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8/8/2019 1203085136 Environmental Liability Report
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The Environmental Liability DirectiveEnhancing Sustainable Insurance Solutions
February 2008
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Disclaimer and competition statement
The material, comments and information contained within this document are for information purposes only. The authors
offer no guarantee for the accuracy and completeness of its content. All liability for the integrity, confidentiality or timeliness
of this document or for any damages or loss resulting from the use of information herein is expressly excluded. Under no
circumstances shall the authors be liable either jointly or severally for any loss or damage arising in any way from or relating to
this document.
In preparing the material, the experts were aware of, and were committed to comply with all applicable competition laws
during the meetings held and during the meetings to come. All participants were aware of their obligations in this respect.
Minutes were taken at the meetings so that there is evidence that all restrictions under anti-trust law were duly observed.
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Table o contents
Executive Summary1. 4
Introduction2. 5
The requirement to prevent2.1 6
The defences2.2 7
Restoration of the environment2.3 7
Risk assessment, evaluation and decision on risk3. 8
T3.1 erms and elements of the risk assessment 9
Building the conceptual model3.2 9
Criteria to evaluate the risk 13.3 4
Making decisions on risk 13.4 7
Summary 23.5 1
Possible insurance options 24. 2
Existing insurance products - preventing gaps and overlaps 24.1 2
E4.2 nvironmental liability insurance new concepts 26
Summary 34.3 7
Claims management 35. 8
General remarks 35.1 8
Co-operation with the competent autho5.2 rity 38
Claims-handling under the insurance policy 35.3 9Questionnaire for steps to be taken 35.4 9
Future developments 45.5 0
Closing remarks 46. 1
Annexes 47. 2
Directive transposition update 47.1 2
Risk mapping exercise 47.2 8
Insurance options and underwriting checklist 47.3 9
Claims management questionnaire 57.4 2
Glossary 57.5 4
References 57.6 8
List of CEA-EEWG Members 57.7 9
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Executive Summary1.
Last year, the CEA Environmental Expert Working Group launched the White
Paper on Insurability of Environmental Damage. The purpose of the White Paper
was to stimulate and further deepen the discussions with the key stakeholdersIn the meantime the transposition deadline set in the ELD (i.e. April 30, 2007)
to implement this Directive into Member States law elapsed. The current status
(as per January 1, 2008) shows that less than half of the Member States have
enacted the Directive into their national law. Some States have adopted the
Directive with its full scope and some States did exceed its scope. The other
Member States are still in a transposition phase and, in most of them, draft
legislation is being discussed.
In Member States that have enacted legislation, a trend is beginning to emerge
for insurance solutions to come to the market. This is particularly the case where
transposition has followed the scope of the Directive very closely. There is a strong
indication that a clear legal framework and a close relationship to the Directive is
key to the development of sustainable insurance solutions.
The CEA paper on Enhancing sustainable insurance solutions is designed to
stimulate further the discussion with stakeholders on how to cope with the
challenges linked to the transposition of the Directive and highlights areas which
stakeholders might wish to consider in providing risk transfer solutions. This paper
covers issues in the risk selection and underwriting process which underwriters
may wish to consider when working on possible insurance solutions. Risk
selection and a sound risk assessment process are important steps in evaluating
and assessing a risk properly. A close co-operation between an operator who
wants to insure his liabilities under the Directive and the insurer is essential to
ensure that the insurer can assess the risk adequately.
Insurance should not be viewed as a substitute for risk management. Underwriting
a risk is not the only consideration. An effective claims management is also
essential to restore the environmental damage. Directive type losses require
new claims management skills, in particular for compensatory damage. Claims
managers may benefit in claims handling if underwriters make appropriate
inquiries to obtain relevant information during the risk assessment process.
The insurance industry also supports the development of an effective working
relationship with the competent authorities who are, according to the Directive,
responsible for either accepting proposed preventive or remedial actions by the
responsible operator or determining their own preventive or remedial measures.
Insurance companies have a significant interest to be part of that process, in
particular in cases of cross boarder damage.
This paper is also intended to support discussions with competent authorities
to develop methods to restore environmental damage in the most effective and
cost efficient way.
Trend is beginning to
emerge or insurance
solutions to come in the
market
Further discussions on
insurance-related issues are
needed
ELD-type losses require new
claims management skills
Building up efcient
working relationships with
the competent authorities
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Introduction2.
With the launch of the CEA White Paper on Insurability of Environmental Liability
in January 2007, the CEA Environmental Expert Working Group stimulated the
discussions with stakeholders. This paper is meant to further deepen the dialoguewith stakeholders, with a clear focus on enhancing sustainable insurance
solutions.
This paper deals with the most important issues the insurance industry has to
address when underwriting environmental risks, i.e.:
Risk assessment, evaluation and decision on risk
Possible insurance options
Claims management
Legal clarity and certainty is one of the prerequisites achieving that goal.
The section below highlights the greatest features of the Directive which have an
impact on the underwriting process.
At the time of writing this report, the transposition of the Environmental Liability
Directive 2004/35/EC (the Directive) across European Member States is ongoing
beyond the 30 April 2007 deadline. Therefore, currently many unknowns exist
concerning for example, the manner of transposition within Member States,
the designation of competent authorities, the outcome of transposition choices
concerning issues such as optional defences and apportionment of liability,
and the legal status of Non-Governmental Organisations (NGOs). An updated
table on the transposition status is attached in Annex 7.1.
The Directive specifically implements the polluter pays principle. Its fundamental
aim is to hold operators whose activities have caused environmental damage
financially liable for remedying the damage. It is expected that this will result in
an increased level of prevention and precaution. In addition, the Directive holds
those whose activities cause an imminent threat of environmental damage liable
to take preventive actions. Both requirements should result in a higher degree of
environmental protection throughout Europe.
For liability to be effective, polluters must be clearly identifiable. To this effect
the Directive provides for two distinct but complementary liability regimes. The
first one is a strict liability regime which applies to operators who professionally
conduct potentially hazardous activities, as defined in Annex III of the Directive.
The second liability regime applies to all other professional activities.
For insurers, the key features of the Directive are:
Administrative liability applies, i.e. it is not based on common law/civil
law. The party entitled to claim is not the injured or damaged third
party but the public administrator that has the authority to protect thedamaged natural resources and who holds an executive power to enforce its
decisions. Therefore, the position of the insured, hence that of the insurer, in
the claim is weaker than is the case with traditional liability insurance
This paper highlights key
insurance-related issues
Legal certainty remains a
key prerequisite
The Directive creates new
insurable interests and a
challenge or the insurance
industry
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The object of the claim is the remediation of damage to natural resources,
not to people, private property or economic interests. Where full repair
or replacement is not possible (i.e. primary restoration), the remediation of
the lost environmental service with identical, equivalent or similar natural
assets must be undertaken according to new procedures, rules and methodsthat still have to be finalised, i.e. complementary remediation measures
Natural resources can, at the same time, be res communes, third parties
or first-party properties
Liability includes actions to prevent imminent losses
The compensation of the claim is not monetary indemnity for the damage,
but remediation thereof. This is very likely to entail complex projectswith
long execution periods that require very demanding and specialised
monitoring activity.
Therefore, the Directive creates new insurable interests that the insurance industry
can respond to, via new products or by extending existing ones.
The Directive is not retrospective, therefore close up any damage caused before
30 April 2007, which is the expiry of the deadline for implementation of the
Directive will not be covered by its provisions.
