What risk managers should be thinking about when it comes to environmental liability cover.
Environmental risks have always been with us. They are the obvious side effect of many industrial processes.
The severe consequences of catastrophic events such as oil tanker truck crashes and factory explosions periodically remind everyone of the risks, although it is not only the high hazard operations that carry environmental liabilities.
Take property owners, for example, it is difficult to discount the potential underlying historic contamination from previous uses at a site.
Our understanding of the extent of environmental damage, its causes and consequences is growing in sophistication.
Governments have responded to that by placing a wide range of obligations on businesses and property owners.
The insurance market has, in turn, developed new covers to protect businesses against these extended liabilities, but it worries that many risk managers think that their environmental liabilities are taken care of under their general liability.
Global companies reviewing their top losses will see that environmental features because, when there is a loss, it is usually a big loss.
Who is responsible for the environmental risk?
The responsibility follows the polluter pays principle. But where the polluter cannot be found then the responsibility falls on the property owner.
Property owners are particularly prone to overlooking this risk. They tend to believe that any on-site pollution will be the responsibility of their tenants.
After all, they are not carrying out any potentially polluting events so why would it be a problem to them?
A pollution risk has always existed but it is widely assumed that it is covered under general liability.
Off-site clean-up, for example, is usually covered but on-site clean-up isn’t. This should be one of the key covers for operators as it can be a big cost for many of them.
Another key differential is gradual pollution, which is often assumed to be covered in much the same way as sudden and accidental damage is covered by conventional general liability policies.
Not everybody is ignorant of the risks from gradual pollution claims – risk managers who are property owners and operators are on top of this threat.
Many have purchased environmental liability policies for several years so they are now getting the benefit of greater certainty that they are covered.
Quite simply, the longer the cover is in place, the more likely it will have been taken out before an initially undetected gradual pollution incident started, meaning the policy will pay out.
Firms may be aware of their vulnerability to fines for gradual pollution damage because of some recent incidents that have hit the headlines, particularly since the new sentencing guidelines have meant fines are in the seven figures, but they were only the start of the costs.
The clean-up costs and all the costs and time associated with repairing the damage and restoring the environment to its pre-pollution state are rarely publicised, and these add up.
The uncertainty that Brexit holds means that operators and property owners cannot rest easy that there will not be upcoming adjustments in legislation.
Changes in the legal environment can leave companies unexpectedly exposed to pollution liabilities.
Other emerging risks include such areas as cyber. A pollution incident that has resulted from a cyber attack might not be covered.
It isn’t necessarily written into a standard base environmental policy and could be excluded, especially where terrorism is the cause.
There are lots of moving parts, and each pollution scenario is different, though environmental liabilities are not as complicated as they seem.
Awareness of environmental exposures and understanding options for managing the risks is the beginning.
For more information, please contact Greory Schilz, Executive Vice President on 415-819-6585.
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