The future of environmental insurance

June 2020  |  FEATURE  |  RISK MANAGEMENT

Financier Worldwide Magazine

June 2020 Issue

The environmental insurance industry is booming. In the US, there are over 100 different environment insurance policies on offer today, with many new entrants joining the market over the last few years.

According to Ling Ong, a partner at Weightmans LLP, the environmental insurance market is thought to be worth around $2bn in premiums. “It is a specialist product which often has bespoke terms, deals with complex and unique issues, and often carries high-value limits,” she explains. “Since being introduced about 40 years ago, the market has evolved into a sophisticated class of business. Over recent years, there has been an increased awareness among businesses of their exposure to environmental factors, which has led to increased demand.”

The financial implications of an uninsured environmental loss to a company can be significant, yet are often overlooked or underestimated. “One thing that always seems to be the case in the face of an environmental calamity: invariably the responsible party is self-insured, which is a code word for uninsured,” says David Dybdahl, president of the American Risk Management Resources Network, LLC. “Case examples show that when a firm reports that it does not have insurance to cover an environmental loss, the company will lose at least 10 times the estimated loss in shareholder value within the first 60 days.”

At the same time, evolving environmental regulation around the world has introduced tighter rules, with more rigorous enforcement in various jurisdictions. Multinational companies in particular are keen to transfer the associated risk with environmental insurance.

Crucially, many of the costs stemming from an environmental incident are not covered by general liability policies. Accordingly, specialist environmental liability insurance provides cover for gradual pollution events, such as undetected leaks, as well as those that are sudden and accidental.

“Environmental insurance policies can cover a wide range of risks,” says Simon Colvin, a partner at Weightmans LLP. “Common environmental impairment liability policies will cover contamination risks. They will address things such as on-site and off-site risks, liability to regulators and third parties and business interruption costs and liability arising from the transportation of hazardous substances. In those jurisdictions where high-risk activities such as mineral extraction or the operation of regulated facilities are more common, compulsory requirements for environmental insurance have evolved accordingly.”

Environmental liabilities are often complex, costly, time intensive and difficult to manage. Arranging the right cover can ensure that risks are identified and managed, reducing losses or even preventing insurance claims. But the process of obtaining environmental insurance involves a variety of data gathering and analysis depending on the risk profile. “Ideally, there will be a ground investigation report to help underwriters understand the technical risks,” says Keith Davidson, a consultant at Mills & Reeve. “For lower risk sites, underwriters will often accept a phase one walkover report. If there is a property portfolio, a desktop survey could suffice.”

For directors and officers (D&Os), most are familiar with the importance of arranging D&O liability insurance – but they should also take into account specific environmental issues, as liabilities can be imposed on individuals as well companies. “Individuals can be targeted if theirs acts or omissions cause the pollution or increase the environmental damage,” points out Mr Davidson. “The new HMRC enforcement powers for fly-tipping have increased the risks for D&Os in the UK. An important feature for environmental policies, and D&O cover with pollution extensions, is cover for clean-up, technical investigations and rectification costs if individuals are targeted for pollution spills or environmental damage. There is a potential legal exclusion under the Contaminated Land Regime for individuals on hardship grounds, however wealthy individuals would be more at risk.”

These risks are likely to rise in the coming years. Global warming and climate change will be core areas of focus, with financial implications in relation to physical, liability and transition risks. More companies will look to insurance to manage these risks. According to the Geneva Association, the insurance industry has a crucial role to play in “building socio-economic resilience and enabling economic development and entrepreneurial pathways for achieving climate change goals and targets”.

For D&Os, particularly in traditionally pollutive industries, climate change may pose more significant problems. Culpability around their actions and contributions to global warming may result in retroactive punishment. According to Mr Dybdahl, D&Os should be held responsible for the environmental damage caused by their decisions. “Others feel the same way,” he warns, “and the D&Os of big oil companies will be taken to task by plaintiff lawyers for their role in promoting fossil fuels and suppressing efforts to curb global warming through the distribution of false or misleading information.”

Such developments would surely have consequences for coverage, exclusions and pricing of environmental insurance.

© Financier Worldwide

BY

Richard Summerfield