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Environmental Risks:
Liability, exposure and Insurance Solutions
Environment vs Oil and Gas
How to turn and conflict into mutual cooperation?
Bucharest 24th November 2010
Presented by:
Simon Johnson, Ph.D. Practice Leader EMEA
Aon Global Environmental Services Group
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
1
Agenda
� Environmental Risks and Liability
– Current Operations
– Historical
– New technologies
� EU Environmental Liability Directive
� Exposure to uninsured loss and damage
� Environmental Insurance Solutions
� Summary
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
2
Oil and Gas - operations
� Environmental incidents since 1997 in Europe:
– 32 major accidents in commercial and transport activities
– 24 major incidents in oil refineries
� Causes:
– Leaks from valves/joints/pump failure
– Overspill
– Corrosion and defects
– Bulk storage tank collapse and failure
– Pipeline burst
– Fire and explosion
Pollution and environmental damage from oil and elated products and also
fire water and foaming agents
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
3
Explosion – Tank Farm – Buncefield 2005
All images courtesy of Hertfordshire Constabulary
Petrol leakage from storage tank – vapour cloud ignited.
Explosion registered 2.4 on Richter scale
and was heard 125miles away.
Fines so far total >£10M
Environmental issues remain as a result of product and
contaminated firewater entering the ground and groundwater
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
4
Donges - France – 2008
Accidental leak - pipeline breakage
400 tons released
Environmental damage to river Loire
Damage to protected reed beds
Photograph Cedre
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5
Star Terminal—Suburban Washington DC
A petroleum leak from the Pickett
Road Tank Farm on a nearby site
contaminated the 1,500-home
community
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
6
Puerto Rico – San Juan Harbour - 2009
An explosion of 11 fuel tanks at a fuel storage complex which shook the ground of
Bayamon, a municipality near San Juan, with the force of a 2.8 magnitude earthquake
caused the evacuation of about 1,500 residents, school closings and class actions
suits. Environmental damage.
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
7
Plaine de Crau – France - 2009
� France
– Coussouls de Crau
nature reserve
– Oil pipeline failure 4M litres
– Clean-up costs exceed €25M
– Protected species damaged include:
– Crau grasshopper and ocellated lizard
– Environment also important for several
rare birds
– Treated as ELD type claim
– Currently in litigation
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
8
Oil and gas - Historical Activities – Legacy Liabilities
Redevelopment – decontamination – residual liabilities
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9
Carbon Capture and Storage
RISKS: Real vs. Perceived
OR
Issues include: Cost; scalability; short-terms risks;
long-term security and who pays ……
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
10
Carbon Capture Risks
� In general, geological carbon sequestration projects can be
summarized into five risk categories:
1. Movement out of the storage reservoir - escape
2. Release of CO2 at high concentrations - catastrophic
3. Risks to ecosystems - biodiversity
4. Geo-mechanical and geophysical risks – settlement/heave
5. Risks to underground sources of drinking water - carbonic acid; co-contaminants -
Hydrogen sulfide and nitrous oxides present in the CO2 stream; and salinisation
The above risks can be both short and long-term
Uncertainties can be addressed using environmental insurance
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
11
Carbon Capture – New techniques - Aon US Project
Solution – environmental insurance program to provide coverage for:
• Pollution of adjoining drinking water system
• Catastrophic release, including control of well risk
• Geo-mechanical failure
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
12
Environmental Laws and Regulations
European Union
Environmental Liability Directive (EU ELD)
Environmental Damage and Remediation Regulations (England and Wales, similar for Scotland and NI)
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
13
The EU Environmental Liability Directive
� Implemented across EU
� Liability for environmental damage not just pollution
– To protected species and habitats—Biodiversity
� Creates Strict Liability for many types of
industrial operation
� Financial security may be required – e.g. Portugal
with others to follow
� Financial impact of damages are uncertain
� Croatia implementation through EU law approximation
� Setting a global precedence
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Financial impact of damages are uncertain
� French Government Report April 2010
– Spill of hypochlorite 1996 – costs (imposed by Regulator) €42,000 today with ELD
€140 - €400k – depending on approach (in-situ/ex-situ)
– Pesticides in warehouse fire 1997 – costs (imposed by Regulator) €10,000 with ELD
€4M
Result of Damage Event
Time
Value of
Environment?
