Testing the Waters

Beginning in the 1990s, governments around the world began to focus their attention on the problem of environmental pollution. In Canada, legislation at both the federal and provincial levels prohibits activity that may cause damage to the environment, and regulations continue to be updated. Environmental insurance is continuously adapting to this changing regulatory environment.

At the federal level, the Canadian Environmental Protection Act makes individuals, corporations, corporate officers and directors subject to prosecution for environmental offences and, if convicted, liable for fines and/or prison terms.

Environmental insurance has been available in Canada since the mid-1980s. Carriers usually offer “sudden and accidental pollution coverage” under a casualty policy, but this cover can contain gaps and uncertainties. Separate pollution products typically offer cover for pollution conditions that occur gradually over a period of time (no time-period reporting requirements). Often, the coverage is for pollution that is created by a company’s own operations.

As part of the underwriting process for an environmental policy, insurers have to understand how insureds are managing their risks. Applications for environmental insurance are detailed. But because of the current regulatory requirements and the need for sound environmental management practices, many insureds find they can address an insurer’s questions by providing copies of documents they’ve already developed, such as risk management procedures and operating plans.

Lines of liability

For insurers and claims adjusters active in this market, the definition of environmental liability can be a challenging issue.
For a start, there is liability imposed by government regulation. This level of liability is continuing to evolve and remains subject to change. For example, several provincial regulators have recently instituted revised soil and groundwater contaminant concentration criteria, making standards more stringent.

Regulatory issues aside, liability can arise when one party tries to sell a contaminated site to another party. This type of liability is a fairly recent development.

Liability can also arise in relation to a third party, such as when a contaminant is released into a waterway and a claim is brought for damages.

CGL policy puzzles

In cases of liability to a specific party, courts have fastened on the regulatory principle of “polluter pays” and have imposed penalties. However, the collective direction of these decisions is unclear in some areas, particularly in connection with coverage under commercial general liability (CGL) policies.

Many CGL policies specify a 120-hour window within which the insured must report the pollution incident to the insurer in order to trigger coverage. But conflicting court decisions have left adjusters and insurers – and insureds – uncertain as to whether the 120 hours begin when the incident occurs or when it is discovered.

Room to grow

Commercial insurance has been in a soft market for the past few years, so many insureds have been saving on insurance. This has created increased interest in more specific environmental insurance policies as insureds seek to reduce their uncertainty, broaden their insurance programs and address pollution gaps in their CGL policies. Environmental insurance is still an unfamiliar area for many brokers and insureds, so carriers spend significant time educating the marketplace about the cover and benefits associated with a pollution policy.

In the oil and gas sector, large companies tend to self-insure their environmental pollution risks but smaller companies are increasingly interested in pollution cover. Environmental impairment liability (EIL) policies include coverage for bodily injury liability, property damage liability, cleanup (both on-site and off), business interruption, contracted liability, loss of value of a third-party property from contamination, and legal defence costs. For smaller oil and gas companies, a coverage package like this can make good sense. This is a growing area of business for Canadian insurers.

In other sectors, large companies have traditionally been the main purchasers of pollution coverage. But again, small-to-medium-size enterprises are beginning to see value in environmental policies. Stimulus spending has launched many public-private partnership (P3) projects in Canada in recent years, making environmental coverage of contractors and construction projects a particularly active area.

Open questions

Increasing government scrutiny of environmental risks is leading to more-stringent regulation and harsher penalties. In addition, high-profile events such as the deaths of 1600 ducks in a Syncrude tailings pond in Alberta and the Deepwater Horizon oil spill off the US Gulf coast are likely to have long-lasting repercussions. In the wake of Deepwater, for instance, the policy cap on consequential damages may now be irrelevant – there will always be political pressure to break the cap and make the operator liable for all costs of containment pollution cleanup and business interruption. This kind of increased regulation and oversight will affect the insurance industry as potential first- and third-party exposures become even more uncertain.

Ongoing technological developments are another source of uncertainty. Determining environmental liability can be particularly challenging when new technologies are involved. In general, the less-tested a technology is, the greater the risk it poses.
For example, new processes of carbon capture and storage could theoretically mitigate the effects of fossil fuel emissions. But the UN’s International Panel on Climate Change (IPCC) has acknowledged that safe and permanent storage of CO2 cannot be guaranteed and that even very low leakage rates could potentially undermine any climate mitigation benefits. For adjusters and insurers dealing with environmental coverage for large-scale facilities such as power plants, such evolving technological recommendations can further complicate liability issues.

Climate change raises yet another set of liability issues. Setting aside any questions about the extent to which human activity has contributed to the problem, enterprises increasingly view climate change as a business risk they need to manage. And a changing climate poses risks not only to property and health but to businesses and governments through liability. Potential exposures range from mass tort claims against regulators or companies for not enforcing or meeting emission standards, to shareholder lawsuits against corporations for not disclosing environmental risks. Adjusters and insurers may find themselves dealing with environment-related claims brought under D&O policies, as well as the ones made under environmental policies.
For adjusters and insurers alike, the environmental insurance market remains one to watch as it continues to evolve in response to both new information and new regulatory pressures.

This article is based on excerpts from ADVANTAGE Monthly, a series of topical papers on emerging trends and issues provided to members of the CIP Society. The Chartered Insurance Professionals’ (CIP) Society is the professional organization representing more than 16,000 graduates of the Insurance Institute’s Fellow Chartered Insurance Professional (FCIP) and Chartered Insurance Professional (CIP) programs.