Re/insurers grapple with 'hard-to-predict' PFAS problem

Casualty re/insurers face certain persistent worries. Some stem from dysfunctions in markets or regulatory systems, like the “social inflation” fuelled by ever-rising legal costs in the US.

Other problems come from the insured perils themselves, which may produce unexpected liabilities. Widely used substances, such as asbestos and tobacco, can turn out to be harmful long after they became part of everyday life, creating potential liability claims for casualty insurers across several lines, possibly decades into the future. At present, insurers are especially concerned about “per- and polyfluoroalkyl substances”, or PFAS.

PFAS is a class of chemicals constituted by bonds between carbon and fluorine atoms. Carbon-fluorine bonds are among the most durable chemical bonds in existence, so PFAS decompose very slowly, hence the nickname “forever chemicals”. There is considerable – if not always conclusive – evidence these chemicals, used throughout modern manufacturing, could cause a variety of serious health problems.

For insurers, the PFAS threat combines scale and uncertainty. PFAS are ubiquitous, which means the scale of legal actions and insurance claims could be titanic, and spread across almost every imaginable market. In November 2023, casualty risk modeller Praedicat called PFAS its “top emerging risk”, saying the world’s 50 largest chemical manufacturers could face tens of billions of dollars in damages for bodily injury just in the US.

Although many insurance policies do not cover “environmental contaminants”, claims may still cause “insurer resources [to] become strained in responding to PFAS claims and/or litigation”, Ethan Aumann, senior director of environmental issues and resiliency at the American Property Casualty Insurance Association (APCIA), warns.

At the same time, because PFAS are so widespread, and because their precise impacts are unknown, insurers cannot quantify their exposure. For many carriers, the best they can do in the short term is to start excluding PFAS liabilities from their policies, and use existing pollution exceptions to try and shield themselves.

Widespread production

The first PFAS to enter widespread commercial production was polytetrafluoroethylene, first discovered in 1938 and better known as Teflon. Since then, several thousand PFAS have been developed. The European Environment Agency (EEA) counts more than 4,700. 

Manufacturers use, or have used, PFAS in an extraordinary array of products, especially those that require heat- and liquid-resistant materials. These include waterproof and flame-retardant clothing, firefighting foam, insulation, packaging and cosmetics.

As a result, PFAS can be found almost everywhere. In 2023, the US Geological Survey estimated PFAS had contaminated at least 45% of US tap water, including perhaps 75% of urban piped water sources.

Scientific research has linked PFAS to a number of health problems. The US Environmental Protection Agency (EPA) says PFAS can damage the immune system, interfere with child development, impair fertility and increase vulnerability to obesity. They may also increase vulnerability to some cancers. The EEA lists several diseases that may be PFAS-related, including testicular cancer, liver and thyroid disorders and high cholesterol.

A November 2023 report by Dallas-based actuarial consultancy Milliman, citing an examination of previous studies, says there is strong scientific evidence that PFAS could cause “endocrine system injury” and problems of child development, and somewhat weaker indications the chemicals could impair immune system function.

Regulatory scrutiny

Regulators have moved to ban or limit PFAS production. The Stockholm Convention, which became effective in 2004, bans or restricts the production of “persistent organic pollutants”. Signatories commit to ban chemicals listed under Annex A of the convention. Among PFAS, Annex A now includes perfluorooctanoic acid (PFOA) and perfluorohexanesulfonic acid (PFHxS).

Regulatory scrutiny of PFAS is rapidly developing and encompasses manufacturers, PFAS users and utilities or other enterprises that might need to remediate PFAS contamination.

“With the US Environmental Protection Agency’s designation of PFAS as hazardous substances earlier this year, there may be increased concern about liability arising from alleged PFAS exposure,” APCIA’s Aumann said. In the EU, PFOA has been banned since 2020, and PFHxS since 2023.

The US EPA has also successfully pressed large manufacturers to stop or reduce PFAS production, forging an agreement with eight major producers in 2006. One of them, 3M, had begun phasing out PFAS production in 2000.

Litigation

The US saw its first PFAS lawsuit in 1999, according to Milliman. By 2023, the firm counted more than 9,800 cases involving the chemicals, including more than 4,000 just between 2021 and 2023. These have resulted in about $16.7bn-worth of legal settlements.

Citing data from Praedicat, Milliman says modelling indicates a 5% probability that total settlements and defence costs incurred in bodily injury lawsuits could exceed $70bn.

Ian Plumley, a partner at global law firm DAC Beachcroft, explains PFAS poses a “potentially huge” problem, because its manufacture and use are so widespread, and because PFAS can also enter the human body through multiple pathways.

Another danger – one of particular concern for insurers – is PFAS’s remarkable persistence in the environment. Because they break down so slowly, and because they are almost impossible to eliminate, PFAS could continue to generate legal and reputational claims for decades to come, even after their manufacture has ceased, Plumley says.

Plumley adds the US has, to date, been the main venue for PFAS-related litigation, partly because “the US claimant bar is so much more sophisticated” than that of other jurisdictions. However, there have been PFAS cases in Europe, including regulatory actions brought in Sweden and Belgium.

"With the US Environmental Protection Agency’s designation of PFAS as hazardous substances earlier this year, there may be increased concern about liability arising from alleged PFAS exposure"

^{Ethan Aumann
American Property Casualty Insurance Association}

“It is very much an international issue and there are cases that have been settled in Europe and class actions in Australia, for example,” Chris Mather, senior executive for technical underwriting at the Lloyd’s Market Association (LMA), says.

