Energy companies are facing an environmental time bomb in Latin America

Tougher regulation, a growing compensation culture and long time-bars are leaving many companies operating in Latin America exposed. Robin Hamilton of JLT Specialty argues that a full review of your insurance cover is vital.

In recent years we’ve witnessed a worrying increase in both the number and cost of environmental liability claims emanating from energy companies in Latin America. Ageing infrastructure has played its part in this. But the main cause, in my experience, is the tightening of environmental legislation and the rapid expansion of a compensation culture based on the North American model.

Much higher standards of clean-up are now required under a raft of new laws in Latin American countries. These include Mexico’s 2014 environmental law of responsibility, based on the ‘polluter pays’ principle, Peru’s new contaminated soil regime and Bolivia’s environmental laws that enable people to sue oil and gas companies on behalf of ‘Mother Earth’.

But it is the trend towards a class-action culture that is worrying energy companies and their insurers and reinsurers. Some of these cases run into tens of millions of dollars and the impact puts the squeeze on insurers in these increasingly competitive market conditions.

The South American tendency to use long time-bars also creates added pressure for energy companies. For instance, a recent claim for a minor spillage in Brazil – where the time-bar is unlimited – was brought ten years after the event and led to a fine in excess of $1 million.

Overall, the trend is a worrying one for the countries themselves with their big stake in attracting investment in the oil and gas sector. In Peru, the government has reacted by making companies exempt from environmental impact assessments. But they are still liable if they pollute. This can result in a growing environmental time bomb with companies ignoring massive risks.

Of course, this makes proper insurance protection all the more vital. I believe that a full review is the only way to ensure that new legal liabilities are adequately covered. Site visits and surveys by expert engineers can also pay dividends. I’ve come across companies whose biggest environmental risks – landslides, for instance – are specifically excluded in their policy. Fundamental operational risks, such as illegal tapping or soil pollution from damaged pipelines, must be included in the broadest possible cover to ensure that your policy will respond when it is needed.

A pre-agreed remediation protocol is also a very good strategy in a world where underwriters are taking a much more forensic approach to adjusting environmental claims. This means establishing with your broker and insurers in advance of a loss precisely what should be done and by whom, helping to drive out the uncertainty.

Insurers need confidence in the risks they are underwriting. So it’s important to allay some of their concerns about the rising cost of environmental liabilities. The only sensible way forward is for energy companies to work with the insurance industry to mitigate losses.

Robin Hamilton is an energy broker at JLT Specialty

Robin Hamilton