Public authorities will play an important role under the regime. It will be their
duty to identify potential polluters and finance, or to undertake themselves the
necessary preventive or remedial measures that the Directive requires.
Public interest groups, such as NGOs, will be able to require public authorities toact and, if necessary, to challenge their decisions before the courts. Additionally,
the new Directive n 2003/4/EC on public access, which became binding on
14 February 2005, gives the European public better access to environmental
information.
The requirement to prevent2.1
One of the key provisions of the Directive is the requirement for operators to take
preventive action where there is an imminent threat of damage. Furthermore,
where the imminent threat is not dispelled despite preventive measures being
taken, the operator must inform the competent authority as soon as possible1.
Both of the liability regimes imposed by the Directive apply to the imminent
threat of damage occurring by reason of the relevant activities. Imminent threat
of damage means: a sufficient likelihood that environmental damage will occur
in the future2.
1 Article 5
2 Article 2(9)
It is expected that the
Directive will result in an
increased level o prevention
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The defences2.2
Third party and compliance with a compulsory order deences
As outlined in Article 8 (3) of the Directive, an operator will not be required to
bear the cost of preventive or remedial actions taken pursuant to the Directivewhere he can prove that the environmental damage or imminent threat of such
damage:
Was caused by a third party and occurred despite the fact that appropriate
safety measures were in place; or
Resulted from compliance with a compulsory order or instruction emanating
from a public authority other than an order or instruction consequent
upon an emission or incident caused by the operators own activities.
Therefore an operator will not be considered at fault or negligent for an emissionor event expressly authorised by, and fully in accordance with, the conditions of a
public authority order, as applied at the date of the emission or event.
Permit and state o the art deences
An exemption from liability under the Directive also applies where:
An emission or event expressly authorised by, and fully in accordance with,
the conditions of an authorisation given under applicable national laws
which implement the legislative measures specified in Annex III3
The operator can demonstrate that the activity was not considered likely
to cause environmental damage according to the state of scientific and
technical knowledge at the time of the event4
.
Restoration of the environment2.3
Remedial measures covered under the Directive mean any action or combination
of actions, including mitigating or interim measures to restore, rehabilitate, or
replace damaged natural resources and/or impaired services or to provide an
equivalent alternative to those resources or services as foreseen in Annex II5.
Annex II of the Directive sets out a common framework to be followed in order to
choose the most appropriate measures to ensure the remediation of environmentaldamage. These measures include:
Primary remediation: any remedial measure which returns the damaged
natural resources and/or impaired services to, or towards baseline
Complementary remediation: any remediation measure taken in relation
to natural resources and/or services to compensate for the fact that
primary remediation does not result in fully restoring the damaged natural
resources and/or services
Compensatory remediation: any action taken to compensate for interim
losses of natural resources and/or services that occur from the date ofdamage occurring until primary remediation has achieved its full effect.
3 Article 8 (4a)
4 Article 8 (4b)
5 Article 2 (11)
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Terms and elements of the risk assessment3.1
Risk is the core subject of insurance. In order to fully appreciate the characteristics
of an insurable risk, it is necessary first to understand the nature of risk.
Risk is often described as an event, a change in circumstances, a consequence, ora combination of these. Insurers have a particular way of viewing and analysing
risk. As insurers deal with most types of risk in society, from scientific to public
liabilities, it is more valuable for insurers to dissect the idea of risk and consider its
component parts. The main components of risk may be summarised as:
Uncertainty
Frequency/probability
Severity.
Risk assessment is the scientific process of addressing the informal questionshow risky is it? or what is the chance of a loss? Risk assessment may involve a
general or a very comprehensive investigation of all relevant sources, pathways
and receptors concerning an occupational activity.
The preliminary stage of the risk assessment may focus on the development
of an initial conceptual model of the occupational activity in order to evaluate
potential attractive and unacceptable risks. During this stage, the assessor
collects and reviews all available desk-based information and may also carry out
field assessments to assist with the preparation of a conceptual model. The main
stages of the risk assessment may be to:
Establish the context and objectives for the risk assessment (section 2)
Develop the initial conceptual model for the operator (sections 3 .2 and
section 3.2.2)
Evaluate/judge the risk (section 3.3)
Decide on any potential unacceptable risks and further appropriate action
(section 3.4).
The risk assessment is an iterative process that may require further investigation
and assessment to revise and update the conceptual model and/or to focus the
assessment as appropriate.
Building the conceptual model3.2
The main purpose of a conceptual model is to assist with an objective and
consistent assessment of the environmental risk associated with an activity and
to assist with the management of that risk.
Defnition3.2.1
A conceptual model may be described as a representation of a potential scenario
associated with an activity in diagrammatic or written form that shows the
possible relationships between source(s) of environmental damage, pathways
and receptors. An amended version of the definition of a conceptual model as
What is risk?
Understanding the various
stages o the risk assessment
that lead to the decision to
insure environmental risks
What is risk assessment?
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defined in BS8 10175 (2001) to encapsulate the requirements of the Directive
may be proposed as:
A textual and/or schematic hypothesis of the nature and sources of environmental
damage (such as contamination), potential migration pathways and potential
receptors, developed on the basis of information from the preliminary investigation
and refined during subsequent phases of investigation and which is an essential
part of the risk assessment process.
The model is initially derived from information obtained during the preliminary
desk-based investigation and is used to focus any subsequent investigation(s)
considered necessary. The results of additional field investigation can provide
data to further refine the conceptual model. Therefore, the conceptual model
is a working model to be refined and validated throughout all stages of the
investigation process. The elements as they pertain to the Directive are outlined
below.
Potential sources o environmental damage under the Directive
In summary, the potential sources of environmental damage covered in
the Directive apply to all occupational activities, whether private or public,
profit-making or non-profit making9
. A strict liability regime applies to those
activities listed in Annex III, whereas a fault-based liability regime applies to all
other activities.
Pathways and receptors
In terms of the Directive, a pathway may be described as a mechanism or route,
e.g. water or air, by which environmental damage to a receptor occurs.
Environmental damage as defined under the Directive means damage to receptors
identified as:
Protected species and natural habitats10
Waters covered by the Water Framework Directive11
Land contamination that risks harming human health12
.
8 BS: British Standard
9 In accordance with Article 2(7) the Directive applies to any activity carried out in the course of an
economic activity, a business or an undertaking, irrespectively of its private or public, profit or non-
profit character. Further Article 2(7) defines an operator as any natural or legal, private or public
person who operates or controls the occupational activity or, where this is provided for in national
legislation, to whom decisive economic power over the technical functioning of such an activity has
been delegated, including the holder of a permit or authorisation for such an activity or the person
registering or notifying such an activity.10 In Article 2 (1) and (3): The definition of protected species and natural habitats refers to species
and habitats listed in the Birds Directive 79/409/EEC, OJ 1979 L 103/1 and the Habitats Directive
92/43/ EEC, OJ 1992 L 206/7
11 Directive 2000/60/EC Articles 2(1) and (5)
12 Article 2(1)
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Elements o the investigation and development o the conceptual3.2.2
model
The circumstances and context of the risk assessment should determine the criteria
for evaluation, in order to achieve a practical and cost-effective assessment. A
focused investigation should be based upon a specifically designed environmental
brief that fits the underwriters basic model for hazard analysis. For example, BS
ISO 14015 (2001), Environmental Assessment of Sites and Organisations (EASO)
provides a detailed methodology to assist with the conduct of a systematic process
of identifying environmental aspects and environmental issues. Further, an example
of a basic model for hazard analysis is provided by Busenhart et al (2007)13.
