With Corby Borough Council preparing to appeal a contamination ruling against it, Ana Paula Nacif explores the uptake of contractors' pollution insurance.
With UK environmental legislation becoming more stringent, and high-profile legal actions such as Corby hitting the headlines, the case for environmental liability cover has never been stronger (Post, 6 August 2009, p8). However, despite the media fanfare, take up of this type of specialist insurance remains at low levels, with many contractors, local authorities and landowners carrying out projects without adequate cover.
In the case that continues against Corby Borough Council, in which it is alleged that redevelopment of the town's steel site caused birth defects in some children, the claimants' legal costs alone are reported to be around the £2m mark, with the council's total liability still unknown.
Corby Borough Council has announced that it is planning to appeal against the general liability judgment that found in favour of the child claimants and gave the green light for individual cases to continue on the issue of causation. And, as the legal battle goes on, insurers argue that lack of awareness among both contractors and local authorities" as well as efforts to keep costs down" are to blame for the gap in insurance coverage.
Mathew Hussey, associate director of UK corporate risks at Tysers, explains that landowners tend to place all the risks on the contractor. "This is flawed and we have been saying that for quite a while," he says. "It is a rarity when contractors buy the right pollution cover."
The problem is that contractors tend to only buy insurance when is absolutely necessary and clearly specified in the contract. "It comes down to individual authorities," comments Wayne Harrington, UK & Ireland manager for environmental risk at Ace Europe. "Some pass the risks to contractors, but some contracts don't even mention environmental liability. It is inconsistent."
He adds that contractors look at the short duration of the project when, in fact, claims can arise many years down the line. "Unfortunately, many don't consider the environmental aspect of the project. Contractors' pollution liability insurance should be built into the tender so that when they are bidding for the business, they know how much the insurance will cost and they can add that to the overall quote."
If tenders are not specific enough and contractors are looking to keep their costs to a minimum, local authorities may well have to dig deep in their pockets to pay for potential claims for which they have no cover. "Contractors are pennywise," says Mr Hussey. "This is a competitive market and they have to secure cheap insurance. And indemnity warranties are worthless, a waste of time, especially if contractors go insolvent or their insurance doesn't cover the risk."
Although cost may still be a barrier, Simon Harwood-Matthews, environmental underwriter at XL, argues that the cost of contractors’ pollution liability insurance has gone down over the past three years. But he agrees that awareness remains a major hurdle. Whereas previously this type of environmental cover was purchased mainly by contractors, Mr Harwood-Matthews says that “now we see landowners and local authorities getting owner-controlled insurance in place”, which means they are covered for potential environmental claims and contractors don’t need to obtain a separate policy.
In fact, Tony Lennon, European manager for Chubb Environmental Solutions, highlights that a developer/landowner controlled environmental insurance programme would have provided “the Corby developers with much needed insurance protection from such liabilities, without any concerns regarding the very limited pollution liability cover provided in a contractor’s public liability insurance”. But it seems that the slight movements in the market in terms of lower premiums and better take up of owner-controlled insurance have not been enough. According to Mr Lennon “most remediation contracts are undertaken without adequate insurance in place”.
He adds: “Even now, contractors doing a similar development to Corby’s would not think about buying contractors’ pollution liability cover unless specifically required, so it is up to advisers to the council who draw up the contracts to be specific. The vast majority of civil engineering work employing contractors does not have such specification. And it doesn’t take an environmental insurance specialist to realise the big gap in coverage.” Mr Lennon even calls on the engineers’ professional body to take action. “It goes all the way to the Institute of Civil Engineers. A lot of their standard contract conditions do not mention environmental risks.”
Contractors’ pollution liability insurance can be crucial, as it covers: property damage; bodily injury — which is the case with Corby; and clean-up costs arising from pollution, gradual or otherwise. But, unwittingly, many insureds rely on their public liability policy to do the job. This has left many defendants empty-handed as contractors’ public liability insurance policies have a pollution restriction, from the early 1990s, and will only cover pollution damages if caused by a sudden unexpected and unintended event, not those resulting from gradual pollution.
“Our experience is that clients are often surprised that the insurance policy they have doesn’t respond,” says George Mortimer, associate at law firm DLA Piper UK. “It is vital that clients understand the risks they face and what insurance is available to mitigate those.” Pollution exclusion
According to Mr Mortimer, in large government private finance initiative projects, liability cover required from contractors will exclude pollution unless there is a clear pollution risk, with only specialist remediation contractors carrying pollution cover.