EU ELD requires the full environmental value is restored
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15
ELD Summary
� The ELD creates a new liability
� Uses a “Polluter Pays” model
� Strict liability for hazardous operations (16) industries
� Biodiversity Damage a New risk for ALL companies
– Not linked to physical damage or pollution condition
� Coverage is available and inexpensive now in Europe
– Freedom of Services policy covers Biodiversity claims
– Local markets
– Underwriting process is easy compared to USA
– Provides Gap coverage, fills the pollution exclusion
– Carriers provide expertise in handling regulators and their claims
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
16
The Environmental Insurance Gap
General Liability/
Public Liability
Property
D&O
Environmental
Exposure GAP
‘The gap between traditional insurance cover
and the range of environmental liability …has become uncomfortably
wide and will get wider.’
IUA Report on Environmental Risks: insured or not?
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
17
Cover and Comparisons – GL and Environmental Liability
YES including pollution (Sudden and
Accidental and Gradual) and damage
where not caused by Pollution
No CoverEnvironmental Damage –
biodiversity – non-pollution trigger
YES including Gradual PollutionDepends on wordingTransport
YES including Gradual PollutionSudden and Accidental OnlyBusiness Interruption
YES including Gradual PollutionNo CoverDirectors and Officers
YES including Gradual PollutionSudden and Accidental OnlyLegal Defence
YES including Gradual PollutionNo CoverClean-up –on-site
YES including Gradual PollutionDepends on wording and only
sudden and accidental
Clean-up - off-site
YES including Gradual PollutionSudden and Accidental Only3rd Party Bodily injury and Property
Damage off-site
YES including Gradual PollutionSudden and Accidental Only3rd Party Bodily Injury and Property
Damage on-site
Pollution Legal LiabilityGeneral LiabilityCover and Trigger
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18
Operational Risks - Information and process
� Underwriting Information– Property location
– Activity
– Details of facilities—property surveys
– Environmental reports—management, etc.
– ISO 14001/EMAS
� Submission– Application form – required for warranties
– On-line option
� Response– By return – simple cases
– Within 5-working days
Underwriting requirements do not require new or additional environmental testing
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
19
Example - Claim and Loss – Iberia 2008
� Iberia
– Food processing plant
– Loss of product off-site not realised for
nearly 12 hours – fuel eventually entered
river – September 2008
– Significant product lost causing significant
damage
� Response
– Plant had environmental insurance
– Insurer had local environmental expert
on-site within 24-hours of notification
– Insurer’s representative with Aon and
the insured were able to meet with
regulators and the local authority to
discuss appropriate actions
– Clean-up/restoration complete May 2009
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
20
Claims—Experience, Trends and Lessons
� Number and severity is increasing
– As regulations take effect and enforcement increases
– Industrialization pushes in pristine habitats
– Growing and vocal environmental action groups
� Complex—cause, damage, coordination and response
� Require immediate response—expertise
� Liaison/communication
– Regulators
– Other local enforcement agencies
– Communities
– NGOs/pressure groups
� No insurance – no help!
� No insurance - no legal defense costs
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
21
Summary
� New Regulations and implementation of existing regulations
drive risk
� Environmental damage, biodiversity and climate change present
new and emerging risks
� Claims for pollution and environmental damage are increasing
and are increasingly complex
� Current casualty/property programs may be inadequate and
have significant gaps - be aware and beware of the exposure
� Environmental insurance represents a cost effective and
efficient access to contingent risk capital
� Market continues to develop solutions and streamline processes
Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential
22
You Can No Longer Ignore Environmental Risks
Plausible deniability
of environmental
risks is no longer a
viable option in
today’s world
Contact:Simon Johnson Ph.D.
Practice Leader EMEA
Aon Global Environmental Services Group
+ 44 207 216 3719/+ 44 7507 882 266
Simon.johnson@aon.co.uk
Silvia Pavalascu
Aon Romania Broker de Asigurare Reasigurare
+40 212125816/+40 372 195 337
Silvia_Pavalascu@int.aon.nl
Andreea Mihai
Aon Romania Broker de Asigurare Reasigurare
+40 212125816/+40 372 195 335
Andreea_Mihai@int.aon.nl
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