Risk: Environmental Liability Insurance


By Dave Lenckus

As regulators strengthen legislation, pollution insurance is ever-more essential.

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Many global companies still see pollution regulation as more bark than bite. But many of the world’s major economies are toughening their environmental protection regulations, requiring contracting parties in business deals to purchase pollution insurance to cover any expensive surprises after the transactions close. Which means it is high time corporate insurance buyers revisit their policies. Fortunately for those insurance buyers, rates are relatively soft, as a spike in the number of environmental impairment underwriters has triggered insurer competition.

Environmentally risky businesses like landfill, mining and hazardous waste producers in many jurisdictions must demonstrate that they have the financial means to cover the cost of a pollution incident. But in the US, Europe and China, those businesses account for a small segment of the environmental liability insurance market. The much larger segment consists of companies that could inadvertently acquire polluted sites through acquisitions, construction contractors, lending institutions, and companies with operations that are not significant pollution risks but could cause costly environmental damage in a mishap.

While at-risk companies increasingly face contractual obligations to purchase pollution insurance, most others see little reason to purchase it. “Part of that is because pollution claims are low-frequency and high-severity [events], so many entities don’t see themselves in that situation,” explains broker Chris Smy, an MD and global environmental practice leader at Marsh.

But many brokers and underwriters say they expect that mind-set will change as more countries enact and enforce environmental regulations and business learns the true costs of a pollution incident. In the United States, which expanded environmental protection and polluter-pays regulations in the 1970s and 1980s, pollution insurers have been able to tap only a fraction of their potential market. Mary Ann Susavidge, chief underwriting officer for the North American property/casualty environmental unit at XL Group, estimates that pollution insurers have penetrated only 20% to 30% of the US market.

And market penetration is even lower in Europe and China, where environmental regulation is less stringent—but is getting stricter. Every country in the world wants to be “green,” notes Veronica Benzinger, MD and chief broking officer in the environmental services group at Aon Risk Solutions. “So laws start with the polluter-pays principle.”

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Walker, Willis: Previous loss experience is no guarantee for the future

Under the Environmental Liability Directive, enacted by the EU in 2004, polluters for the first time face liability for biodiversity damage. And individual EU member states are at liberty to toughen the law when they enact it. While the directive also imposes liability for harm to humans, land and water, older EU environmental laws supersede the directive in those areas in many—though not all—cases, notes Aon’s Benzinger.

But a European Court of Justice ruling has already imposed retroactive liability on polluters in some cases. Under a 2010 ruling, if a pollution incident is found to have been caused by a single identifiable event, such as a leaky pipe that also had contaminated the environment before the directive’s effective date of April 2007, the polluter is liable for the entire incident.

In 2014 the EU will consider whether it should make compulsory an ELD provision requiring companies in at-risk industries to post financial security that could include pollution insurance. Eight of the EU’s 27 member states have already done so.

China has also enacted tough environmental protection regulations over the past decade. But demand for pollution insurance has not surged there because enforcement is lax. That makes it tough to write cover in China, notes John Gibson, SVP and the environmental product line manager at the Chubb Group.

Another problem for the insurance market is that many companies with environmental risks do not understand the true cost of a pollution incident, according to market participants.

For example, in Europe the media focus largely on the fines that regulators assess in the wake of a pollution incident, says underwriting executive Simon White of XL Group. But fines account for “only 5% to 10% of the total cost” of a pollution incident, he says. Defending against third-party claims and the cost of cleaning polluted sites are the main costs.

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Susavidge, XL: Pollution insurers have penetrated only 20% to 30% of the US market

Many insurance buyers in Europe believe they have all the pollution coverage they need under their general liability insurance policies, according to insurers and brokers, which cover sudden and accidental pollution. General liability insurers in the United States excluded the coverage decades ago after fighting numerous legal battles that never clearly established whether the coverage grant referred to all unintended pollution incidents, including gradual contamination, or only incidents that occurred quickly and for a short duration.

General liability insurance in Europe covers only third-party claims arising from pollution incidents that occurred for a brief period, brokers and underwriters say. That coverage often is not clear to policyholders, many of whom believe the cost of cleaning their own property is included, notes White of XL. Policyholders “need to be very careful,” he says. “You’re not covered for this risk.”

The coverage is “very limited,” agrees broker Clive Walker, project director in the environmental practice at Willis Group. Brokers and insurers say prospective pollution insurance buyers are beginning to understand their pollution risk, and that awareness eventually will lead to greater demand for coverage.

As for the rationale of many corporate insurance buyers that they have never had an environmental accident before so they do not need pollution coverage now, Walker at Willis notes that there are countless examples of companies that discovered, to their detriment, that previous loss experience was no guarantee for the future.


What a difference a generation makes. A quarter-century ago, insurers wanted no part of pollution risk. Now they are competing for business. After the standard-lines insurance market ran away from the coverage in the mid-1980s, a handful of surplus-lines insurers began underwriting environmental impairment coverage.



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Gibson, Chubb Group: Pollution insurance rates have dropped off

That is largely how the market stood until 2008, when the crisis hit. Insurers then began rushing to provide pollution coverage to generate additional profits—a strong allurement in a soft insurance market and a weak economy. Today more than three-dozen underwriters offer some type of pollution cover.


Insurers typically design coverage according to their policyholders’ needs. Site coverage—which insures against third-party claims and the cost of site cleanup—remains the most popular. But demand is growing fastest for contractors’ pollution liability insurance, as more project owners insist contractors obtain cover.


The influx of underwriters in the pollution market has boosted market capacity and triggered rate competition. Depending on the risk, buyers can cobble together as much as $200 million of limits.


The drop-off in rates has been “a drastic change,” says John Gibson, SVP and the environmental product line manager at Chubb Group. But they have stabilized over the past 12 months and in some cases have ticked up slightly, brokers. It remains to be seen what will happen to rates, and access, as the global economic picture stabilizes.