Insurance gap widens for environmental losses: U.K. report

The range of environmental liabilities to which organizations are now exposed and the liability cover provided by traditional insurance policies has become wide and will get wider, predicts a new research paper out of the United Kingdom.

Environmental Loss Scenarios – penned by the Non-Marine Environmental Committee of the International Underwriting Association of London (IUA), in association with Berwin Leighton Paisner LLP – considers numerous environmental claims scenarios.

The report concludes gaps in cover exist when relying on standard public liability and property policies, or even public liability policies with regulatory clean-up and contamination costs extensions, notes the IUA, which represents international and wholesale insurance and reinsurance companies operating in or through London.

Based on real-life examples, the environmental loss scenarios in the report include the following:

• Dust problems on a construction site: Chronic releases of dust over a long period from a construction site cause a neighbour’s asthma to be aggravated, discolours sealant on the windows of the woman’s home and damages carpet inside the home. Total liability from tort liability was £30,000.
• Unexplained failure of a hotel’s oil tank: The failure led to 10,000 litres of oil escaping into the ground. The hotel is adjacent to a college and a site of special scientific interest, with a river running through the neigbouring area. Total liability from regulatory liability for clean-up was £450,000.
• Pesticide spill during transport: A tanker attached to the insured’s tractor overturned as it was being hauled along a public road, causing 10,000 litres of liquid pesticide to be released into a dry ditch. Total liability from regulatory liability for clean-up was £20,000.
• Waste composting fire: When composting waste ignited spontaneously at the insured premises, water used by responding firefighters to extinguish the flames became contaminated by a slurry-like mixture from the compost. The water reached a nearby stream and migrated to a lake, causing a substantial fish kill and damage to the aquatic ecosystem. Total liability from fire damage to buildings, regulatory liability and tort liability was £160,000.

“The gap in cover exposes the insured to environmental liability risk that could be costly to handle and time-consuming to deal with in the short, medium and long term,” notes the report. “Environmental liability is clearly not the exclusive preserve of heavy industry with obvious potential to pollute,” it adds.

“What is most striking about the scenarios is that it is easy to imagine a very wide range of businesses being involved in an environmental incident,” Chris Jones, IUA’s director of market services, notes in a statement.

The report cites key features of various insurance policies that potentially apply to environmental risks, including the following:

• public liability policies cover liability in tort for third-party damages claims, but most environmental liabilities do not fall into this category – rather they are statutory or regulatory;
• public liability policies with extensions relating to regulatory clean-up and contamination costs do give some cover for statutory or regulatory liabilities;
• property policies are essentially first-party (not liability) policies, thereby providing cover only in respect of specific “buildings” and not, as a general rule, land;
• motor policies cover the driver’s liability to third parties (including passengers) for personal injury and property damage arising out of use of a vehicle; and
• environmental policies are designed to cover a wide range of environmental liabilities, such as statutory or regulatory liabilities, tort liabilities, liability stemming from gradual and sudden pollution incidents, and liabilities relating to both the insured’s own land and land the insured does not own.

In the European Union, “the importance of having adequate environmental insurance in place has significantly heightened with the introduction of the EU Environmental Liability Directive, which is based on the ‘polluter pays’ principle,” Jones notes in the company statement.

Adds the report, “Its introduction has placed a strong emphasis on risk assessment and management and prevention by operators, and has been a driver in increasing awareness of the potential environmental risks operators face.”