late 2030s as exemptions for some uses of PFAS run out. Because PFAS uses are now so widespread, the ban has the potential to impact thousands of products, including electronic devices like mobile phones, wind turbines and solar panels, cosmetics, medical devices, industrial equipment, and cookware.

The increasing risk for insurers

Several insurance companies globally have recently indicated that they fear that PFAS is on the verge of becoming a major issue for the industry, with the new reality of health and environmental damage claims dragging them into court battles. Insurers have largely avoided being embroiled in most litigation so far as virtually all of the many thousands of PFAS-related lawsuits worldwide in 2022 targeted the makers or users of the synthetic chemicals.

Historically, insurers have argued that they are not deemed liable for pollution from these laboratory-created substances, many of which didn’t exist when older policies were written. However, businesses are starting to push back after finding it impossible to secure coverage for PFAS contamination in many countries.

For the insurance industry, both in the Nordics, and further afield, the impact of these anthropogenic compounds is certain to become an increasingly significant issue because these chemicals will potentially lead to costly claims related to environmental contamination and toxic torts (a legal claim for harm caused by exposure to a dangerous substance —such as a pharmaceutical drug, pesticide, or chemical).

There are many things we simply do not know

As Matti Sjögren, Nordic Liability Risk Management Specialist highlights, “There are many things we simply do not know. We need more information on the effects of several thousands of PFAS. The US Environmental Protection Agency (EPA) highlights that both in academia and industry, a growing body of research is being done on PFAS. To really understand what the impact is we need to learn more about, for example, the health effects associated with exposure to these chemicals. However, this is difficult to specify for many reasons, including the fact that there are thousands of PFAS with potentially varying effects and toxicity levels, yet most studies focus on a limited number of better known PFAS compounds.”

One of the challenges for insurers is the fact that PFAS are extremely resilient and do not break down easily in the environment. This means that contamination can remain in the soil, water, and air for long periods of time, increasing the likelihood of long-term health effects and liability claims. For example, people who live near sites where PFAS have been used or released into the environment may be at risk of health problems such as cancer, immune system dysfunction, and developmental delays.

There has been a growing wave of litigation in recent years over water contamination and this has led to rising concerns among insurers that the PFAS could expose them to the same kind of expensive, unanticipated claims like the ones caused by the asbestos crisis (where it is estimated that the insurance industry had USD 100 billion in losses from asbestos liabilities in 2022).

One recent example in the Nordics includes a municipal water company in Sweden, sentenced in April 2021 to pay damages to residents of Kallinge, a small town with approximately 4,500 inhabitants, who had consumed municipal water for many years from a source that was contaminated by fire-fighting foam that was used in fire drills in a nearby area. The verdict from the district court was appealed, and the Court of Appeals has cleared the company from liability. The case will subsequently be trialled in Sweden’s supreme court.

Consequently, several insurance coverage issues are likely to arise in the near- to mid-term future, starting with what type of insurance a party facing claims involving PFAS has, like environmental, and commercial general liability, for example. There might also be an increasing trend towards adding specific PFAS exclusions for selected properties that are suspected of using PFAS or might have been exposed to the PFAS from neighbouring properties. In addition, typical pollution exclusion clauses will need to be closely analysed, dependent on the specific facts of the case, to see if they will apply to preclude coverage for PFAS claims.

Cleaning up polluted sites is difficult and costly

Insurers may also face liability claims related to property damage and business interruption due to historical contamination from PFAS. As noted earlier, cleaning up polluted sites is likely to be technically difficult and very costly. As a result, many insurers, including If, are now beginning to take a variety of approaches to manage their exposure to PFAS risk.

Examples of risk mitigation involve the including of PFAS contamination in their risk assessments and underwriting processes to better understand and manage this risk. Some insurers are also adding exclusions for PFAS-related claims in their policies, while others are raising premiums or deductibles to reflect the increased risk.

With many US States and the European Union, for example, now proposing increasingly stringent legislation to regulate PFAS, this is likely to increase the potential for legal claims against companies that use or dispose of these chemicals. Insurers then, may need to adjust their coverage and risk management strategies accordingly, to ensure they are adequately prepared to handle these emerging risks.

Furthermore, insurers including If, may also look more closely at working with their clients to mitigate the risk of PFAS contamination, such as by recommending alternative chemicals or providing guidance on safe handling and disposal practices. However, insurers must balance these risk management strategies with the need to maintain a profitable business, which can be challenging in the face of emerging and complex risks like PFAS.

The future PFAS risk landscape is uncertain

In terms of the damage that has already been caused, the historical legacy of PFAS will likely cast a greater shadow on consumers, companies, and even entire countries as more evidence of the damage caused is further revealed. The Nordic, and of course global nature of the issue, and the potential and multiple negative impacts these forever chemicals are currently creating, and will continue to create in the long-term future, are now providing the backdrop for legislative bodies, property owners, companies, and entire industries to take immediate action.

As a result, many manufacturers, retailers, and importers in the Nordics, will soon be increasingly caught up in potentially expensive PFAS claims. Compounding the issue, while US and EU legislation is ramped up, it is currently proving problematic to clearly define who, throughout the hugely complex global supply chain, will be immune to product and environmental liabilities.

To that end, as the regulatory focus increases at a Nordic, European and global level, If Insurance will be further engaging in detailed communication with their clients on the issue and will continue to utilise their Risk Engineers and Risk Management Specialists to better enhance their assessment, management and mitigation of the risks associated with PFAS. 

"We know that many of our clients already have made efforts to replace PFAS with other less harmful substances, however every company should be focused on phasing out their use of PFAS as a priority", Håkan Larsson concludes.