The volume of claims is already immense, Laura Madders, a partner at law firm Kennedys, says. “In 2021, [chemical manufacturer] 3M was named in an average of three PFAS lawsuits every day, and lawsuits outside of the US, especially in northern and western Europe, are gathering pace,” Madders says. In Italy, 350,000 claimants have joined a lawsuit against chemicals manufacturer Miteni, and 4,000 Dutch plaintiffs are suing Chemours, she adds.

Lawsuits will mainly target manufacturers, Plumley says, since they are most aware of the dangers of their own products. Retailers might be liable if they have enough market power to affect production.

Plaintiffs might also go after distributors and retailers selling manufactured goods, Mather says. He notes that in Australia, the government has been sued for its use in fire suppression.

Polly Sayers, legal advisor to the insurance, risk and regulatory Team at HCR Law, says some plaintiffs have sued “’secondary’ defendant groups” further along the supply chain, including enterprises that handle refuse and some companies and public-sector agencies that provided equipment or used products that were made with PFAS.

“These groups have been subject to fraud proceedings (false advertising, consumer protection violations, deceptive marketing) and exposure litigation,” Sayers says.

Inconclusive evidence

However, PFAS claimants would still struggle to win lawsuits. Although there is considerable evidence for the health impact of PFAS, Plumley says researchers have not yet produced conclusive evidence that PFAS causes any specific ailment in the same way science has proven tobacco and asbestos cause cancer. Nor has any court made a finding of fact that PFAS is responsible for illness, Plumley continues.

But there is evidence linking PFAS to a wide variety of ailments, Sayers says. “However, quantifying the extent of causation remains the subject of ongoing scientific inquiry. This creates a chasm of potential exposure for insurers, as they are unable to confine the categories of injury until the science becomes settled.”

Even if PFAS are generally responsible for some sort of medical condition, Plumley warns that plaintiffs must also prove the chemicals caused their specific condition for many claims to succeed.

In a November 2024 report, Larry Crotser, head of key case management at Allianz International, said: “Personal injury litigation may prove challenging, as it would require plaintiff attorneys to show specific causation, and which product or manufacturer is responsible. Yet, almost everyone has PFAS in their blood, and it is hard to prove where they got it from”.

“The plaintiffs’ bar can be very inventive, however,” he continued.

"Quantifying the extent of causation remains the subject of ongoing scientific inquiry. This creates a chasm of potential exposure for insurers, as they are unable to confine the categories of injury until the science becomes settled"

^{Polly Sayers
HCR Law}

In some lawsuits, DAC Beachcroft’s Plumley notes however, the plaintiffs do not need to prove PFAS has caused them a specific harm. If PFAS is treated as a pollutant, then a company may be liable for its presence, even if it has not injured someone.

Insurers face several major problems in estimating the scale of the PFAS threat. 

Unlike most casualty perils, PFAS has not yet generated a pattern of loss events. Also, PFAS causes harm gradually, making it hard to say what year the losses fall into, and there may also be uncertainty over which policies cover PFAS injuries.

The LMA’s Mather says insurers cannot predict the number of claims, how they will be formulated, or how much will be claimed, which means they cannot predict their exposure and potential losses. “The big challenge financially for insureds could be related to the clean-up costs, especially if pollution is over a wide area,” Mather says.

Policy exclusions

Perhaps the easiest way insurers can shield themselves is through simply excluding PFAS from their cover. Some insurance policies try to include PFAS exposure within existing blanket exceptions for pollutions. Allianz’s Crotser notes insurers sometimes rely on more general language excluding pollution as a covered peril, but courts do not always accept this argument.

Steve Carr, an account executive at Miller, describes one suit where a court found the general pollution exclusion did not apply. The court held the insurer had a duty to defend claims from PFAS exposure from fire equipment, because PFAS exposure did not count as “traditional environmental pollution”.

So insurers are also making use of more specific language excluding PFAS. Carr says “most, if not all” US casualty insurers have elected to include a PFAS exclusion endorsement as standard on all new business with some element of chemical exposure.

Madders, at Kennedys, argues insurers are “balancing the application of exclusions against  the fact that there is no viable alternative to PFAS in many products and manufacturing processes and the use of PFAS chemicals is not yet banned in many countries”. But that still means they are likely to make growing use of exclusions.

Cameron Douglass, West Coast regional director of Gallagher’s environmental practice, says firms seeking protection for PFAS will need more bespoke insurance, such as “standalone pollution liability or combined general liability and pollution liability” policies.

Reinsurers are also shielding themselves from PFAS exposure, Douglass says. “The majority of casualty and environmental reinsurers are scrutinising underwriting guidelines and requiring that insurers complete in-depth PFAS questionnaires to renew their reinsurance treaties.”

In some cases, reinsurers are also adding exclusions, but Douglass also notes reinsurers are forcing carriers to adopt a more careful approach to any PFAS liabilities: “When carriers are offering PFAS coverage, a strict underwriting and approval process must be implemented to satisfy reinsurers, and they are often involved in developing that process.

Although worrisome, it is far from clear that PFAS exposures represent a crisis for casualty insurers. 

Carr, at Miller, says insurers expect “further consumer product claims”, but some claims alleging a failure to inform the public about PFAS use in packaging have failed.

“The bar will, undoubtedly, continue to shift with increased regulations expected in the coming years,” Carr continues.

Given PFAS are ubiquitous in the physical world and human bodies, “it is difficult to comment on whether PFAS claims could be more manageable when considering the current litigious environment,” Douglass concludes. “All we know is that the costs associated with cleaning up this widespread contamination, as well as the future bodily injury and legal defence costs, are going to be significant.”