Environmental Liability Insurance
Following the volatility of the
early 2000s, the London Environmental Liability insurance market has rebounded
and expanded. The market now consists of five insurers, namely: ACE, AIG,
Chubb, Quanta and XL.
All of the insurers offer property
transfer policies with periods of up to ten years, as well as a wide range of
operational policies that are available for up to five years, with a maximum of
three years for manufacturing and similar sites. The policies are renewable.
Types
of Products
Three types of environmental
insurance are now available for commercial risks: site-specific policies, policies
for professionals and policies for general, remediation and asbestos
contractors.
Homeowners may protect themselves
against the risk of liability under Part IIA by warranties and an insurance
policy. In addition, environmental insurance is often used as a central element
of risk financing for commercial risks.
Most environmental insurance
policies are underwritten on a claims-made-and-reported basis. A claim must be
made against the insured and reported by the insured within the policy period.
Some policies, such as property transfer policies, include an automatic and
optional extended reporting period when the insured may receive and report a
claim from pollution conditions. An automatic extended reporting period is
around 60 days. An optional extended reporting period, which is available for
an additional premium, has a maximum length of three to four years depending on
the insurer.
Main
Areas of Cover
- Third Party Liability for pre-existing pollution and/or land contamination
- Third Party Liability for new pollution and/or land contamination events
- Clean up costs, at neighbouring premises, following a pre-existing event
- Clean up costs, at own premises, following a pre-existing event
- Clean up costs, at neighbouring premises, following a new event
- Clean up costs, at own premises, following a new event
Site-Specific
Policies
This type of policy provides cover
to the owner or operator of one or more insured sites for third-party claims
for bodily injury and property damage, and works to remediate contamination
that is on or migrating from the site(s). Specified legal and other fees and
expenses that are related to the loss may also be covered as well as business
interruption, loss in rental income and diminution in the value of third-party
property. A lender, trustee, developer or seller may be listed as an additional
insured. Coverage is not necessarily limited to sites specified at the
inception of the policy; sites may be added (and deleted) during the policy
period by endorsements to the policy.
The seven types of site-specific
policies are described below. Some policies have a menu-type format that
includes types of cover, allowing the insured party to select the cover that is
required.
(i) Environmental liability
policies: An EIL policy provides cover to owners and occupiers of land as
indicated above.
(ii) First-party pollution policies:
A first-party pollution policy provides cover for the cost of remediating
contamination on the insured’s site(s) as well as bodily injury and property
damage that results from a pollution incident that occurs on the site(s) during
the policy period. Other losses that may be covered include business
interruption, loss of rental income and diminution of third-party property.
(iii) Property transfer policies: A
property transfer policy provides cover to owners and occupiers of land as
indicated above. An insurer may agree to provide cover for pre-existing
contamination that is known to the insured at the inception of the policy
provided that the insured discloses such contamination to the insurer.
Alternatively, the policy may carve out cover for remediating known
contamination at the site(s).
EIL, first-party pollution and
property transfer cover is typically offered in a single policy with the
insured choosing the required cover. A standard endorsement to such policies
lists any known Underground Storage Tanks (UST’s) that insurers agree to cover.
The purpose behind listing UST's is to provide the insurer with details of
their condition, in particular, integrity testing.
(iv) Remediation cost cap policies:
A remediation cost cap policy provides cover for remediation costs that exceed
a level agreed by the insurer up to the limit of indemnity provided in the
policy. The agreed level is the estimated cost of remediating the contamination
plus a buffer, or deductible. Remediation cost cap policies tend to be offered
only for projects that are estimated to cost at least £1 million. They provide
cover for cost over-runs, the failure of remedial works and unforeseen costs
due to the presence of more extensive contamination than anticipated.
(v) Post-remediation policies: A
post-remediation policy provides cover for any further remediation that must be
carried out at an insured remediated site. The requirement to carry out
additional remediation may result from a request or demand by a governmental
authority or a change in law.
(vi) Lender liability policies: A
lender liability policy provides cover to a funder for the costs of remediating
contamination at a borrower’s site or the payment of the borrower's principal
loan balance if the borrower defaults. The policy may also cover third-party
bodily injury and property damage.
(vii) Commercial land insurance
policies: A commercial land insurance policy is a hybrid EIL, first-party pollution
and property transfer policy providing cover for the cost of remediating
pre-existing contamination and contamination that results from a pollution
incident at the insured site during the policy period. The policy is offered
for low-risk sites, including property portfolios, on the basis of a desktop
report. It is offered for a renewable one-year period.
Placing
Cover
Environmental insurance policies are
placed in a different manner from general liability policies due to the
site-specific nature of many policies and the environmental underwriting skills
that are required. Over 70% of environmental insurance policies are negotiated.
This does not mean that each policy is bespoke – such policies are issued only
for highly complex sites. Instead, insurers provide a specimen policy, the
terms and conditions of which may be altered by standardised endorsements
during their negotiation.
The first step in placing an
environmental insurance policy is to contact a broker, either directly or
through advisors including, in many cases, an environmental solicitor. The
client indicates the type of policy that is sought and possibly, the insurers
to approach. The broker may also provide names of insurers who offer
appropriate policies. If a site-specific policy is sought, the client will need
to give details of the site(s) including environmental site assessments and
verification reports of any remediated contamination.
