Burning issues for environmental claims

There is a common view that environmental exposures are only really an issue for very large companies in certain sectors, notably oil and gas. But this stereotype does not stand up in the light of European environmental impairment liability claims that we are now seeing.

Now in its second year, AIG’s European Environmental Impairment Liability (EIL) Claims Intelligence report reflects some important environmental loss themes, with implications for companies of all sizes and from all industry sectors. It is certainly not just where the cover has been mandated. It is much more universal than that.

As the report notes, the EIL claims data captured in 2017 demonstrates the cover is being utilised by a broadening spectrum of insureds as the product grows in maturity and awareness of environmental liability increases. The claims insights are testament to the fact that the insurance is responding to a wide range of environmental incidents resulting from activities as diverse as waste management, transport and conveyance, and emergency fire response.

Emerging exposures
The EIL claims statistics in 2017 show that environmental impact as a result of fire is an emerging exposure for many clients. Fire events impacting property, facilities and habitats emerged as one of the leading losses in 2017 with 15% of all loss incidents documented as fire emergency response, compared with 7% in 2016. And the report notes that pollution arising from firefighting run-off is an often overlooked consequence of facility fires.

Clients sometimes say they have all their environmental exposures managed and they do not have any concerns. But the best risk management practices unfortunately do not always prevent events such as a fire taking place. Highlighting the impact of fire events can help those who do not think they have an environmental exposure understand where such an exposure may exist.

The report reveals that transportation, communications, electric, gas and sanitary services comprise the industry sector experiencing the largest number of EIL claims notifications. But claims in the construction sector showed an almost doubling of loss incidents last year. The claims information suggests the biggest issue for construction companies at present is inadequate waste management processes. There has been a rise in losses relating to improper construction and demolition waste management practices.

Multinational issues
One of the issues that we see with multinationals is that information about the environmental policy is sometimes not disseminated properly through the group, in particular down to the local level. It may have been bought at headquarters, perhaps by the chief financial officer, for corporate protection, but that information has not been passed down to local management at local operations in other territories.

Unlike, for example, general liability, environmental insurance is not something that local operations will automatically assume has been purchased by headquarters. An important area that we stress to clients is to ensure that the data is pushed down from headquarters to the local level, ensuring that they know what policies are in place and what help and support they can provide. It is about communication and, ideally, having a dedicated person involved in risk management.

Ultimately, these policies can only respond if people know that they are there and use them to their full potential. Most environmental policies have an element of mitigation or emergency costs, with the aim of encouraging immediate works to take place that can mitigate the loss, or prevent it from getting worse. If not communicated well, this element can be missed. We have seen incidents where policies could have responded if people had only known about them.

Local policies are particularly important for environmental coverage in multinational insurance programmes. Clearly, local wordings are the compliant option from the legal point of view and, in terms of claims handling, having the wording in the local language is important.

A local policy may have more coverage than the master programme, because of the local requirements. There are a lot of local environmental laws and regulations around the world, including countries that have elements of mandatory insurance or financial guarantees around environmental, which will need to be taken into account. Coverage may be very different if you buy a multinational policy with local underlying policies, compared to just covering all risks on a single policy. The latter might mean that you would be missing elements of cover that would be the market standard and possibly required.

What the report shows is just how the environmental insurance sector has changed and grown in recent years. As an industry, we have made it more accessible, market capacity has grown and conditions for potential clients are more favourable, including reduced deductible levels compared to a few years ago. So, claims that may not have attached before are starting to attach, across a wider range of industries and geographies than ever.

Contributed by Peter Jarvis, head of international environmental, AIG