In fact, only 1% of all premiums spent in the UK go towards specialist environmental products, according to Chris Fletcher, head of disease litigation at law firm Halliwells. “The difficulty,” he points out, “is the way enforcing authorities have approached environmental liabilities, which has been quite slow.” He adds: “Environmental risk is not at the forefront of people’s minds and the perception, especially among SMEs, is that they are probably covered under their combined insurance arrangement anyway.”
As a result of this lack of a bolder approach from the enforcement agencies, the insurance market for environmental products in the UK has failed to make strides. “The UK market is not as well developed as it could be,” explains Anna Nilsson, regional manager for UK & Ireland environmental liability at AIG. “Other European Union countries which implemented the legislation [Environmental Liability Directive] earlier on have an insurance market that is more developed than what we see here.” And, if many contractors are carrying out work without adequate insurance and local authorities are failing to demand that in their contracts, Corby Borough Council could be one of many local authorities left with a large hole in their balance sheet.
Jim Byard, a partner in the disease team at law firm Weightmans, says: “I understand from a commentator for the claimant side that Corby is one case in terms of reclamation involving a large contaminated steel work site that was close to the town centre but others, perhaps smaller, remain dotted around the country. There is speculation as to whether they are as large or extensively contaminated as the Corby site is alleged to have been.”
If local authorities are to avoid nasty surprises, Mr Byard suggests: “There must be close liaison between the owners of the site, contractors and insurers to make sure that cover has been agreed in accordance to existing legislation. They should also ensure that everything is well-documented.”
Mr Hussey emphasises that the best way for local authorities and other landowners to protect themselves is through project specific insurance, which covers all parties. “This type of insurance has been available for more than 10 years. Effectively, it does take the risks away from all the parties involved.”
Another alternative is for local authorities to get blank coverage, but the price of such peace of mind comes at price. “It may save the client a lot of work but, in reality, it is not the most cost-effective way to get insurance,” says Mr Hussey. And, as pollution risks can have long tail liabilities, experts say that an occurrence basis policy is more appropriate in these cases. “There could potentially be a long period before a claim is made, so clients need to anticipate that a loss may not arise for 10 or 20 years.”
To get the right policy, insureds need to look for sound advice. And although some industry experts believe that general brokers can provide clients with proper information and advice, others are keen to point out that, when it comes to environmental cover, insureds are better off talking to specialists. “Remediation projects are a technical matter and, as such, would benefit from specialist advice,” says Ms Nilsson. “If you don’t have a policy that would respond to gradual pollution and already existing pollution, that is the biggest gap. You also need to have bodily injury, property damage and clean-up costs.” Others are even more critical of brokers, including their peers. “There are only five brokers in the UK who know what they are talking about,” says Mr Hussey. “You have to be a specialist.
Some contractors come to us with wordings that provide no coverage. This is a sad indictment for the broking industry, but brokers selling the wrong insurance are not uncommon.” However, Alan Dobson, director of the environmental division at Questgates, believes that the majority of brokers are doing their homework and are usually well-placed to discuss potential environmental liabilities with their clients. “They are aware that standard public liability clauses don’t provide protection for all environmental risks, including gradual pollution, and they will flag this up.
The issue is whether or not their clients take that on board.” And Mr Harwood-Matthews adds: “More brokers have a deeper knowledge of environmental products and how they can benefit their clients. It is important for developers to have a team that can cover the commercial and technical aspects of the project and who work closely with brokers and underwriters.” Regardless of where local authorities go for advice, one of the main challenges they face is to understand the extent of their environmental liability.
Duncan Spencer, vice-president of environmental impairment liability at Liberty Mutual Insurance Europe, explains that, although local authorities have always recognised the potential for this kind of liability, “it has been difficult for them to identify a way to manage this risk because they cover such a large area, with many projects, so it may be difficult for them to assess, at a certain point in time, what their liability is.” Pinpointing liability But, he adds that, in the last couple of years, electronic databases and geographic information systems have helped local authorities and that “just now they are in a position to really understand their liability”.
Although having a clear picture may help, Galen Brislane, partner in the construction unit at JLT, emphasises that the combination of a more litigious mindset in the UK and more stringent regulations, such as the ELD, means that companies and local authorities can easily be targeted from all sides — litigants as well as regulators. “Everyone is exposed at some point in time,” he concludes, “and, with the UK becoming more litigious, people need to be cognoscente, whether they are liable or not, that people will go for those with deeper pockets who have the ability to pay.”
And with costs potentially run into the millions of pounds, as in the Corby case, local authorities, and indeed any landowner, would do well to ‘dot the i’s and cross the t’s’ in their contracts with developers to make sure they are fully covered by their insurance policy.
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