At the next stage, the broker
prepares a market presentation that outlines the requested policy, together
with potential deductibles, limits of indemnity and policy periods. The broker
puts the market presentation forward to the various underwriters, along with
further details about the risk to be insured. Depending on the risk and the
requested policy, an underwriter may visit one or more of the sites to be
insured. The underwriter of an EIL or first-party pollution policy may, for
example, wish to review the operations at one or more sites to evaluate the
insured’s environmental management system. The underwriter of a property
transfer policy may wish to inspect the environmental condition of the site(s).
The underwriter then provides the
broker with suggested premiums for the various deductibles, limits of indemnity
and policy periods. The underwriter may state that it will not cover certain
sites, cover only specified environmental liabilities arising from such sites
or will carve out cover for specified contaminated areas at them.
The broker then presents a
comparative analysis of the various submissions to the client. Following the
analysis the broker and in some cases, the environmental solicitor negotiates
the terms and conditions of policies. client submits the completed proposal
form. In the final step, the insurer binds the policy terms and conditions,
issues the policy (including the negotiated wording) and the insured pays the
premium.
Future
As described above, the London
environmental insurance market has a long history. The times of uncertainty
about whether the market will survive are now in the past. Every indication is
that the number of insurers in the market will continue to grow while the range
of policies issued by the market will expand.
The total premiums for the London
environmental insurance market in 2004 were estimated to be £50 million,
including policies underwritten for continental Europe and other locations
outside the US. The London market is small compared to the US, where total
premiums for 2004 are estimated at over $1,000 million.
The difference in the size is due to
many factors, not merely the larger land area of the US. Reasons include more
rigorous enforcement of environmental legislation, as well as more advanced and
extensive brownfield remediation programmes, more financial security
requirements in environmental legislation and a greater public awareness of
environmental insurance.
Various factors will heavily
influence the rate of growth in the London environmental insurance market. The
scope of environmental legislation in the UK (and other member states of the
European Union) now equals that in the US. If the Environment Agency, the
Scottish Environment Protection Agency and local authorities enforce
legislation rigorously, the need for environmental insurance policies will
increase exponentially as the range of companies purchasing policies increases.
Much will, of course, depend on the
companies' knowledge of the availability of policies together with their
flexibility compared to policies offered in the early 1990s. The environmental
insurance market has much work to do in continuing to educate the public about
their products.
The development of the national
brownfield strategy in England will continue to drive the redevelopment of
brownfield sites. This will lead, in turn, to a demand for specialised policies
– as in the US – to cover liabilities associated with redeveloped sites.
Unlike the US, where environmental
legislation includes financial security requirements for a range of activities
from the ownership and operation of USTs and waste disposal sites to dry cleaners,
financial security requirements are limited to waste-related activities in the
UK. This is changing, however, with the inclusion of financial security
requirements in recent and forthcoming European Community legislation.
Insurance is not the only way to comply with the requirements, but is a common
means of doing so. Such legislation is, therefore, likely to be a driver for
the London environmental insurance market as it has been in the US.
Environmental
Liability Directive
Other events that will influence the
future rate of growth of the London market include the transposition into
domestic law of the EC Directive on environmental liability, with regard to the
prevention and remedying of environmental damage, by 30 April 2007.
The environmental liabilities
imposed by the Directive – in particular, liability for damage to protected
species and natural habitats – will make the gap in cover for environmental
liabilities in public liability insurance policies grow into a chasm. There is
already a question about whether such policies provide cover for remedial works
carried out by the insured on its own and third-party sites; most do not.
This does not mean that the
potential does not exist for certain environmental liabilities under this
Directive and other environmental legislation to be covered by the wording of
public liability policies. It may lead public liability insurers and their
reinsurers to consider deleting the qualified pollution exclusion in their
policies in favour of an absolute pollution exclusion.
If – or rather when – the change to
an absolute pollution exclusion occurs, environmental insurance policies are
likely to be commoditised in the UK as they have in the US. In the meantime,
the only way for a company to ensure that potential environmental liabilities
arising from its operations or ownership of land are covered is to purchase an
environmental insurance policy.
New content: standard clauses to transfer environmental liability in sales of land
PLC Environment and PLC Property have published new standard clauses for transferring environmental liability in property sales.
PLC Environment
PLC Environment and PLC Property.
The clauses set out drafting for allocating environmental liability on the sale
of land, in particular liability for:
·
Statutory liability under the contaminated land
regime under Part IIA of the Environmental Protection Act 1990.
·
Civil liability under common law nuisance (for
example, if contamination migrates to neighbouring property and causes damage
there).
The accompanying drafting notes explain:
·
The key environmental risks associated with
property sales and the role of due diligence in understanding those risks.
·
How to allocate environmental risk in property
sales, including by using:
o
an agreement on liabilities;
o
the sold with information test; and
o
the payment for remediation test.
The drafting notes also suggest different approaches to environmental risk,
depending upon the state of the property market, the type of client and the
extent of any known contamination problems on the property.
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