Getting A Handle On Emergency Response Costs

By: Daniel Morganelli, P.G., Senior Project Manager, Tetra Tech FW, Inc.

It’s in the news almost every day. Somewhere in the world, there has been a petrochemical spill, a power blackout, or an explosion. Root causes for these incidents often are similar - aging infrastructure, facility maintenance budget constraints, and, unfortunately, even terrorism. Whatever their cause, our reaction justifiably tends to be emotional. Then calmer heads prevail and experts move in to protect human health and the environment, assess and repair damages, and provide financial relief. For those who insure against environmental disasters and terrorism, it is a time to be both empathetic and vigilant. It is simply good business practice to be aware of and understand what is happening in terms of emergency response actions.

Costs of emergency response generally are viewed in a different context than normal, everyday cleanups. Costs of services and materials are almost always higher when required under conditions that warrant rapid action. Other factors that impact costs are supply and demand, contractor qualifications and experience, and quality control. Supply and demand becomes an issue when, due to the magnitude of resources required to deal with a large-scale incident, contractor and equipment shortages develop. In these situations, many responders may be needed and some may not be ideally qualified to perform tasks assigned to them. Therefore, quality control is essential for tracking response activities to be sure they are executed and completed in accordance with contract agreements, even if these are of short duration.

Insurers must accept the challenge of negotiating claims in good faith and, at the same time, being able to recognize potential waste, fraud and abuse relative to submitted charges. To be sure, it is a sensitive issue, and becomes a matter of balancing good client relationships with the need to manage future insurance premiums. One only needs to look at trends of the past few years; oil pipeline failures and regional power outages are glaring reminders of the country’s aging infrastructure. Until that infrastructure is renewed (and that process will take substantial time and money to accomplish), the incidence of high-cost emergency responses is likely to increase. We cannot continue to pick and choose what is insurable, we must learn how to insure the existing infrastructure reasonably. To do so, we must become more efficient in managing emergency response costs.

For a number of reasons, it is difficult to track or manage emergency response costs after the fact. Inadequate and improper documentation of work performed and time and material quantities results in cost overruns and sometimes shoddy work. Additionally, project audits are nearly impossible. The end result is contract retention, and/or disputed invoices and payments. No good can come of these negotiations; they create heartburn and breed distrust. Better to keep good records as activities progress and make coverage and payment determinations from these logs and photographs. In the final analysis, the key to successful management of emergency response is good project management that dictates appropriate pre-emptive planning for such events.

What’s going on?

The first step in managing emergency response costs is to assign an individual or team to monitor work in progress. Note the operative word here is monitor, which carries a totally different meaning than direct. It is difficult enough to track contractor activities without your role being construed as one of interference. In order to gain a perspective on what is happening as the activities unfold, try to get a copy of an existing facility (emergency) response plan. Ideally, the insurer would have reviewed and commented on this plan before an emergency occurs. With or without this “blueprint” for response actions, it is incumbent upon a monitor to understand what tasks are being performed and who is responsible for completing them. Industry refers to this information as a work breakdown structure and project staffing. It helps an observer to understand project work components and the various responders’ roles and duties (“organizational breakdown structure”). This knowledge becomes useful later when invoices are submitted. Perhaps the most difficult aspect of evaluating project tasking is in assessing what the drivers are for a given activity; certain actions may be required by regulation or code, while others constitute best management practices (i.e., good engineering judgment).

Who maintains a project (incident response) logbook?

Chances are no one will if you don’t. In the heat of getting emergency response accomplished, contractors’ interests are focused on completing the job done, not necessarily keeping a journal of their daily work activities. With government work, third parties frequently are retained in a project oversight capacity, however; this usually is not the case in the private sector. It makes sense for an insurer to dispatch an observer to a major response to witness and document activities. This may require a significant time commitment by the insurer’s onsite representative but it should greatly facilitate the post-incident invoice reviews. It is unreasonable and illogical to apply the same limited degree of scrutiny to a major emergency response such as might be given to simpler incidents with easily identified responsible parties, obvious causes and lesser damages. The degree of scrutiny for major versus minor incidents needs to be proportional for coverage and payment allocations to make sense.

What other documentation is appropriate?

In addition to having an insurance company representative keep a field logbook and take photographs throughout the response, there are a number of other items, including what commonly is referred to as “invoice backup,” that should be obtained and reviewed. These documents may consist of basic ordering agreements between the owner/operator and emergency responders (useful for evaluating labor categories and stipulated rates), daily work logs, and timesheets. Timesheets need not be subject to detailed auditing but should be used to confirm that laborers were onsite during the prescribed time frames indicated on the submitted invoices. Other relevant backup documents may include vendor receipts and waste disposal manifests. To request these data after the incident is an exercise in futility; an insured needs to be afforded a “heads-up” on the quantity and quality of support material that are required pursuant to a timely processing of their claim. These data requirements should be provided to the response contractors by policyholders. Avoidance of payment retention and protracted claim processing times benefits everyone who is involved. Vigilance and good record keeping are paramount to effecting this result.

In summary, the old adage “an ounce of prevention is worth a pound of cure” really has special meaning relative to an insurer’s attempts to exert some degree of control over emergency response costs. Proactive incident observation and record keeping is much more beneficial than a fuzzy retrospective on incident causes, remedial actions and contractor/vendor project tasks and billings. This forward-looking process facilitates claim processing and negotiations and ultimately may lead to a win/win situation wherein more policies are written and more competitive premiums are realized in conjunction with improved damage cost control.

Tetra Tech FW, Inc. is a U.S. based leading environmental consulting, engineering and remediation firm. We provide our clients with a full range of traditional and innovative services, that are delivered cost effectively, timely and in compliance with applicable regulations and requirements. For more information contact Daniel Morganelli at 215-962-4052 or DMorganelli@TtFWI.com .

Environmental Risk Resources Association

Getting A Handle On Emergency Response Costs