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In The Public Eye: The Challenges of Coverage for Water and Sewer

By Alliant

Carleen Patterson welcomes Seth Cole and Robert Lowe, Alliant Public Entity, to discuss the emerging risks and challenges within the water and sewer insurance market. The team examines quasi-governmental entities and the benefits and challenges of their structure.


Intro (00:00):
Welcome to the Alliant In The Public Eye Podcast, a show dedicated to exploring risk management topics and challenges faced by today's public sector leaders. Here is your host, Carleen Patterson.

Carleen Patterson (00:18):
Welcome back everyone to another episode of In The Public Eye. Our last few podcasts, we have been focusing on some of the specialties within public entity. Whether you're a city, or a K through 12 school district, or a water and sewer authority, you have specific exposures and specific needs that need to be addressed. And so today I am excited to welcome Rob Lowe and Seth Cole to our podcast. Well, before we get started, wanted to give you a little bit of an opportunity to introduce yourselves and tell a little bit about your background. So, Seth, if you want to start and then we can just go into Rob.

Seth Cole (00:57):
Sure. Thanks, Carleen, Seth Cole. I'm out of Alliant San Francisco office, been with Alliant for 22 years now, working mostly with public agencies, particularly water and wastewater authorities throughout the country.

Carleen Patterson (01:11):
Thank you, and Rob?

Rob Lowe (01:13):
Thanks, Carleen. I've been in the insurance industry for 21 years now and focusing exclusively in the public sector over the last 13. I'm with Alliant based out of the Los Angeles office.

Carleen Patterson (01:26):
All right, thank you very much. So, I guess, you know, when we talk about water and sewer authorities, there's a lot of unique quasi-governmental entities. And I guess one of the things that I want to talk about are some of the unique exposures, the unique operations, and then we'll kind of talk about some of the emerging risks and how we're dealing with them as brokers. So, I guess if one of you wants to kick it off, how has it been in the insurance market with working with water and sewer authorities?

Seth Cole (01:58):
I can kick it off, specific to insurance marketplace, I'd say that water and sewer agencies are not immune from the hard market conditions, like other governmental entities. And, you know, while treatment plants are generally considered a good class of business to write, many are now generating power for use at the plant and or selling it back to the grid, and these can pose challenges in the market today.

Rob Lowe (02:21):
And what I'll add to that is what a lot of people don't realize is, you know, we are flushing our toilets with drinking quality water, right? And a lot of folks don't realize all of the work that goes into them. One of the things that I really like about water and wastewater sewer districts is the fact that they are very, for the most part, they're very independent from the cities and the municipalities where they are located in, and they have their own budgets. They tend not to defer maintenance and they do what's right from a safety and operational perspective, and that makes them very unique from the public sector.

Carleen Patterson (02:58):
Yeah, it's kind of interesting that you say that Rob, because I'm a bit of a water snob and, you know, drink a lot of bottled water and then, you know, you test some of that bottled water, the name brands to be unnamed, and really what we are flushing down our toilets is sometimes better quality than some of what we're buying in bottles. So, it is interesting that you say that. I guess it's a privilege of living in the United States. So, tell me a little bit about the insurance programs and the insurance market for water and sewer. Are there certain concerns, risk managers, they're dealing with when it comes to this sector?

Seth Cole (03:39):
Yeah, and you know, I think you can look at it from like a liability perspective, a property perspective. From a liability perspective, you know, water and sewer agencies have very unique exposures, right? I think for a sewer agency, the single largest exposure that they deal with is what we call SSO, sewer backups, sewer overflows, generally into homes and/or businesses. And that's very unique exposure to public agencies that operate sewer systems. And from water perspective, water main breaks, you don't think about it, but you know, when a water main breaks, there's some significant force behind that water that is coming out of that broken main and it can cause a lot of destruction and some pretty significant damage from a property perspective. Oftentimes these are located in more rural areas, oftentimes pump stations in some of the treatment facilities. In particularly on the west coast, and in California, wildfire is a major concern. A lot of water and sewer agencies have significant exposure to wildfire risk out here on the west coast.

Carleen Patterson (04:39):
Wow. That's not something you'd think about from a water facility, but yeah. Okay.

Rob Lowe (04:43):
And in a lot of cases, you also, you're dealing with a lot of aging infrastructure. You know, it's - what are the plans to replace those pipes? What we run into a lot of times is pipes are designed and put into the ground to have a 30-year lifespan. And in some cases, they've been in the ground for 60, 70 years, they've exceeded that lifespan and they're still being used. From a liability perspective, from water main breaks, it's really interesting to see every water district operates a little differently and they have a plan to replace all of that infrastructure, but due to financial restrictions, they can't always get to them as quickly as possible. I think one of the other interesting aspects when you really go into a water utility plant, a lot of people don't talk about the cyber exposure because they're SCADA systems, they're developed on a different kind of system than what everybody else uses, and to an extent, depending on who you talk to, they believe that the cyber risk is minimal. My concern, or what I would say would keep me up at night, from a cyber exposure risk is if someone somehow penetrates those systems and starts messing with the water pumps to make them overheat, to create backflow issues, or even the chemicals that are used to clean this water, if somebody messes with those levels, you could end up with a significantly larger exposure and a larger loss.