As part of the conceptual source-pathway-receptor model development,
the elements that may be considered for review are outlined in section 3.3.1
and the development of the conceptual model may require a detailed desk-top
investigation concerning the occupational activity and may, following furtheranalysis and at the discretion of the underwriter, be revised and updated with
further investigation. The primary objective of this exercise is to compile and
review information from which possible source-pathway-receptor relationships
can be identified, as covered in the Directive. This would include an evaluation of
the potential for and/or imminent threat of adverse environmental impact from
current activities to water, land, protected species or natural habitats.
Some key benefits gained from the development of the conceptual model may
be to:
Evaluate the liability status of the activity, i.e. whether the operator may
be a responsible party under the Directive and if so whether they may be
subject to a strict or fault-based liability regime14
In the case of providers of goods or services, evaluate whether they may
be exposed to claims issued by a responsible operator using their right of
recovery according to the Directive
Document the ownership and operation history of the activity according
to the Directive
Evaluate details of any pre-existing conditions and associated environmental
liabilities, i.e. retrospective liabilities in respect of the Directive transposition
date.
Key actors to be considered
There are a number of factors that may influence the risk of an activity. The
overall risk may be a complex issue to assess, given that it may arise from a
wide range of possible sources. In summary, an assessment may also include
factors that may be largely inherent to the process. The main factors to be taken
into consideration can be described as technical and environmental, legal and
corporate and other factors relating to management and processes. These are
described in more detail below.
13 See Busenhart, J., Baumann, P., Schauer, C., Orth, M., and Wilke, B, Insuring environmental
damage in the European Union, Technical Publishing Casualty, Swiss Reinsurance Company. (Swiss
Re Publications 2007).
14 It is proposed by Swiss Re that the differentiation between strict and fault-based liability facilitates
an initial separation of risks. The main differentiating factor is that activities that are not cited in
Annex III have a lower risk potential, Busenhart et al, 2007, section 5.
There are some key benefts
in the development o a
conceptual model
Key actors gathered during
the risk assessment process
may also provide useul data
or claims management
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Technical and environmental actors
The location and geographical extent of the operation
The specific nature of the activity, i.e.:
Processes and associated resource requirements, for example
types of raw material, by-products and products used and stored,
material storage and handling, waste generation and handling,
transportation, etc.
Specific details of major raw materials, by-products and products
used, stored or transported, transport mechanisms, toxicity effects
and attributes as appropriate
Details of emissions and discharges to air, water and soil
Environmental information concerning the site(s) of the occupational
activity and the local setting, including for example:
Land use
Layout of site(s), including any natural (e.g. waterways) and
man-made features, (e.g. gas, electricity, water, sewage,
telecommunications, railways)
Site setting/local environment(s), including, for example, local and
regional hydrology, geology and hydrogeology, geochemistry and
ecological system
Details concerning current environmental damage mitigation and
prevention measures present on-site, e.g. storage and spill containment
features
Information concerning any pre-existing conditions and any associated
remediation or monitoring and compliance and current status, i.e. whether
completed or ongoing
Identification of potential pathways and receptors as defined in the
Directive, i.e:
Protected sites and habitats
Protected species
Water
Land damage that creates a significant risk of human health, taking
into consideration the current and future land use
Identification of human receptors
15
Nearby residences and recreational facilities
Nearby industrial, commercial and retail areas
Schools, hospitals, institutions and other places of public assembly
Evaluation of the preliminary source-pathway-receptor model scenario
based on the additional information review.
15 Annex II (2) requires that the remediation of land damage shall ensure that the remediated land
no longer poses any significant risk of adversely affecting human health, subject to risk assessment.
Further, Article 7(3) states that the competent authority, in making a decision regarding potential
remedial measures (i.e. including natural resources/services) shall take risks to human health into
account. On the basis of these requirements it is recommended, that potential human receptors be
included in the development of the conceptual model.
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Legal and corporate actors
Local regulatory environment within the area of operations
The identity and status of the operator(s) as defined in the Directive
The corporate and management structure of the operator. This may include
the quality of the management of the risk and the competence and
authority of the person/people in charge. The higher the seniority the risk
management function is within the organisation, the greater influence it
will have to instigate actions and obtain adequate funds
A chronology of the site/facility ownership and operation dates at least
since 30 April 2007 or the effective date of the transposition law
History of risk assessments, understanding of the environmental risks
associated with the activities and plans for actions to minimise the risks
identified
Implementation of a formal Environment Management System (EMS)
as described in EMAS or ISO 14000 and commitment at all levels to
implementing risk improvement measures
Work procedures and practices
Regular audits to monitor performance on a continuous basis and
subsequent corrective actions
The extent to which the EMS has been externally certified or verified to
recognised standards
Financial strength of the organisation. Companies need to be financially
sound to implement a proper risk management policy. Companies that are
struggling financially are unlikely to invest in new equipment or to maintain itproperly. Experience has shown that in difficult times risk management can
be one of the first things to be dispensed with, as it may be seen as not
adding to the profit of the organisation. The most attractive companies
for insurers will be those that are successful and will continue to invest in
safe and modern facilities and equipment
Employee training: all employees should be given proper training in
awareness of all aspects of environmental protection; best practice needs
to be shared and implemented throughout the organisation. It is also
important for refresher training to be given so that employees can keep
their knowledge up to dateWritten procedures, widely communicated in the organisation, including
general policy, standards, templates, etc.
Emergency plan that sets out in detail what to do in the event of an
emergency, who has responsibility for each action and stage and associated
training of employees to respond to emergencies
Licences, permits or other environmental regulatory authorisations
pertaining to the activity
Compliance with statutory requirements and regulations. If applicable
dates, time-frames and details concerning previous emissions, non-
compliance events, notifications or warnings from the regulatory authority,fines or court proceedings
Contingency plans
Adequate testing and maintenance of plant equipment to ensure it is in
good working order.
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Other actors
In addition to relevant items that may be covered above, particular operational
aspects that may require evaluation in respect of organisations that manufacture
or distribute products or provide services such as architects, engineers etc. may
include:
Whether any pending legal action exist and if so the nature of warranties/
representations being made
Compliance of labelling and design standards with relevant trade or
professional standards and legislative requirements
Product testing procedures and standards
Experience of the manufacturer or service provider and the level of
experience of key employees
Details of any subcontracting arrangements
Details of discontinued products, why they were discontinued and when
Identification of any producer responsibility issues that may arise.
Criteria to evaluate the risk3.3
This section is intended to provide an overview of risk evaluation tools taking
into consideration the requirements of the Directive. The aim is to help insurers
to evaluate whether unacceptable exposure risks exist and, if so, what further
investigation or action may be needed.
Risk context3.3.1
As we have seen, risk is usually expressed in terms of a combination of thefinancial consequences of an event (severity), and its likelihood (probability).
Environmental risks are no exception and the underwriter will have to try to
quantify both aspects for pricing and reinsurance considerations.
Probability o exposure3.3.2
There are three types of key factors to assess:
Geographical data which will lead to a threat potential for water and
soil. Items to be considered are the number of protected areas in the
vicinity and distance to them, density and proximity of water bodies and
classification of areas of concern
The transport/media
Type of contaminant (ecotoxicological effects) and storage volume.
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Examples of rating tables are shown below:
Soil rating table
Rating PotentialNumber oprotected
areas
Descriptions
Suraceshare oprotected
area
0
small noneUrban area without significant natural areas.Bad lands, deserts or similar areas withoutsignificant protected species.
