Managing risk and liabilities arising from PFAS

May 2024  |  TALKINGPOINT | RISK MANAGEMENT

Financier Worldwide Magazine

May 2024 Issue

FW discusses how to manage the risk and liabilities arising from PFAS with Drew Groth and Travis Grulkowski at Millman, David Loughran and Graham Tibbets at Praedicat, and Matthew B. Anderson at Mendes & Mount LLP.

FW: Given that there is limited settlement history to date, to what extent is it possible to produce reasonable estimates and set reserves for per- and polyfluorinated substances (PFAS) liabilities?

Grulkowski: The word ‘reasonable’ should be viewed on a relative basis. Actuaries always strive to produce credible estimates in their work product based on the most up to date and reliable data sources as possible. Currently there is growing evidence that per- and polyfluorinated substances (PFAS) claims will continue to garner attention in the industry, and companies should be aware of the implications. As such, actuaries are well equipped to model potential settlement scenarios using the known settlement information to date. The estimates and underlying methodologies will continue to evolve.

Groth: Settlement history may be limited, but the $16.7bn in jury awards and settlements we have seen so far provide a compelling argument that these liabilities are significant and need to be properly reserved for to make important business decisions today. Limited data, evolving litigation strategies and uncertainty around which companies will be liable may complicate the analysis, but PFAS is not the first emerging risk the industry has dealt with. Insurers and corporations can develop reasonable reserve estimates by working with actuaries that are well-versed in similar liabilities – including asbestos, pollution and health hazards – to apply related concepts and methodologies. The techniques used need to extend beyond traditional approaches to consider stochastic frameworks and reliance on other expertise, such as claims management, legal strategists and predictive modellers, to understand the leading indicators of future liabilities, which are essential to calibrating assumptions and determining the credibility of the produced estimates.

FW: Many insurance publications are drawing comparisons between PFAS and asbestos exposures. Are there similarities between the two? What can be learned from the past few decades of asbestos settlements?

Grulkowski: Ultimately, the validity of comparing PFAS to asbestos depends on the context. To the extent PFAS will potentially be around for decades and corporations and insurers alike will be dealing with the clean-up and aftermath of these liabilities, yes there is a similarity. There is also some overlap in the actuarial approaches utilised to develop liability estimates. Also, from an actuarial due diligence point of view, we recognise there is the potential to transact on PFAS liabilities. Similar to asbestos liabilities, where claims will continue be paid out for many years, it is highly likely that the clean-up work and proper disposal of PFAS pollutants will take several decades. Therefore, transactions involving PFAS liabilities are possible, especially where reserve estimates can be understood by all parties.

Anderson: From a legal perspective I do not think the PFAS and asbestos comparisons are necessarily that helpful. Certainly, in the context of trigger of a policy, the types of claims are very dissimilar. In many states, bodily injury is presumed with the first inhalation of an asbestos fibre which then requires policies triggered by damage during the policy period to respond. Common sense tells us that is not necessarily the case with PFAS. Reportedly, approximately 99 percent of people have PFAS in their bloodstream but few have manifest a PFAS-related disease. Clearly, there must be some amount of bioaccumulation in the body before an injury is first caused by PFAS, if at all. While the science is still developing, this likely varies between each type of PFAS and the various alleged diseases associated with that PFAS compound. The ubiquity of PFAS and the property and bodily injury claims also distinguish PFAS claims from asbestos.

FW: With PFAS settlements to date totalling more than $16bn, how much bigger do you believe this litigation could get?

Loughran: The cost of meeting the Environmental Protection Agency’s (EPA’s) PFAS drinking water standards is likely to greatly exceed settlements reached by 3M, DuPont, Chemours and Corteva to date. With so many municipal water supplies affected, plaintiffs will be looking to defendants beyond just chemical manufacturers to defray these costs. A wide range of industries could be impacted including textiles, semiconductors, packaging, pulp and paper, and building materials. And there are thousands of bodily injury claims pending today that have yet to go to trial. If plaintiffs prevail in bellwether trials, this could really open up the floodgates. Our forward-looking liability catastrophe model generates expected bodily injury costs of $16bn across a wide range of PFAS defendants. And there are simulations in which the ultimate litigation costs could be much higher. The model indicates a 5 percent probability that total settlements and defence costs incurred in PFAS bodily injury litigation could exceed $70bn.

Anderson: It is important to keep in mind that based upon media reports the settlements to date have primarily involved the big players and manufacturers of PFAS compounds and have involved claims where the science, causation and culpability were likely clear to those involved. For the PFAS claims on the horizon, I do not think that is the case. It is simply unknown how this will play out given the ubiquity of PFAS products and if the science will ultimately support a link between certain injuries and PFAS sources. While all indications are that the plaintiffs’ bar will chase these claims, the scope of future litigation and settlements will need to be driven by the science, policy wording and case law.

