Natural resource damages are essentially assessments made against corporations?pursued by state or Federal agencies on behalf of the public?where assessment dollars are used to restore resources damaged by pollution. The funds are intended to restore natural resources?land, fish, wildlife, drinking water supplies, etc.?to a pre-damaged state and to compensate the public for loss of use.

Corporations can seek coverage of NRD costs under existing insurance policies, as they have for costs for cleanup and remedy of hazardous waste sites, third-party liability claims, and associated litigation costs.

The report, "Environmental Liabilities: Wait, There's More," is part of an ongoing look at the potential impact of environmental liabilities on p-c insurers that Morgan Stanley began in April.

In the earlier report?"Forget-E-Not: Environmental Liabilities Poised to Rise?"?Morgan Stanley analysts looked only at "traditional pollution claims" for site cleanup and remediation. That report warned that politics and rating agency scrutiny could boost environmental claims.

Focusing attention on non-traditional NRD claims, the latest report highlights increased activity in New Jersey, where state officials announced (in late 2003) their intention to pursue NRDs at 4,000 sites. While NRD claims have been dormant historically, the N.J. activity has implications for other states that may learn from the Garden State, and for insurers, the report suggests.

Noting that New Jersey is home to 10 percent of the sites on the Environmental Protection Agency's National Priority List, and extrapolating an average cost for NRDs already recovered there ($40 million for 48 N.J. sites) to the 4,000 site total, the cost could be $3.5 billion just for New Jersey.

Emphasizing the rough nature of this estimate, the report says, "We are reluctant to apply a factor of ten" to that to reflect potential national NRD costs. "But clearly this is not a trivial risk for the [insurance] industry."

The report provides historical background on NRDs, created under the Superfund law (the Comprehensive Environmental Response, Compensation and Liability Act of 1980), noting that NRDs are probably not contemplated in most insurers' already weak environmental reserves.

While case law is developing, there is good reason to think NRD claims are covered by insurance, Morgan Stanley said, noting however that there are some mitigating factors for insurers.

One mitigating factor is the existence of a CERCLA provision that says that damages which took place before CERCLA passed cannot be pursued. This provision, together with the fact that insurers put absolute pollution exclusions in policies in 1986, argues for a lower potential exposure but is subject to interpretations as to when the damage took place, Morgan Stanley pointed out.