0-1%
0.1 1-2%
0.2 belowaverage
very fewUrban areas with semi-natural areas. Meagerlandscapes with a small diversity of species.
2-3%
0.3 3-5%
0.4average few
Mixed man-made environment with averagediversity of species.
5-7%
0.5 7-10%
0.6 aboveaverage
someMixed man-made environment withsignificant nature areas included.
10-15%
0.7 15-20%
0.8 large many Natural landscapes, large forests or similar. 20-50%
0.9very large a lot
Primary natural environment with largebiodiversity.
50-75%
1 75-100%
Water rating table
Rating PotentialNumber oprotectedareas
Descriptions
Suraceshare oprotectedarea
0small none
No waterbody or river near the site. Nosignificant waterbodies in the vicinity.
0-1%
0.1 1-2%
0.2 belowaverage
very fewNo waterbody or river near the site. Someinsignificant waterbodies in the vicinity.
2-3%
0.3 3-5%
0.4average few
No waterbody or river near the site. Somesmaller waterbodies in the vicinity.
5-7%
0.5 7-10%
0.6aboveaverage
some
Several smaller water bodies nearby or onesignificant waterbody in the vicinity. Riverwith no protected area downstream passessite.
10-15%
0.7 15-20%
0.8 large manySeveral waterbodies nearby. River on sitewhich finally leads to smaller protected areasdownriver.
20-50%
0.9very large a lot
Many water bodies in the area and on site.Several and significant protected areasdownstream.
50-75%
1 75-100%
Severity o exposure3.3.3
The severity in terms of environmental damage is expressed generally in monetary
terms. For many lines of business, generally two factors are considered: the
expected average claim amount when the law of large numbers can be used
and the maximum foreseeable loss (MFL), or the most probable loss (MPL), for
underwriting considerations.
However, neither are possible because there is no claims data from which to
calculate an average cost or predict a MFL/MPL.
It was therefore decided to look for sources of data in the United States, becauseof the earlier involvement of US corporations in defining acceptable methods of
cost quantification. Information contained in a report was used as a source of
reference to assist in the preparation of this paper16.
16 Total cost assessment methodology (the TCA report) published in July 1999 by the American
Institute of Chemical Engineers Center for Waste Reduction Technologies.
Underwriters may wish to
consider tables o this nature
in assessing the risk and
determining the expected
loss to assist with the
calculation o premiums
Expected costs are still
difcult to assess due to the
paucity o claims data in this
feld
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Remedial costs
Remedial (site clean-up) costs could be associated with process-based releases,
transportation-based releases, and waste handling, storage and disposal practices
proposed for the new process or product. In general, remediation liability items
include site investigations, remediation of specific areas of soil contamination or
waste areas, and remediation of ground water.
A literature search was conducted by the authors of the TCA report to locate
remedial costs for sites with contaminated soil and groundwater. Average site
costs, expressed in 1997 US dollar figures, are listed in the table below and
should be adjusted for inflation.
US EPAs estimated average site costs
Site Estimated Average Site Cost ($)
Superfund - EPA lead 10,000,000
Superfund - PRP lead 8,500,000
RCRA 14,900,000
UST 125,000
DOD 3,400,000
The first two lines refer to Superfund sites when remedial work is done by the
Environmental Protection Agency (EPA) where there is no potentially responsible
Party (PRP) or when it is done by a PRP. Although these costs do not directly relate
to the Directive because they mostly relate to historical pollution, they are a good
indication of what to expect for remedial costs.
The third line referring to remedial costs under the Resource Conservation and
Recovery Act (RCRA) is more pertinent to the Directive. It is particularly interesting
to note that these costs are in the same order of magnitude or even larger than
standard remedial costs.
The other lines indicate costs related to underground storage tanks (UST) and to
Department of Defence/military sites (DOD).
Natural Resources Damage (NRD)
There is a variety of methods to assess economic damage. NRD restorationgenerally includes the cost of:
Damage assessment
Planning
Restoration (to the condition that would have existed had the release not
occurred)
The loss of the resource and/or the benefits or services derived from the
resource from the date of the damage until the full restoration of the
resource and/or the benefits or services and periodical monitoring of the
restoration progress.The TCA report mentioned above studied a sample of 79 NRD claims in 1996. As
many as 20 sites have NRD claims in excess of $20 million (1998 figures); another
40 sites have claims between $5 million and $50 million.
The US experience as a
starting point: the TCA
Report 1999
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Making decisions on risk3.4
This section focuses on the approach insurers may wish to take when evaluating
environmental liability and the influence of the Directive.
Current insurance approach in respect o environmental liability3.4.1
Although there are regional differences in Member States in the provision of
cover, environmental liability is effectively covered either by a GTPL policy or an
EIL policy. Generally GTPL cover is provided for sudden and accidental events
whereas under EIL policies cover usually extends to include events that are
gradual in nature.
Underwriters from the GTPL and EIL markets take a differing approach to risk
evaluation. GTPL underwriters tend to take an actuarial view based on past losses/
claims and hazard assessment associated with the applicants operations. On the
other hand, the majority of EIL underwriters have a background in environmentalconsultancy or engineering that imparts a level of professional judgement that
they use to assist in the determination of coverage and pricing.
The two approaches are described in more detail below:
A GTPL underwriter will review the frequency and severity of past sudden and
accidental events, extrapolating that experience in an effort to predict the scale
of future losses under the policy and the probability of those losses occurring,
from which a maximum possible loss can be established. This process cannot be
extended to include ELD type liabilities at the present time due to the absence
of data.
The EIL underwriting approach is based primarily on environmental risk
assessment (source/pathway/receptor) as described in section 3.1 and 3.2 above
rather than attempting to quantify the likely impact associated with a particular
event. With reference to section 3.3.1 above, it is true to say that a greater
emphasis is placed on assessing the probability of a particular event occurring,
than attempting to calculate the severity of an event. Underwriters will take the
information provided in environmental surveys supplied by the applicant and
review the risks associated with each case on its own merits. The risk assessment
approach means that there are certain key questions that underwriters will haveto satisfy themselves on, for example:
Sensitivity of surrounding area both human and ecological
Applicants risk management procedures
Types of materials used on site
Ground, groundwater and surface water conditions
Sites historical usage
Financial standing of the applicant
Details of any known claims or circumstances.
The insurance approach in
respect o environmental
liability is twoold
GTPL underwriters will ocus
on requency and severity o
past events
EIL underwriters will place
a greater emphasis on
assessing the probability o
a particular event
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Implications o the Directive or underwriting methodologies3.4.2
At present, it is commonly accepted by GTPL and EIL underwriters that the
techniques, approaches and therefore costs associated with the remediation of
environmental damage are well understood. Consequently, once the nature of
the incident is known, it is possible to have an idea of the likely scope and cost
of any potential primary remediation as well as the related costs associated with
evaluation of the size of the claim, i.e. environmental consultants/engineers
fees and legal costs.
Following the introduction of the Directive, there is a degree of uncertainty in
respect of the costs of compensation for:
The inability to remediate the damaged resource to baseline through
primary remediation alone, i.e. complementary remediation and/or
The loss to the environment between the point of damage and attaining
baseline conditions, i.e. interim losses associated with compensatory
remediation
The expenses required to evaluate the extent of compensation.
This uncertainty will affect the underwriting process.
General third party liability
As discussed above, GTPL underwriting is based at least partly on loss experience
to establish the MPL as well as the insureds risk management practices. The
creation of compensatory and complementary remediation in the Directive createsissues for the GTPL market in that the loss experience to be able to understand
the MPL is not readily available and therefore the approach of extrapolating from
past losses will not today produce accurate loss estimates.