FW: What advantages may insurance companies gain from using exposure-based approaches to set reserves for PFAS liabilities and other emerging risks?

Groth: Most traditional actuarial reserving approaches rely on credible claims history to calibrate model assumptions. When that data is lacking, an insurer may set up a bulk reserve to handle emerging risks like PFAS, but this amount is often established in a simplistic manner. Another approach is to follow industry-accepted exposure-based methods. Insurers use these methods to classify what is known about their book of business today, including the accounts insured, types of policies written and limits offered. Once the potential exposure is understood, an actuary can draw insights from leading indicators to segment the insured accounts into different risk tiers and calibrate the reserve estimate associated with each exposure. While these methods may not be fully credible when initially implemented, exposure-based approaches provide more concrete support for a bulk reserve number and the framework allows the actuary to improve the credibility of the estimate as more information becomes available.

Tibbets: Exposure-based techniques are more responsive to emerging risks like PFAS that are poorly represented in an insurers’ claims data. While PFAS is a 25-year old litigation event, actual settlements to date have been highly concentrated in a few defendants and the future course of the litigation with hundreds of named defendants spanning dozens of industries is highly uncertain. Moreover, the science investigating PFAS exposure and disease is evolving rapidly, implying a forward-looking approach is needed to identify and quantify the impact of novel causes of action. Exposure-based reserving enables insurers to pinpoint accumulations of emerging risks and potentially deficient loss reserves that, left unmanaged, could lead to reserve restatements and other adverse financial outcomes.

FW: Where is the science most supportive of plaintiff claims of bodily injury?

Loughran: There is broad consensus among scientists that PFAS disrupts the normal functioning of the endocrine system. Endocrine disruption per se, however, is not a compensable injury. Studies have documented a correlation between PFAS exposure and diabetes, obesity, infertility, low birth weight, neurological impairment, immune suppression and other potentially compensable injuries, but the evidence may not be strong enough today to support successful litigation. Many pending bodily injury lawsuits claim one of the six disease conditions litigated by plaintiffs in the DuPont Washington Works litigation that settled in 2017: high cholesterol, ulcerative colitis, thyroid disease, testicular cancer, kidney cancer and pregnancy-induced hypertension. It remains to be seen whether plaintiffs making these claims will survive motions to dismiss on the basis of general causation. With so much scientific interest, though, there is a good chance that more supportive studies will emerge in the future.

Tibbets: PFAS bodily injury science, at least for certain injuries and PFAS compounds, will be adjudicated soon in the aqueous film-forming foams products liability litigation multidistrict litigation (MDL) underway in the federal court in South Carolina. Judge Gergel has cleared the way for an initial set of 25 bellwether cases to move forward in which plaintiffs – firefighters and individuals consuming contaminated water – claim one of four injuries: kidney cancer, testicular cancer, thyroid disease and ulcerative colitis. Plaintiffs, though, have asked the court to permit cases claiming other injuries including liver cancer, thyroid cancer, high cholesterol and pregnancy-induced hypertension. Judge Gergel has ordered plaintiff and defence attorneys to submit peer-reviewed studies addressing these additional disease conditions by 15 May 2024. Judge Gergel will then evaluate whether those cases can move forward in the MDL.

FW: Are there specific coverage issues particular to PFAS claims that an insurer should be aware of in both responding to a claim and in performing a reserve analysis?

Anderson: PFAS claims could implicate a whole host of policies depending on the type of claim and the years the PFAS was in use. This could range from environmental policies, claims-made coverage, historic occurrence-based policies, advertising injuries and even directors’ and officers’ coverage. In evaluating a claim, certainly a pollution exclusion will be front and centre in the analysis as well as any terms and conditions unique to the particular type of claim. If historic policies are implicated there could be exhaustion issues from payments of prior claims or prior settlements that would remove the policies from consideration. Allocation of any indemnity claim between multiple policies will likely also be a key area to analyse given the ubiquity of PFAS both in the number of products that contain PFAS as well as given the number of decades the products have been in circulation.

Grulkowski: Reserve analyses for legacy liabilities are often impacted by coverage issues, as jurisdictions differ in how to interpret older policy language that did not anticipate emerging risks. Decades of legal precedent across numerous jurisdictions deciphering similar policy language has made it slightly easier to incorporate insurance coverage into reserve analyses for asbestos and pollution liabilities. With PFAS, analysing coverage issues is still quite difficult given the limited history of PFAS-specific court rulings, but that does not mean it is impossible. Insurers can build stochastic reserving approaches to account for this uncertainty, calibrating the coverage assumptions by reviewing how jurisdictions have ruled in similar contexts and relying on legal experts actively engaged in the coverage disputes at hand. A few issues materially impacting PFAS reserves include application of pollution exclusions, duty to defend, number of occurrences, exhaustion of limits from prior settlements and medical monitoring in the context of bodily injury, among others.

