Suzanne Kearney takes a look at the limitations of insurance policies in covering pollution incidents
Environmental pollution insurance policies are no longer a prerequisite only for oil companies and radioactive waste operators. Dry cleaners, paint manufacturers, prisons, schools and universities are just some of the organisations that should be taking a look at their standard public liability policies and considering whether the pollution cover is sufficient.
Specialist environment insurance policies started to appear in the UK from the 1970s. They were initially intended to protect against losses arising from accidental pollution. Although the market was slower to mature in the UK than the US, where environmental legislation has been much more draconian and led to the development of additional insurance policies, several turning points have resulted in the growth of similar policies in this country.
These decisive moments include the Association of British Insurers’ introduction, in 1991, of a standard exclusion for pollution liabilities in public liability policies and, in 2000, the launch of the contaminated land regime, under the Environmental Protection Act 1990. There has also been growing pressure on companies to report their environmental impacts and the implementation of the EU Environmental Liability Directive (see box below).
The Directive introduced the “polluter pays” principle to remedy environmental damage and established new liability for operators of commercial and industrial activities to prevent and rectify harm to protected species and natural habitats.
With standard public liability policies offering only limited cover, businesses need to weigh up the impact of a pollution incident as well as the often costly cleanup, and consider the implications of their standard policy not providing adequate cover.
The impact of the ELD
In a recent update, Lloyd’s, the specialist insurance market, warned about the increasing focus by regulators on ensuring polluters pay for any environmental damage. Although it acknowledges that the implementation of the Environmental Liability Directive (ELD) is still in its infancy and its impacts are, to an extent, untested, Lloyd’s points out that the ELD puts the onus on companies to return the environment to its original state. It says a company can now expect to pay between 10 and 40 times more for remediation under the ELD than it would have done before the Directive came in. With environmental damage no longer limited to pollution, this has also increased companies’ exposure, says Lloyd’s.
What’s covered?
Cover for environmental and pollution incidents under public and products liability insurance is limited and insufficient for most businesses. For instance, pollution coverage is almost always limited to third-party claims resulting from “a sudden identifiable unintended and unexpected incident”.
If you do not have a specific pollution and contamination cleanup extension you are unlikely to be covered for the cost of any remediation undertaken by the Environment Agency, for example, and, even if you do have one, the amount payable will be limited.
The extension is also likely to exclude other important losses such as cleanup of the organisation’s own property – even where such remediation is required by a regulatory authority – and restoration of flora and fauna. In addition, pollution cover under policies protecting property or material damage/business interruption is certain to be restricted to loss caused by pollution associated with a defined peril, such as flood or fire.
For many pollution incidents there is potential that the existing policies will not provide adequate cover and put a business at risk of having to fund the cleanup and the restoration of habitat.
Most standard insurance policies are also unlikely to provide any cover for liabilities resulting from gradually occurring pollution or for cleanup of land or water at a company’s sites. Nor will they provide any cover for environmental damage liabilities.
Furthermore, where any form of pollution cover is provided under any standard policies, it is likely to be in the form of a “complete exclusion”. This means that all pollution costs will be excluded from cover, unless one of a series of policy-defined exceptions applies. This is likely to place responsibility for proving that all the conditions for cover have been met on the policyholder and not the insurer.
There is also the potential for grey areas to emerge, which render a business unable to prove that all the stated policy conditions required for cover have been met. To put it bluntly, an organisation is likely to have significant potential for uninsured losses if any of its activities release pollution.
What can be done?
In the past 10 years or so, new environmental insurance policies have been developed to meet the demands of modern businesses and the regulatory framework. They fall into the following categories:
- Environmental impairment liability (or pollution legal liability insurance) – has options to cover loss from historical contamination, loss from contamination caused by ongoing operations or a combination of the two.
- Remediation cost cap/stop loss – covers loss arising from cost overruns during remediation.
- Contractors’ pollution liability – covers loss arising from contractors operating on third-party sites.
- Business-based liability – covers pollution and environmental liabilities arising from the activities of the organisation.
The main option is specialist pollution liability insurance to cover business sites and activities. Such policies provide cover on a single site, multi-site or portfolio basis. Cover can include, for instance, onsite and offsite statutory cleanup costs, natural resource/biodiversity damage, third-party claims for injury and property damage, as well as investigation and legal defence costs. Coverage can be provided for both new and historic pollution conditions, depending on the options available. Policies can also potentially be extended to cover business interruption resulting directly from pollution.
Insurance premiums
“Organisations that suffer a major loss as a result of an environmental incident are likely to face increases in their insurance premiums. However, the issues surrounding this area of insurance remain nebulous as the market continues to develop.
Clearly there are certain types of business that are more likely to face environmental exposures and risks. Some companies will have a heightened exposure as a result of their emissions to air or waste management activities, while others are more likely to face oil and chemical spills or the discharge of contaminated water from cleaning or cooling operations.
Those businesses with no operational processes, particularly landowners and property management companies, must also be aware of the environmental liabilities they could assume from the activities of their tenants and neighbours, as well as from any industrial processes that took place at the site in the past.”
Simon Taylor is executive director at Clear Insurance Management
If an organisation needs further protection, environmental damage insurance will cover pollution liabilities resulting from a business activity on its own or leased property, as well as on third-party premises and during the transport of goods. The policy can also be extended to cover the increased cost of working – similar to business interruption – and can also cover any lender with an interest or security in the business.
As in standard pollution liability policies, the wording in environmental damage insurance policies makes no distinction between pollution conditions resulting from sudden and accidental incidents and those that gradually occur, so typically cover both. However, gradual pollution incidents can potentially sit alongside an existing public liability or products policy on a “difference-in-conditions” or “difference-in-limits” basis.
Getting covered
Once risk managers and finance directors have tested the efficacy of their current pollution insurance programmes, it may be time to look at additional cover. The cost of purchasing extra cover has fallen in recent years, particularly where the operational risks are relatively straightforward.
Although it’s very unlikely that insurance is available for ongoing known pollution liabilities, it may be possible to insure known pollution or contamination risks that could result in future liabilities, and it will certainly be possible to insure unknown pollution risks with the right insurer. The principal benefit of buying specific pollution liability insurance is that it can fill in most of the potentially significant gaps in cover under standard public liability policies. It may be prudent to focus on the key risks, such as:
- liabilities resulting from gradually occurring pollution, especially historical pollution;
- cleanup of pollution of land or water at your sites;
- environmental damage liabilities under the Environmental Liability Directive; and
- business interruption loss resulting from pollution.
Knowing what is at stake is the first priority. Environmental liabilities are here to stay. For a small investment, a suitable extension may be purchased, which will allow a business to continue to trade through any major pollution incident and minimise its bottom-line costs.
Suzanne Kearney is head of liability and specialty services at Davies Garwyn.