A number of GTPL insurers are looking to use geographical information systems
(GIS) and hazard/industry risk assessments as a means of assisting with determining
pricing, terms and conditions but this approach, as described by Busenhart et al
(2007) and comprising the analysis below, has yet to be widely formalised:
Assessing of the applicants risk management practices
Deriving process hazardsIdentifying hazardous substances
Identifying sensitive receptors
Developing of incident scenarios
Quantying of the results of those scenarios.
Environmental impairment liability
There will be a greater need to understand the sensitivity of the site environs in
terms of the types of species and the uniqueness of the habitats present but this
represents an extension of existing practice as opposed to something completely
new. Information systems such as geographical information systems are commonly
used, and other criteria such as the applicants risk management and the ability
of ground and groundwater conditions beneath the site to act as pathways for
pollution are already assessed as part of the underwriting approach.
Some concepts in the
Directive create an
uncertainty that aects the
underwriting process
Use o new inormation
sources or risk assessment
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The approach of the competent authority should also be given consideration in
those Member States where the environmental regulatory environment is less
well established; for instance in some of the newer EU accession countries. A
number of EIL insurers are already issuing policies covering pollution-related
losses arising from the Directive in a number of European territories where theregulatory environment is well understood and the likely volume of ELD type
losses, at least in the short term, is such that those cases are unlikely to result
in any great change in regulatory behaviour/approach. However there are
exceptions to every rule and these will have to be understood when approaching
the provision of ELD coverage across Europe. In particular, Member States that
have gone beyond the scope of the Directive in transposition may well find they
have a higher number of losses.
Section 3.2.2 Key factors to be considered lists a range of technical and
legal criteria that underwriters are likely to require an understanding of whenconsidering the types of industry most likely to be affected by the Directive,
however the reader should not assume the list to be exhaustive, nor that the
whole list of requirements applies to every risk.
Case-specifc underwriting
What is apparent from the types of liabilities covered by the Directive is that each
risk will have to be considered on its own merit. While it would be easier if an
average premium existed for a certain type of exposure, in reality this is unlikely
to be the case as there are too many variables involved in the assessment
process, for example:
Type of habitat/species
Nature of operations
Nature of release: sudden, gradual, emissions to air, land or water
Potential pathways: groundwater, surface water, air
The nature of the incident that results in environmental damage: pollution
release, explosion, flood.
Risk assessment provides an appropriate framework to assess these types of risk.
However, over time it can be anticipated that there will be a fusion between
the methods adopted by the GTPL and EIL underwriters. If, as hoped, insurance
for liabilities introduced by the Directive becomes widely available, it will not be
practical for a detailed risk assessment to be undertaken in every case, especially
for less hazardous activities where the surrounding area is not particularly exposed.
It is likely that these less hazardous risks will be more suitable for underwriting
along the traditional GTPL methods while the larger and more complex cases will
be dealt with through the EIL approach.
Implications or deence costs
It is understood that both lines of insurance provide cover for costs incurredin the defence or evaluation of loss. While this may not influence how to
decide on a risk directly, it is likely to have a bearing on the terms, including the
premium, that an underwriter will apply to a risk. As losses associated with the
Future trends in case-specifc
underwriting
Evaluation o costs are anissue or underwriters
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more subjective elements of the Directive (compensatory remediation) are less
well understood, it follows that determination of that loss may take longer and
have greater expense associated with it. Again, we refer to section 3.3.3 and,
in spite of the experience of NRD type losses in the US, the absence of any clear
information as to the expense required to evaluate an ELD claim. This will be anissue that underwriters will have to consider as part of their overall view of a risk
when defining coverage and pricing.
There is always a danger that if costs threaten to spiral out of control then insurers
may offer to settle to avoid protracted litigation and evaluation. The absence of
any indication of legal and evaluation costs in section 3.3.3 suggest that this may
already be happening, which one imagines does not mirror the original intent of
the Directive.
3.3.3 Implications or operators
It should not be forgotten that while there is a degree of uncertainty among
insurers regarding how the Directive will work in practice, this sense of
uncertainty also exists for operators in terms of their liabilities and the extent
of coverage available for their liabilities. Ultimately, the insurance coverage
available for a specific risk and the risk management obligations that this may
impart to an operator are a matter for private discussion between insurer
and operator. However, it is suggested that where insurers identify elements
of coverage associated with the Directive that they know will require significant
improvements/investment on behalf of the operator, or indeed a specific sector,
then these are made known to operator/industry associations at the earliestopportunity to enable appropriate consideration.
Sel-assessment o liabilities
On the basis that this paper focuses on quantification of the liabilities under the
Directive from the perspective of insurers and policy-makers, it is easy to forget
that one of the most important elements of insurability is industrys assessment
of its own risk and the management protocols that result. A key question for
industry will be what to self-insure and what to seek insurance for? from which
stems the question what is the extent of my liability?.
In attempting to understand the question regarding the extent of liability,
frameworks for environmental due diligence exist that could be used to assess
environmental liability associated with sites or organisations. An example of
such a framework is the BS ISO 14015:2001 on Environmental Management
- Environmental Assessment of Sites and Organisations (EASO), which provides
guidance on identifying environmental issues and their business consequences.
While it should not be confused with regulatory compliance audits or impact
assessments (dealt with separately in the following section on risk management),
EASO covers the roles and responsibilities of the parties to the assessment and
the various stages of the assessment process: planning, information-gathering,validation, evaluation and reporting.
Guidance is already available
to operators to assess their
liability and better manage
their environmental risks
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Risk management
Once an operator has established the extent of their own liability, then the
question of what to self-insure/manage and what to seek insurance for?
becomes relevant and the operators risk management will be a central part of
this assessment. To echo the comments made in section 3.3.1 and 3.3.3, risk
management requires an understanding of both probability and severity through
the operators ability to prevent incidents occurring but also their ability to
contain releases from a given site, should an incident occur. In broad terms there
should be an indirect correlation between the level of risk management and the
potential to incur ELD - type losses - as the level of risk management improves,
the probability of an event occurring reduces, and vice versa.
Again, guidance is available on best practice and emergency response through
Seveso II and IPPC schemes, and the related SHAPE-RISK programme
coordinated by INERIS on behalf of the European Commission, which acts as
a knowledge-sharing forum in the health, safety and environment fields. We
would refer the reader to these and similar local guidance on the implementation
of these two Directives for further information.
Summary3.5
The preliminary stage of the risk assessment process may focus on the development
of an initial conceptual model of the occupational activity in order to evaluate
potentially attractive and unacceptable risks. The main purpose of a conceptual
model is to assist with an objective and consistent assessment of the environmentalrisk associated with a site or organisation and to assist with the management of
that risk. In particular, the development of the conceptual model should enable
identification of the major factors that may contribute to the environmental risk.
Consequently, the assessment should also assist with identifying and focusing on
improvements that may be implemented as part of the risk management process,
thereby reducing the probability of a loss from occurring17.
Once an understanding of the environmental risk is reached, a judgement as
to the severity and probability of the risk is necessary to enable the insurer to
evaluate the key indicators, MFL and MPL. The severity is generally expressed in
monetary terms and currently a paucity of data exists in respect of environmental
damage costs in Europe. Some limited information may be gained from the US
experience.
For the insurer, deciding on the risk requires an evaluation of, in the first
instance, whether to insure, what elements of the risk may be insured and
the best insurance approach that may be applied, i.e. GTPL or EIL approaches.
