Environmental impairment liability comes of age

As environmental impairment liability (EIL) claims frequency and severity trends upwards, Peter Jarvis, head of environmental product, Europe, at AIG, considers whether environmental liability should continue to be viewed as an ‘emerging risk’.

Environmental damage claims are becoming more frequent, impacting a wider range of industries than ever before, while remediation costs are creeping steadily upwards. This is the conclusion of AIG’s latest claims intelligence report, which analyses more than 100 EIL claims notifications for 2016.

We observe several trends underlying this, including the product’s growing popularity, broader wordings and a greater understanding of the scope of EIL policies among regular buyers. There is clear evidence that the mindset within the market has changed, aided in part by high profile pollution events and the bedding in of new legislation.

Take the record £20m fine brought against Thames Water by the UK Environment Agency for numerous offences in 2013 and 2014 at sewage treatment works along the Thames*. The regulator took the utility company to task both for the “unprecedented” amount of untreated sewage discharged into the river system, as well as the long period of time the discharges occurred over.

While none of the notifications in 2016 were brought under the scope of the Environmental Liability Directive (ELD), it is clear that the framework’s influence and scope are having an impact on loss experience. The Thames Water fine also demonstrates the appetite of regulators to hold guilty parties to account for causing environmental damage, and to pass on the expense of returning ecosystems to their original state.

Forty-five percent of EIL claims notifications in 2016 arose from environmental damage or pollution caused by third-party activities. In one example from last year, the insured was held liable for clean-up costs after a subcontractor working on the construction of a highway accidentally drilled through high voltage cables, releasing 1,000 litres of oil.

In the instances where the original polluter cannot be traced or if they have gone out of business, it is not always the polluter who pays. Property owners can be held to account for damage that has occurred by tenants on their premises, even if they were not directly responsible.

What we observe is that environmental regulators have the appetite and ability to pursue liable parties for remediation costs. A combination of their own limited resources, and the introduction of broader, more stringent environmental legislation across Europe, has heightened regulators’ willingness to flex their muscles and ensure the polluter pays.

For AIG in 2016, this included instances of pure environmental (non-pollution) damage, which were responsible for 13% of notifications in 2016. It marks a significant development in the type of loss that falls under the scope of EIL coverage, reflecting the growing influence of the ELD even where the laws are not specifically being used to bring a claim. Over time we would expect this to develop as environmental inspectors become more comfortable with ELD reparation and compensation models, and as there are more test cases to set a precedent.

Whereas EIL claims were once largely associated with heavy industry, our claims statistics reflect the broad range of industry sectors that experience losses under our EIL policies. Claims notifications spanned 30 industrial major groups, including transportation, communications, electric, gas and sanitary services (55%); and finance, insurance and real estate. Insureds ranged from large multinational corporations through to small and medium-sized enterprises.

In one example, the insured was a mid-sized logistics company involved in the transportation of fuel. A spill of 36,400 litres of kerosene occurred from one of the company’s tankers during a theft attempt. This resulted in third-party property damage and pollution of a nearby river, requiring swift remediation.

There remains a wide spectrum of primary contaminants of concern behind the incidents AIG indemnifies, including a number of recalcitrant compounds, pollutants that can remain in the environment for a long period of time without breaking down. These are of particular concern where environmental damage occurs over a long period of time, as these are incidents that may not be detected until many years later and are not covered under general liability policies.

Time and again, we observe that a quick and proactive response goes a long way to mitigating the extent of environmental damage and total cleanup costs. Regulatory fines and penalties are also less likely to be an issue where the insured can demonstrate it had strong systems in place to prevent environmental incidents occurring and, post-loss, had taken prompt action to minimise damage and fulfil their statutory duties. The aftermath of the incident affords a critical opportunity for a business to consider the root cause and apply lessons learned across all areas of its operations, helping to prevent such incidents in future.

To find out more about AIG’s EIL Claims Intelligence Report visit: www.aig.co.uk/insights

* While fines and penalties are not typically encompassed within the scope of EIL insurance, insureds are less likely to suffer such losses due to the risk consultancy and advice they received from their insurers and brokers.

Back to top button