Carleen Patterson (06:05):
Yeah. Isn't that where one of the first like killware type attacks came from, was from a water and sewer district? I think so. So, you're right. There is a significant cyber exposure because so much of what happens is computer controlled, you know, kind of backing up to your infrastructure. Seth, I know you work with a lot of water and sewer districts across the country, not just in California. And so not only is it aging, but sometimes it's a lead pipe issue. It's the type of material that was used back in the day. So, what are your clients doing about that issue when it comes to aging infrastructure?

Seth Cole (06:46):
Yeah, a lot of our clients have capital improvement plans in place to over time. You know, their infrastructure can span miles and miles throughout their service area, so it's not something that can be done in a short period of time. So over periods of time, they have capital improvement projects to replace aging pipes and pipes that, you know, we saw that in certain parts of the country. Absolutely right, Carleen, where there was lead in the pipe fittings and so there was a big effort to replace all those pipe fittings throughout the systems. We're also seeing because of just population growth, there's an edict for wastewater treatment plants, as well as water treatment plants to increase their capacity to keep up with the demand. So, we're seeing some pretty significant capital improvement projects to increase the footprint of their facilities.

Carleen Patterson (07:35):
Alright. So, there was some very highly publicized, you mentioned, you know, talking with some of the entities with lead. Is it a bigger issue than what's been publicized?

Seth Cole (07:46):
Yeah, it's an interesting question. I mean, certainly, I believe it is an issue in certain, you know, geographies, but we haven't heard much chatter about that in recent times. And interestingly, you know, the insurance marketplace has responded, and lead is now a common exclusion for potable water.

Carleen Patterson (08:05):
Are PFAS an issue with water and sewer? Some of the other emerging risks that I've seen across other segments, do you run across that as well?

Seth Cole (08:15):
Yeah, PFAS is definitely a major concern. You know, they're finding unacceptable levels of PFAS in drinking water all throughout the country. It is a major concern. It is on the forefront of water and wastewater operators. And again, this is another area where the insurance industry, how they're addressing it, is by adding exclusions. Most of our public agency clients have already seen PFAS exclusions added to their liability programs, and if they haven't, they likely will in 2023.

Carleen Patterson (08:45):
So, if it's being excluded, and I'm assuming that's from their, you know, general liability policies, how can a water and sewer authority protect themselves?

Seth Cole (08:55):
Well, I think there's a lot of research that's happening right now, right? Your typical treatment plant was not built to remove PFAS in certain chemicals in, you know, materials from water during the treatment process. So, I think there's a lot of research into what can be done to address it. We're even seeing, you know, some pollution carriers, pollution legal liability carriers have not excluded it yet. And so, there is some limited coverage in the market from a pollution legal liability perspective. But that's a great question, Carleen, and one that we're all scratching our heads and trying to come up with a solution.

Carleen Patterson (09:30):
Yeah. Do most water and sewer authorities buy pollution legal liability?

Rob Lowe (09:35):
So ironically with my book, I would say it's probably more of an 80/20 split where you do have a lot of these water districts purchasing pollution coverage. Frankly, this pollution coverage was being purchased even before the PFAS aspect, but they are definitely glad that they've had it for a while.

Carleen Patterson (09:55):
Yeah, yeah, I would say so. Especially if they all start running out to the market trying to buy it, it could give the underwriters a little bit of a screech their heels in a bit and look at the pricing on it. So, any challenges on the horizon that you see?

Rob Lowe (10:10):
I see two personally, one very insurance risk management related and one not so much. But I think one of the big challenges that I personally see, Seth, mentioned it earlier, is a lot of these water districts are starting to build hydroelectric facilities, small little ones, onsite to help generate power for their operations. Now the challenge in the market is water districts are viewed one way, and then anything that generates power is viewed in a completely different way in the market. And you're finding yourself - two different types of operations kind of blending in together. And so that's going to present a challenge just overall in the market from a marketing perspective, is it treated as a power utility or is it treated as a water utility? Right? And I think that that really falls onto the broker communicating with their clients, not only preparing them, but also brokering and having conversations with the underwriters to help them understand what the full exposure is.

The other challenge I see is more from a personnel type of issue. Particularly on the west coast, you're dealing with a rapidly aging workforce. There's just not a lot of youth coming into that particular area, right? And so there's a lot of historical knowledge and experience that's being lost and not being able to develop succession plans. And one thing that I find ironic is, particularly with water districts that are independent of a city, they're good paying stable jobs in rural communities, right? So, it's going to be interesting to see what the next four to five years look like as we have a significant amount of that workforce retiring away, and who are they going to bring in and how quickly can they bring them in to train them and bring them up to speed?

Carleen Patterson (11:54):
Right. You know, I think that, you know, the general public doesn't give water and sewer districts enough credit. I've had the privilege of touring a few in my day, and what goes in and what's coming out on the other end are two very different things. Yes, indeed. So really want to thank you both for joining us today. Really appreciate your insight. And as usual and as always, Alliant Public Entity Group is looking to help risk managers navigate these changing environments for our clients and today for our water and treatment facilities. So, thanks very much for joining us.


Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.