Uncertainties in respect of the Directive may also have to be factored into the
insurers evaluation.
Ultimately, a robust assessment of environmental liability by an applicant/operatorwill make the insurers decision on risk easier but this in itself does not make a
risk insurable. An operator wishing to insure against an ELD - type of liability
17 In the context of this document, a loss may be described as an environmental damage event as
defined in the Directive.
Building a conceptual model
as a frst step
Paucity o data still an issue
or underwriters as regards
environmental risks
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will need to reassure insurers comfort that the probability of an event occurring
is low enough for insurers to at least consider the risk. Such reassurance is
difficult to quantify specifically but as long as the applicant can demonstrate
good risk management practices on the basis of their environmental assessment
that not only reduces the probability of a loss occurring but mitigates theseverity of an event should something happen, then it is li ke ly that favourable
insurance terms will be the result. Insurance should not be viewed as a substitute
for risk management.
Possible insurance options4.
Existing insurance products - preventing gaps and overlaps4.1
Insurers may wish to include part or full coverage for the new liability withinthe scope of existing products. However, entities that decide to do so should be
aware of the possible dangers of mixing civil liability and administrative liability
within a single contract and other conflicts such as the policy triggers issues
described below when making strategic decisions that could include redefining
the boundaries of coverage.
The aim of this section is to help the insurance industry to identify the potential
overlaps, gaps or inconsistencies of coverage within the scope of the most
common products in the various European markets, to enable everyone to make
informed decisions.
The Directive does not follow the traditional lines of business definition of the
insurance markets. This is not surprising as it was not designed with insurance
in mind. All insurance solutions that potentially provide coverage for claims from
the competent authority and arising from environmental damage are under
focus, e.g. GTPL, professional indemnity, motor, aviation, marine and property
insurance.
General third party liability insurance4.1.1
In GTPL insurance, the object of the insurance is the insureds civil liability to
compensate third parties for injury or damage to property suffered by them, andin some cases for financial losses incurred by them, arising from the business
activity or property ownership of the insured party.
Strict liability on the operator or damage caused by third parties
According to the Directive18, where the damage has been caused by a third party
the operator of an Annex III activity is strictly liable but can recover the costs
from a third party. There will be circumstances where environmental damage
arises due to defects in premises or equipment operated by the insured but
where the defect is due to errors in manufacture or installation by a third party.
The rights of recovery for the liable operator against the manufacturer or installermay well be subject to different legal systems, e.g. civil liability or principles,
18 Article 8.3
Getting a goodunderstanding o the
state o the art o existing
insurance solutions in
various lines o business
A robust assessment is
needed and insurance
should not be viewed
as a substitute or risk
management
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resulting in the operator not being able to recover fully the loss for which he is
liable under the Directive.
Where the insured is the manufacturer or installer of a defective product or
equipment installed in third party premises he may be pursued by the operator
in civil law for the recovery of losses incurred as a result of the environmental
damage.
Liability or damages to insureds own land
Pollution to land owned or occupied by the insured or by a third party is one of
the main areas of environmental liability. This must be considered with the fact
that GTPL insurances usually exclude damage to property owned or controlled
by the insured. This is relevant both for deciding on the coverage for costs of
remediation and of prevention of imminent damage to soil.
Where the insured operates on third party land he can be pursued in civil law
by the owner (who is liable under the Directive) for the cost of remediating the
environmental damage but only to the extent that the civil liability system in the
country concerned applies.
Position o the insured in the claim procedure
Claims conditions in GTPL policies usually impose certain duties and respon-
sibilities on an insured, according to which he has to refrain from acting in a way
that could imply he is liable. In the Directive, there are some mandatory provisions
relating to behaving and informing the competent authority that conflict with
GTPL policies but need to be recognised within a policy that applies to ELD losses
to ensure that the insured is not in breach of his contractual obligations.
Multiplicity o claims rom the same event
As stated above, some events can generate environmental damage according to
the Directive and, at the same time, traditional damage to a third party property
and/or bodily injury, e.g. a fire within a privately owned forest affecting protected
species and material property.
Drafting proper provisions would help to:
Prevent dual insurance that could lead to double recovery
Control possible duplication of exposure in the policy(ies); even though the
two categories of claims are probably subject to different legal procedures
and come at different moments in time or even in different insurance
periods.
Proessional indemnity4.1.2
The Directive is applicable to all occupational activities. Therefore, professional
indemnity policies, which cover claims for negligence against professionals, might
be affected by the liability based on the Directive. The services rendered can
be distinguished between low exposed ELD activities like the work of lawyers,
accountants and those which pose a higher environmental damage risk like
architects, engineers or environmental consultants. Errors in planning, design or
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supervision as well as in consultancy might lead to environmental damage which
could result in recourse to claims by the operator. Therefore, special attention
should be paid to the existing pollution cover in the current policies offered.
Motor insurance4.1.3
Motor third party liability insurance (MTPL) may be exposed to claims arising from
the Directive, particularly with respect to the transport of dangerous goods or
waste specified in Annex III. MTPL policies usually cover only damage caused to a
third party on a civil law basis but not all MTPL policies are precise in that respect.
In most European markets there is still uncertainty on whether ELD exposures are
covered under MTPL policies or not. Countries where policy wordings contain a
clear provision that claims based on public law are not covered, e.g. Germany,
or where court decisions confirm such an interpretation of the wording, e.g. UK,
seems to be the exception.
It is unlikely that the transposition of the Directive will result in an increase in
claims frequency, i.e. accidents with dangerous goods have always happened,
but higher claim payments can be expected in this respect, due to the greater
emphasis on restoration in the Directive.
Policyholders most at risk are enterprises and freight forwarders dealing with the
transportation of dangerous goods or waste, as specified in Annex III. Insurers
may wish to study the impact of the Directive on MTPL insurance and decide to
what extent it may affect the coverage provided and insured persons informed
accordingly of the decision.
In any case, coverage designed for this purpose should be in line with GTPL/
EIL solutions, in order to avoid other gaps/overlaps. Special attention should be
paid to activities that may be borderline in terms of which policy is the most
appropriate, such as loading/unloading operations. Similar attention should be
paid to professional or commercial activities performed using non-industrial
vehicles and even private ones.
Aviation insurance4.1.4
Article 4 of the Directive does not mention any exception or limitation regarding
aviation activities. General liability and aviation departments could underwrite
the different activities of the aviation companies through separate policies and
should consider the impact and special nature of this liability regime when
assessing the risks attached to them and particularly try to identify potential
overlaps or accumulation of risks. It may also be necessary to draw these issues
to the attention of all transport operators, including air transport, and should be
encouraged to identify the extent of their potential liabilities, with those of the
owners of the transported goods.
Marine insurance4.1.5
Marine activities are not fully subject to the Directive according to Article 4,
paragraphs 2 and 3, but they can be subject, to the same obligations, including
prescriptions in Annex II, within the quantitative limits of their respective
conventions. GTPL and marine underwriters should make clear the boundaries of
some operations, such as loading and unloading, port manoeuvres and discharge
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of brown waters, in order to avoid duplications or overlaps and adequately take
into account the Directive with its specific peculiarities. In any case, offshore
facilities and activities are not excluded from the Directive.
Nuclear insurance4.1.6
It should be remembered that, even though nuclear insurance is not part of the
Directive, nuclear power plants also create non-nuclear risks, such as changes
in the quantity, quality or temperature of water, that are very likely to result in
potential exposures to environmental liability damage within the scope of the
Directive. Coverage designed with this purpose should be in line with GTPL/EIL
solutions in order to avoid other gaps/overlaps.