FW: What are the current trends, if any, in how courts interpret policy language in the context of PFAS claims?

Anderson: There is a very small but steadily growing body of case law related to PFAS claims. For the most part, these cases, not surprisingly, have addressed the application of pollution exclusions to PFAS claims. The results are directly tied to the specific policy wording, the facts of the claim at issue, as well as the state law that is being applied. Because of these specific claim factors the results have been varied. However, the one trend we do see is that in the majority of these cases so far the courts do recognise PFAS as a pollutant. In addition, in the manufacturing context the pollution exclusions have largely barred coverage for property damage and bodily injury claims. The open question is whether these varied pollution exclusions will otherwise apply to other PFAS claims under the state law being applied.

FW: How should insurers approach the issue of ‘trigger’ in claims handling and reserving analysis, given the lack of conclusive science on the timing and causation of bodily injury claims from PFAS exposure?

Anderson: ‘Trigger’ is definitely a hotly debated topic when it comes to PFAS claims and it is one the policyholders, insurers and, ultimately, the courts will have to grapple with given the lack of conclusive science on the timing and causation of bodily injury. To the extent possible, when evaluating a PFAS claim, it is important to know what PFAS compound is involved and what the current science is in relation to that compound. For example, what is its half-life, what levels of that PFAS compound must bioaccumulate before it has caused an injury? While all of the science may be unknown at this time, it is critical to evaluate what is known in a coverage analysis, especially for policies triggered by damage during the policy period. It simply cannot be presumed that damage is synonymous with first exposure.

Groth: First it is important to note that incorporating the proper ‘trigger’ into a reserve analysis for net liabilities can already be complicated, even for well-understood bodily injury claims such as asbestos-related exposures, due to the differences in how jurisdictions apply the policy trigger. Some legal experts suggest that historical application of policy triggers for asbestos should provide a good starting place to understand jurisdictional precedent when reserving for PFAS, but the lack of scientific consensus on causation and manifestation of disease adds an additional dimension to these coverage assumptions. While not conclusive, there is a growing body of studies that can be referenced to help calibrate a stochastic analysis and develop reasonable estimates for the probability that certain policy years are implicated by PFAS exposures.

Drew Groth is an associate actuary with Milliman who leads teams performing various actuarial functions, particularly in the areas of loss reserving, ratemaking and predictive modelling. His expertise is property and casualty insurance, including automotive (commercial and personal), asbestos and environmental liability, workers’ compensation and general liability. He specialises in quantifying liabilities and tailoring insurance solutions for novel risks, such as autonomous vehicles, PFAS and other emerging mass torts. He can be contacted on +1 (262) 796 3358 or by email: drew.groth@milliman.com.

Travis J. Grulkowski is a principal and consulting actuary for Milliman and has over 25 years of consulting experience. His areas of expertise include transactional work covering general liability and workers’ compensation, specialising in actuarial due diligence with a focus on runoff and latent claims, including asbestos, black lung, PFAS, sexual misconduct and other mass torts. He co-leads Milliman’s black lung reserving practice and serves corporate clients, insurers, reinsurers, private equity and investment banking firms and runoff specialists. He can be contacted on +1 (262) 796 3319 or by email: travis.grulkowski@milliman.com.

David Loughran is the chief operating officer of Praedicat, an emerging risk liability analytics company. Prior to joining the firm as a founding member, he was senior economist at the RAND Corporation where he served as principal investigator for a diverse portfolio of empirically-driven, policy-relevant research in the areas of insurance, labour markets, demography and energy. He can be contacted on +1 (424) 672 6336 or by email: loughran@praedicat.com.

Graham Tibbets is the director of product management at Praedicat, based in San Francisco Bay, California. Previously, he worked as a consulting actuary at Willis Towers Watson in New York. He is a fellow of the Casualty Actuarial Society (FCAS). He can be contacted by email: graham.tibbets@praedicat.com.

For over 20 years, Matthew B. Anderson has represented London, European and domestic based insurers in litigation and non-litigated coverage disputes throughout the US. His extensive experience includes litigating a wide variety of cases including those involving third-party liabilities, first-party property claims and product liability claims under various types of insurance policies. He can be contacted on +1 (212) 261 8412 or by email: matthew.anderson@mendes.com.

© Financier Worldwide

THE PANELLISTS

Drew Groth

Travis Grulkowski

Milliman

David Loughran

Graham Tibbets

Praedicat

Matthew B. Anderson

Mendes & Mount LLP