Does the pollution cover always pay

Environmental pollution policies are no longer just for oil giants and radioactive waste operators. Airports, apartment complexes, pig farms, prisons, dry cleaners, printed wiring board manufacturers and amusement parks, schools and universities, are just some of the businesses that have had to take a fresh look at their standard public liability insurance policies and consider whether the pollution cover thereunder is sufficient.

Specialist environmental insurance policies came into being in the UK in the ‘70s and ‘80s. They were initially intended to protect against specified losses arising out of accidental pollution. Although the market was slower to mature in the UK, than the US where environmental legislation has always been much more draconian, a number of turning points have led to increased growth. These include the ABI’s introduction of a standard exclusion for pollution liabilities in public liability policies in 1991 and the contaminated land regime, which came into force in 2000, under the Environmental Protection Act 1990, There has also been increased pressure on environmental reporting for companies and the Environmental Liability Directive has introduced the ‘polluter pays’ principle.

With the clear limitation of standard covers. businesses need to weigh up the impact of a pollution incident, the often costly clean up and consider the implications of assuming that their standard policy will provide adequate cover..

So let’s look at the cover you may have.

Standard environmental and pollution cover under public & products liability insurance is very limited and probably insufficient for most businesses. For instance, pollution liability coverage under your policy is almost certainly limited to third party claims resulting from “a sudden identifiable unintended and unexpected incident’, If you do not have a specific pollution and contamination clean up extension, you are unlikely to be covered for the cost of remediation required by the Environment Agency, and if you do have a cleanup extension, it will be limited in monetary value terms.

The extension is also likely to exclude other important losses such as clean up of your own property (even where such clean up is required by a regulatory authority) and restoration of flora and fauna. In addition pollution cover under your property or material damage/ business interruption policy is certain to be restricted to loss resulting from property damage or business interruption caused by pollution associated with a defined peril.

For many pollution incidents there is potential that your existing policies will not provide adequate cover and may put your business at risk of having to self fund clean up and/or restoration.

Your policies are unlikely to provide you with any cover for liabilities resulting from gradually occurring pollution or for clean-up of pollution of land or water at your sites. Nor will they provide you with any cover for environmental damage liabilities.

Furthermore, where any form of pollution cover is provided under any of your standard policies, it is likely to be in the form of a complete exclusion. This is likely to place the onus of proving that all the conditions for cover were met on you, not the insurer.

There is also the potential for grey areas to development, which may mean that you are unable to prove that all the stated policy conditions required for pollution cover have been met. To put it bluntly under your current cover you are likely to have significant potential for uninsured losses if any of your sites or business activities release pollution.

So what can be done?

In the last ten years or so, a number of additional environmental insurances have been developed to meet the demands of the modern business environment and the new regulatory framework. They fall into the following categories:

  1. Environmental impairment liability (or pollution legal liability insurance) which has options to cover loss from historical contamination, loss from contamination caused by ongoing operations or a combination of the two.
  2. Remediation cost cap/stop loss, which covers loss arising from cost overruns during remediation
  3. Contractors’ pollution liability, covering loss arising from contractors operating on third party sites.
  4. Business-based liability, which covers pollution and environmental liabilities arising from the business activities.

The main option is specialist pollution liability insurance to cover your sites and activities.Standard policies provide site-specific cover on a single site, multi-site or portfolio basis. Cover can include, for instance, on-site and off-site statutory clean-up costs, natural resource/biodiversity damage, third party claims for bodily injury and property damage and investigation and legal defence costs. Covered for both new and historic pollution conditions, depending on the coverage option selected is available. Policies can also potentially be extended to cover business interruption loss resulting directly from a pollution condition.

If you want to go further Environmental Damage Insurance will cover your pollution liabilities resulting from business activity on property you own, or lease, on third party premises and during transportation. The policy can also be extended to cover your increased cost of working (similar to business interruption) and can also cover any lender with an interest or security in your business.

As in standard pollution legal liability policies, the environmental damage insurance wording makes no distinction between pollution conditions resulting from sudden and accidental and gradually occurring sources and therefore covers both. However, it can potentially be placed on a difference in conditions/difference in limits basis, to sit alongside your existing PL/products policy.

So what is the next step?

Once risk managers and finance directors have tested the efficacy of their current pollution insurances programmes, it may be time to look at these additional covers. The cost of purchasing these has reduced, since markets are now sufficiently mature, and particularly where the operational risks are relatively straightforward.

Although it’s very unlikely that insurance would be available for ongoing known pollution liabilities, it may well be possible to insure known pollution/contamination risks that could potentially result in liabilities in the future, and it will certainly be possible to insure unknown pollution risks, with the right insurer.

The principal benefit of a specific pollution liability insurance programme is that it can fill in most of the significant gaps in pollution liability cover that exist under your existing insurances and significantly reduce your exposure to future uninsured pollution liability losses.

It may be prudent to focus on the key risks: liabilities resulting from gradually occurring pollution, especially historical pollution); clean up of pollution of land or water at your sites; environmental damage liabilities arising under the EU Environmental Liability Directive and business interruption loss resulting from pollution conditions.

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 you to trade through any major pollution incident, and minimise the bottom line costs.

Case study:

Company A and Company B run similar industrial operations on adjacent sites. A wished to purchase B, who has occupied the site for a number of years. A was concerned about inheriting liability for unknown pre-existing soil and groundwater contamination, caused by past activities and asked B to provide an environmental indemnity to cover any future environmental liabilities in the sale agreement. B wanted a clean exit from the site and was unwilling to retain liability for environmental losses that could arise in the future. A refused to proceed without the indemnity.

B’s insurance manager talked to brokers to consider insurance as an alternative option to the indemnity. She obtained various proposals based on an environmental report, which identified only limited areas of contamination of limited risk. It was agreed that A would contractually assume all environmental liabilities for the site, but would take out an insurance policy to cover any costs payable under these liabilities – the cost of the policy to be deducted from the purchase price.

On this occasion, an insurer was willing to include cover for identified contamination, as it did not currently present a significant risk and was limited to specific areas.

B obtained a clean exit from the site and A was insured against any losses arising in the future.

TOP TIPS

  • Review your business activities with your broker
  • Undertake an environmental survey and analyse your coverage delta
  • If you operate near a watercourse, river, reservoir or lake – consider the pollution legal liability policy option
  • If you are developing a brown-field site – talk to an insurer about historical pollution cover.