Property insurance4.1.7
The Directive includes liability for environmental damage caused by an operator to
his own soil. Property insurance policies can be found that include some coveragefor this kind of damage. They include first-party clean-up cost insurance and
decontamination cost clauses, which provide insurance cover for the remediation
measures necessary on a companys own site after an insured event has occurred,
e.g. a fire.
The covered scope of remediation is usually broader than the Directive requires,
i.e. restoring the original condition as opposed to the necessary measures to
eliminate any danger to human health.
Even so, in order to avoid potential gaps - and overlaps, e.g. GTPL or EIL - the
classes of events in which consequential soil pollution is covered should beclearly determined and compared against all potential risks that could result in
soil pollution.
It should also be understood that own soil pollution can be caused by a third
party. In order to evaluate the risks, possibilities of recovering costs and potential
coverage for these claims, the third party analysis should include surrounding
activities, as well as subcontractors, tenants and clients, e.g. service company
works on oil tank and causes pollution the soil. Fire authorities can also create
soil pollution as a result of the run-off of water used to extinguish a fire.
Prior to binding the insurance cover, the risk assessment should include a closeexamination of these and other risks when the clean-up of first-party premises
and property is included in the cover.
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Environmental liability insurance new concepts4.2
The section below outlines possible insurance options. Underwriters may wish
to consider the proposed underwriting checklist in Annex 7.3 highlighting core
elements to identify and assess environmental risks properly.
Stand-alone versus integration in GTPL products4.2.1
Insurance markets generally offer coverage for pollution events in two ways:
GTPL insurance: integrated pollution extension clause or separate section
EIL insurance: stand-alone environmental impairment liability policy.
Both approaches can be effective in binding a satisfactory level of coverage,
provided that product designers and underwriters are conscious of the implications
highlighted in the introductory remarks.
Stand-alone insurance concept
This approach allows insurance solutions to be developed without the need to
interfere with established pollution/environmental third party liability covers,
provided that the latter are properly drafted to avoid misunderstandings that
could lead to the possibility that both policies could be claimed against, in the
event of damage to natural resources.
The advantages of this approach are:
A clear distinction between civil and public law-based insurance cover,
which should increase transparency in insurance markets
It facilitates the development of insurance solutions that can be adapted
quickly and easily in response to emerging trends without hampering the
established client relationship
The development of innovative, specialist and flexible solutions is more
likely as stand-alone insurance products than other solutions.
However:
This approach could still result in the duplication of claims in cases where a
concurrence of environmental liability with traditional third party pollutionliability covers exists in the event of a loss. This would be the case if the
same pollution event triggers third party property damage and bodily
injuries as well as environmental damage
Insurers have to take into consideration their accumulation potential - see
section 4.2.9 - in order to put in place the proper controls or establish the
proper loss accumulation limitation clauses as appropriate
Increased administrative expenditure can be incurred by the insurer having
to issue and manage specific policies on a separate basis.
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In any case, in order to properly define their scope of coverage, stand-alone
policies should state clearly:
Whether they cover only claims based on public law (e.g. Directive) or also
third party pollution/ environmental impairment based on civil liability
Whether they cover only liability claims arising from pollution events or
from any kind of environmental impairment/damage. Most of the EIL
policies limit the coverage to pollution events at present.
Integration into existing insurance solutions via endorsement
The integration of the ELD coverage into an existing policy allows the insurer to
provide coverage for all potential claims for the same event(s) into one single
policy.
The advantages of this approach are:
Insurers will avoid potential accumulation problems if policies state clearly
the maximum amount of cover offered for all liabilities, including such
extensions of cover
The development costs of such a solution and the administrative expense
incurred by the insurance company in managing the policy are likely to be
much lower than in the case of stand-alone insurance products.
However the lack of statistical details, e.g. no separate premium allocation
to the ELD coverage, no separate tracking of ELD claims and no differentiation
of liability concepts may hamper proper risk assessment of claims developments.
In addition, insurers need to be alert to the dangers of mixing different policy
triggers within a single wording.
In any case, endorsements should deal clearly with the features of the Directive,
namely:
Public law regime only; not third party liability
It may not be possible to provide full cover for the liabilities under the
Directive
The obligations of the insured and the rights of the insurer in the claim
procedure will be different.
Also, it must be made clear whether the coverage is limited only to pollution
events or whether it includes all kinds of environmental impairment/damage.
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Insured events4.2.219
A basic principle of an insured event is that the time of occurrence or its discovery
must be unpredictable, and the occurrence itself must be independent of
the will of the insured. Therefore, the natural scope of insurance coverage is
usually limited to identified, unintended and unexpected incident(s). Where the
emissions do not meet these requirements, they can be regarded as occurring
within the normal operations of a given activity, for example:
Authorised emissions: liability of this kind should be attributed to the
competent authority and thus be irrelevant to the insurance
Emissions regularly above authorised limits: when this happens in the normal
course of operations, it represents a management style that shows a disregard
for responsible behaviour towards the environment. Insurance is not a
substitute for poor risk management and is not intended to apply in such
circumstances when the cause of pollution is unexpected and unintended, itmay be classified as accidental and suitable for insurance coverage.
An accidental event causing pollution/environmental impairment can be classified
in two categories:
Sudden and identifiable in time, like fire, explosion, collapse, flood, etc,
commonly known in the insurance market as sudden and accidental
Unintended and unexpected remaining unnoticed, including its
consequences, over a period of time, e.g. seepage, and gradually causing
pollution up to the moment that it or its consequences are finally
discovered, usually described as gradual although market practice in
Member States varies.
Sudden and accidental losses display some positive features that reduce some
of the difficulties of environmental risks:
The precise timing of the event causing the emission is almost always known,
so the timeline of events leading up to the loss, and thus the coverage
period, can be objectively determined
Putting in place measures to limit, control and repair the damage is easier
and the economical consequences are likely to be lower
The estimation of frequency of loss events, based on existing accident data
from traditional damage, is possible for sudden and accidental events.
Where an accidental event causes gradual emissions, the conditions for claims
management can become much more complicated if it is not addressed in the
policy wording that:
At the moment that pollution is discovered, the damage caused is likely to
be much more severe
It may be difficult to allocate the emissions to a definite point in time
and this can lead to disputes over coverage and which insurance contract
should bear the claim.
19 Sudden and accidental, gradual emissions, normal operations.
Apart rom identiying
gaps and overlaps in
existing insurance products,
underwriters might review
key elements o the
underwriting process
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In any case, when designing and underwriting pollution/environmental
impairment insurance it is important to bear in mind the following:
Sudden and accidental is not a legal term
Both terms sudden and accidental should be properly defined in the
policy in order to avoid allegations of unclear wording
As an alternative, to add clarity to the sudden and accidental policy
wording, the use of a time-based clause could be considered, i.e. to limit
the covered emission to a defined period (e.g. seven days) or a named
perils clause (i.e. coverage limited to named events like fire, explosion)
The required loss experience is unlikely to be available in sufficient detail,
which means that adequate risk pricing levels will be very difficult to set
or, at least, subject to considerable uncertainty
In accordance with the general principles of insurance, the coverage for
gradual emission is unlikely to include any liability as a result of authorisedemissions and is likely to be limited to unintended and unexpected
emissions.
Covered costs4.2.3 20
It is anticipated that policies generally will state which prevention and remediation
costs are covered and those that are not. It may also deal separately with
investigation and defence costs.
