‘Insurance cover is often incomplete or even non-existent without a dedicated environmental policy’ – International Underwriting Association.

Insurance cover for environmental losses is often incomplete or even non-existent without a dedicated environmental policy in place. That is the conclusion of a new research paper from the International Underwriting Association examining potential environmental claims scenarios. Chris Jones of the IUA explains.

The report highlights the gaps in cover that exist when relying on standard public liability and property policies, or even public liability policies with regulatory clean up and contamination costs extensions.

It details a range of potential loss scenarios that could affect different business sectors and result in incidents that are both costly and time consuming to handle.

What is perhaps most striking about the scenarios is that it is easy to imagine a very wide range of businesses being involved in an environmental incident. Environmental liability is clearly not the exclusive preserve of heavy industry with obvious potential to pollute.

It is also important to remember that environmental liabilities are often difficult to manage. In particular, they can take a long time to resolve and may require extensive technical input. It is not always possible to resolve them once and for all by paying money to the affected parties. Without an insurer’s help, the handling of an environmental liability could be extremely time-consuming for the insured as well as expensive.

The research paper, Environmental Loss Scenarios, was prepared by the IUA’s Non-Marine Environmental Committee which is made up of underwriters from across the association’s 40 member companies.

Among the scenarios it covers are dust problems on a construction site, failure of a hotel’s oil tank, a spill of pesticide during transportation and pollution of a car park from poorly maintained drains. All the scenarios are based on real life examples.

In each case the report states what loss the insured actually suffered before going on to examine whether that loss was covered under a standard public liability policy, a public liability policy with what is often categorised as a “Bartoline extension” or “PL+” (which potentially provides regulatory clean up and contamination cover), a property policy and an environmental policy;

Further analysis is then conducted to consider what other kinds of loss could potentially have been suffered by the insured in the scenario and whether these would have been covered under a standard public liability policy, a public liability policy with a regulatory clean up and contamination extension, a property policy and an environmental policy.

The key message of the report is that the gap between the range of environmental liabilities to which organisations are now exposed and the liability cover provided by traditional insurance policies has become uncomfortably wide and will get wider.

The need to have adequate environmental insurance coverage in place has significantly heightened with the introduction of the Environmental Liability Directive, which is based upon the “polluter pays” principle and has increased the potential remediation liability of operators.

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.

It should also be noted that the Directive provides an option for EU Member States to require relevant operators to put in place financial security (likely via insurance) to meet their potential liabilities under the ELD. Unlike a number of Member States, the UK has not as yet implemented such a requirement. However, it could do in the future.

Chris Jones is Director of Market Services at the International Underwriting Association.

Copies of Environmental Loss Scenarios,which is published in association with Berwin Leighton Paisner, are available from chris.jones@iua.co.uk. The publication is also available on the IUA website at www.iua.co.uk/environmentaltogether with an earlier report from August 2010 Environmental Risks: insured or not?

Chris Jones