Environmental liability - under-insurance: Clean up your act


Environmental insurance is regularly purchased by companies looking to cover historical liabilities rather than their day-to-day operational risks. Tony Lennon examines the reasons behind this decision.

Landowners and lawyers commonly use environmental insurance to provide financial security against potential historical contamination liabilities and to help secure a sale. In this instance, environmental insurance provides financial protection for either the land purchaser or seller, or both, against liabilities — such as future clean up or remediation costs and third-party bodily injury.

But it is often the case that companies that buy environmental insurance as a routine precaution as part of their acquisition due diligence, fail to obtain cover for ongoing operational environmental risks that may be just as significant.

One of the reasons for the reticence to purchase operational cover is that there is considerable confusion regarding the extent of cover provided under a public liability policy for pollution-related damages. These policies are often described as "providing cover for accidental pollution" or "not covering gradual pollution", neither of which adequately describes what cover is actually provided, and more worryingly suggest that more causes of environmental damage are covered than they actually are.

Wide range of liabilities
The International Underwriting Association recently produced a booklet entitled Environmental Risks: insured or not?, which analyses the indemnity provisions of both PL policies and property policies, and concludes that there are a wide range of liabilities arising from environmental damage that are not indemnified under these two standard policies. Therefore, companies should not rely on standard PL insurance to protect against the environmental liabilities they face.

Another reason why companies fail to purchase environmental insurance is that they assume both that contamination problems will never happen to them, and that if problems do arise, the liabilities will be minimal. Sadly, this view is misguided.

The Environment Agency reports approximately 15 serious environmental incidents which are so severe that they bestow serious harm on the environment occur every week. On top of that, there are tens of thousands of less serious incidents that cause damage and loss to occur, all of which could have the potential for causing financial liability for the polluter and claims under a PL policy.

Although it is often only fines by the EA that make the headlines, a fine is only a minor part of the cost associated with a contamination incident. First, there are the expenses associated with the site clean up, then there are post-contamination and third-party land compensation costs, and, often, there are costs for third-party bodily injury, which can amount to hundreds of thousands of pounds.

Without adequate and appropriate insurance, the manufacturing industry, as we know it today, would cease to exist. The additional costs associated with a pollution incident, if they were ignored, could be the very things that would threaten the existence of a company and seriously affect its 'sustainability'.

In these hard economic times, is it sensible for companies with potential for environmental exposure to question whether or not they can afford environmental insurance? But perhaps the more appropriate question companies should be asking themselves is, 'can we afford not to?'.

Budgeted expenditure on premiums is much easier to manage than an uninsured loss, which will come straight off the company's bottom line and divert management from their prime task — running the company. Many businesses find it difficult to manage the consequences of a significant environmental incident while simultaneously maintaining 'business as usual'.

An example of a typical environmental liability claim is a manufacturing company that had an oil storage tank that fed a heating boiler in its factory. An employee noticed a slight sheen of oil on the surface of a nearby river, and although the company did not think that the oil originated from its premises it initiated an investigation to check.

After an extensive review of fuel usage it was found that more fuel had been used than could be accounted for, and the company concluded that it could be the cause of the oil in the river. The company then contacted its environmental insurers and a full investigation was undertaken. The inspection revealed that the company was the source of the oil, which originated from a leaking underground pipe going from the tank to the boiler.

Costly to remediate
The total cost to clean up the oil, remove impacted soil and re-instate the affected yard was in excess of £150 000. Without insurance, this cost would have been borne by the company, and the incident would probably have resulted in more and longer lasting damage to the environment that would have been even more costly to remediate.

The European Environmental Liability Directive endorses the 'polluter pays' principle, but the directive has been interpreted differently across Europe. In Spain and Portugal it is a compulsory requirement to have operational environmental liability insurance. However, in the UK, Ireland and Germany there is no such legal requirement.

Legislative pressure is undoubtedly going to increase, and prudent companies should be encouraged to 'clean up their act' and make sure that they have the financial resources required to clean up and compensate affected third parties should a contamination occur.

Insurance won't pay a fine associated with an environmental incident, but a fine is likely to be a minor element of the real cost of dealing with environmental damage.

tony lennon chubbTony Lennon is environmental underwriter at Chubb Insurance

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