Costs or preventive measures
These are any measures taken in response to an imminent threat of environmental
damage, with a view to preventing or minimising that damage, includingemergency measures. According to the Directive, the operator is obliged,
without delay, to take the necessary preventive measures even without any prior
notification to the insurer.
The underwriter may wish
To consider whether or not he intends to cover these costs in these
circumstances
To apply a requirement for simultaneous notification to the insurer
To distinguish measures that the insured should always take, as part of
his normal activity, to prevent accidents by means of using best available
techniques, performing proper maintenance and avoiding improper
procedures.
Remediation o land damage
Since land in most Member States belongs to private individuals and enterprises,
or is in public ownership, under the existing civil law liability regime these parties
are normally able to demand reimbursement of the cost of cleaning up their own
land and consequential losses in the event of contamination by a third party.
In most EU countries, GTPL or stand-alone EIL policies already provide insurance
coverage for damage to land owned by third parties, and individual insurers
20 Preventive, primary, complementary, compensatory remediation measures.
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and reinsurers have access to statistics and expertise in claims settlement for
this category of risk.
The same applies to measures for the prevention of impending insured damage
to persons and property when an accident has occurred (prevention21 and/or
mitigation22 costs). In practice it is anticipated that remediation measures will be
similar.
Primary remediation
This instrument is already known to public authorities as a result of existing
environmental legislation. Despite this, primary remediation of species and
habitats can be very controversial and lead to much uncertainty in terms of cost
efficiency. Exhaustive remediation programmes can be extremely expensive with
marginal environmental improvement. Therefore, in order to achieve a proper
risk assessment, premium calculation and conscious underwriting, technicalcriteria should be developed to decide on the methods to be implemented and
the objectives to be achieved in case of environmental damage.
One of the alternatives to be fully or partially considered for primary remediation
is natural recovery, which can entail important cost savings in recovery cost, but
lead to longer recovery period with increasing compensatory restoration bill, as
explained below.
Complementary remediation
This is basically a new instrument for the remediation of environmental damage
but it is already known in respect of infrastructure projects (moving of existing
habitats). There are major issues still to be resolved and legal grey areas which
could well result in disputes with the authorities in the event of a loss, like those
regarding:
The establishment of a relevant threshold
The assessment of the damage or the appropriate remediation measures
The determination of the extent of the loss, which also depends on how
well the baseline condition (the state of the natural resources before the
loss event occurred) was documented, or
The evaluation of the various loss patterns in monetary terms.
21 Expenses for measures prior to occurrence of an insured event to avert or mitigate an otherwise
unavoidable instance of insured damage.
22 Expenses for measures after the occurrence of an insured event undertaken by the insured or
those acting on their behalf in order to avert or minimise insured losses (salvage expenses or loss
mitigation expenses).
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Compensatory remediation
These measures are not connected with the cost of restoring the baseline
condition or the original environmental benefit, but with compensation of the
loss of availability of the environmental services for the period of time needed to
recover the baseline conditions. There are no guidelines for calculating the levels
of this kind of harm so far. Insurability will be enhanced through the creation of
clear and consistent guidelines that can be applied to all Member States and all
cases of environmental damage.
As a result, the insurance industry finds a wide field of uncertainty when trying
to estimate reliably the amount of compensatory remediation due, and the
costs thereof, as a basis for premium calculation. The insurance industry awaits
the completion of the REMEDE project; the delivery of the tool box hopefully
will go a long way towards removing much of the uncertainty. However in the
meantime, the uncertainty should be considered when deciding upon binding
coverage for this category of restoration by using the various underwriting tools
at the underwriters disposal.
Temporal scope o cover4.2.4 23
As latent claims are a widespread issue in environmental liability, it is extremely
important to structure the cover trigger so that a particular loss can always
be clearly attributed to a specific point in time and insurance period. The use
of present-event triggers such as first discovery/manifestation or claims
made may be appropriate. A causation trigger, sometimes referred to as acts
committed, which relates to a point or several points in time in the past whenthe damage had its origin (i.e. manifestation of environmental damage today,
caused by an emission in the past) is not appropriate. The example illustrates that
there may be years between the action or omission which caused the damage
and its manifestation. With such a causation trigger in place it might happen
that policies that have been claims-free for many years can become very claims
productive from historical activities and consequently underlying assumptions
made in assessing the risk and in calculating the expected loss turned out to be
fundamentally wrong.
Occurrence-based triggers could be appropriate to cover sudden and accidentalenvironmental damage if a precise definition of occurrence is used in order to
ensure that the coverage trigger date is about co-incident with the first discovery
date of the loss.
Although the Directive is applicable for events that occurred after 30 April 2007
only, it is possible that some Member States might expand the liability regime for
earlier events. Therefore it is important to understand the extent of the exposure
and it may be advisable for the policy only to cover claims arising from an event
that occurred on or after 30 April 2007, regardless of the trigger used in the
policy.
If retroactive coverage is provided, it is suggested that the retroactive date is
fixed, taking in account the inception date of transposition law, in order to avoid
23 Causation, occurrence, first discovery/manifestation, claims made.
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covering events that happened before 30 April 2007 to be in accordance with
the Directive.
Where the first discovery/manifestation or claims-made principles are applied,
insurers need to decide to what degree cover will continue to be provided after
the expiry of the policy for insured losses which occurred during the policy period
but were not known, had not manifested themselves or for which claims were
not made by the expiry date (extended reporting period).
Geographical scope4.2.5
Many operators have activities in more than one Member State or even further
afield and may wish to arrange their insurance on an international basis rather
than have a separate policy in each country. In addition, environmental damage
can cross international borders and therefore be dealt with wide a variety of legal
regimes.
Cross-border damage
The Directive transposition law applies to the Member State territory only. However,
potentially liable operators are not only responsible for damage occurring in their
home country. Environmental damage might also occur on a cross-border basis
involving neighbouring countries or an insureds activities could result in liability
involving many European countries, e.g. trans-boundary pollution of watercourses
or services provided outside the home country. Underwriters may wish to consider
this fact by determining the geographical scope of an insurance solution.
According to the most recent status update on Directive transposition (see
Annex 7.1), most Member States have not yet enacted the Directive into
national law. Therefore there is a lack of legal certainty for all key stakeholders,
i.e. will Member States adopt the scope of the Directive or exceed it (e.g. non
applicability of the permit defence, introduction of proportionate liability). This
fact should be evaluated in the risk assessment and pricing process. An extension
of the geographical scope beyond the home territory has results in an exposure
to foreign laws and court practices in a field where there may be a lack of legal
clarity or certainty.
Pan-European policy/International programmes
When designing Pan-European policy/international programmes, the fact that
many of the Member States have not yet enacted the Directive has to be
taken into consideration, mainly when the Directive coverage in the master
policy includes difference in limits/conditions coverage.
Below are some questions regarding the design of products that need to be
answered when drafting this kind of programme:
How is the geographical scope of cover defined in the master
agreement?Does the insurance solution cover the liability of the Directive only or does
the scope of cover goes beyond?
What is the scope of coverage in local policies covering particular country
specific Directive transposition legislation?
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This is of particular relevance if an insurance solution has a reversed difference
in conditions24 provision in place to avoid going further than the intended scope
of the international programme. One should avoid importing country-specific
coverage into the pan european policy/international programme.
Losses arising rom deective products4.2.6
Insurers underwriting GTPL policies covering liability for defective products may
wish to consider the potential risk to the manufacturer in case is where the
insured is expose