A recent court decision carved a giant hole in farm liability insurance.
When a Wisconsin Supreme Court judge ruled late last year that manure that contaminates a well is a “pollutant,” it meant the dairy farmer in the case, who allegedly caused groundwater contamination by spreading manure on his fields, was not covered by his farm liability insurance policy.
Case law is state-specific, so for now this ruling is only for Wisconsin; however, many view this to be a precedent-setting case.
“I think from reading hundreds of these cases, the state supreme court in Wisconsin hit the nail right on the head on how to read a pollution exclusion, and other states will follow our lead,” said David Dybdahl, an environmental risk management specialist who served on the EPA’s Contractor Indemnification Technical Review Panel.
Dybdahl and Harrison Scheider, a wholesale environmental insurance broker, outlined common uninsured environmental loss exposures that can be present on a dairy and addressed how to lessen these new risks in a Nov. 4 webinar offered by PDPW.
What dairy farmers and insurance agents once knew about farm liability insurance is rapidly changing.
“More has changed in the environmental risk management picture for dairy farms in the past year than in the past 20 years combined,” Scheider said.
Historically, those in the industry would look to state right-to-farm laws for protection from nuisance claims arising from customary farming practices such as odors and manure spreading. Yet these laws do not grant farmers the “right to pollute,” he said.
If pollution is a concern, citizens are able to instigate lawsuits to enforce federal environmental protection laws when government regulators do not do so. According to Scheider, federal environmental protection laws such as the Clean Water Act and the Resource Conservation and Recovery Act (RCRA) will prevail over state right-to-farm laws every time.
Scheider and Dybdahl have been following a case in Iowa where the city of Des Moines is suing the drainage districts upstream of Des Moines for contaminating the drinking water of its 500,000 residents. The nitrates in the water are expected to be the result of excessive fertilizer application to farm fields along the Raccoon River upstream from Des Moines. The solution is to build a $100 million drinking water treatment facility in Des Moines and get others to pay for building and operating the plant.
In 2015, the lawsuit was filed against the board of supervisors of three county drainage districts claiming that the districts act as conduits for nitrates to move from farm fields into the Raccoon River. The city is seeking federal oversight of the drainage districts and, indirectly, farmers under the Clean Water Act.
“It is highly unlikely anybody involved in this matter actually has any insurance coverage they need for the loss costs associated with it,” Scheider said.
Agricultural waste enjoyed a specific exemption under RCRA until a lawsuit in Washington’s Yakima Valley resulted in the idea that once manure loses its nutrient value to land, manure can become a “solid waste” under RCRA.
The federal court determined: “Manure leaking from defendants’ lagoons is not a natural, expected consequence of the manure’s intended use but rather a consequence of the poorly designed temporary storage features of the lagoons.”
Scheider reported that right before they went to trial, the three dairy farms that were cited settled. The settlement included injunctive relief, which included upgrading manure lagoons and storage facilities, attorneys’ fees in upwards of $1 million [which could be more with appeals], and the farmers must pay for well monitoring and water replacement costs for at least five years.
“When you start talking about $100 million problems, a lot of people are going to need a lot of insurance. Where will that come from?” Dybdahl asked.
Most commercial liability policies have a pollution exclusion, so a separate environmental impairment liability insurance may be needed to fill the insurance coverage gaps.
Dybdahl said to think of it similarly to how a general farm liability policy excludes losses arising from maintenance and operation of an automobile, so people take out a separate auto insurance policy to cover vehicles.
Pollution exclusions have been a part of farm liability policies since the 1970s. While a farm’s specific policy may be different, Dybdahl provided the following as an overview of what a typical exclusion might include:
- No coverage for pollution-caused losses at your premises (land) unless the pollution release is caused by a fire.
- No coverage for a pollution event arising out of the handling, storing, disposing, processing or treatment of waste.
- No coverage for a pollution event created by custom applicators, haulers or manure digesters who may have transported, handled, stored or disposed of your waste.
- No coverage for pollution events created by you or your employees or contractors working for you if the pollutant was brought to your premises or if your work was to clean up or contain the effects of the pollution event.
- No coverage for any costs for pollution events that arise from a request from any governmental authority demanding or ordering you to clean up the pollution condition that was created.
“Pollution exclusions are not well understood,” Dybdahl said. “They are the most litigated words in the history of insurance.”
To help close the exclusion gap, some producers have purchased coverage extensions that amend the pollution exclusion. Dybdahl said, “[The extensions] are better than the full exclusions, but these extensions cannot be relied upon as dependable insurance for any loss associated with manure- or fertilizer-caused pollution. It is pretty good for a spill on your farm but not for spreading manure on a field.”
A better solution, he said, is to purchase a separate environmental impairment liability insurance policy. These were originally created for industrial firms but were modified earlier this year to suit agricultural requirements.
Dybdahl said environmental impairment liability insurance designed for dairy farms should include the following coverages:
- Coverage for liability to others for bodily injury or property damage arising out of pollution conditions from your farming activities
- Coverage for the cost of legal defenses plus civil and criminal fines and penalties where allowable by law
- Coverage for transportation of materials which could lead to contamination
- Coverage for waste disposal and storage activities
- Coverage for damages to “natural resources”
When inquiring about specially modified environmental impairment liability insurance from your local insurance agent, Dybdahl said it is important to be sure the policy provides coverage specifically for pre-existing, low-level nitrate contamination events; losses arising from the application, hauling and storage of manure; as well as gradual and sudden and accidental pollution events. It should also define pollution to include odors, manure, bacteria and nitrates.
“The reason that is so important is that the modern farm liability policy probably excludes those things, especially bacteria,” he said.
Premiums can be as low as $1,500 for environmental impairment liability insurance with a $500/500 policy limit. Dybdahl added that insurance rates should decrease as percent of premium per cow as the size of the herd increases.
The convergence of environmental risk on the dairy industry, including the Wisconsin Supreme Court decision and decades-old federal environmental protection laws now being applied to manure disposal and application, will result in more restrictive pollution exclusions in common farm liability insurance policies.
To continue to reduce the risks associated with day-to-day activities of a dairy farm, Dybdahl suggested dairy farmers implement safeguards against pollution releases; work with credentialed crop advisers to ensure their nutrient management plan is up-to-date; follow their nutrient management plan as much as possible; insure the pollution risks with an environmental impairment liability insurance policy specifically designed for dairy farms; and require custom applicators, haulers and even CCAs to carry his or her own liability insurance coverage that does not exclude losses associated with pollution. PD
Editor’s note: David Dybdahl and Harrison Scheider stated they are risk managers and not lawyers. The comments they offered were for discussion only. None of this content should be considered as legal advice.
