4.6. FACTSHEET-ENVIRONMENTAL LIABILITY INSURANCE

An insurance policy is a contract that transfers liability for the risk of the loss specified in the policy from the insured (policyholder) to the insurer on payment of a premium. It is important to be aware of the differences between insurance policies. Traditional general third party liability policies typically provide no, or limited, cover for environmental liabilities, beyond cover for bodily injuries and property damage from sudden and accidental pollution incidents. Endorsements that provide cover for remediation costs may be added but they tend to be much more limited than environmental insurance policies. This information sheet is primarily concerned with environmental insurance policies for operational risks including cover for liabilities that arise from the Environmental Liability Directive.

Insurance policies may provide cover for claims against an insured by third parties for risks such as bodily injury or property damage suffered by an insured resulting from an accident, for example, unforeseen environmental damage caused by the insured’s operations. They also provide cover for actions against an insured to remediate environmental damage for which the insured is responsible. Insurance policies provide cover for chance or accidental occurrences not certainties. They cannot, therefore, be used to provide first-party cover for foreseen environmental liabilities.

Environmental impairment liability insurance policies, like any other financial provisions, have a maximum level of indemnity. They may not, therefore, provide the entire amount of cover for a disastrous pollution incident. In addition, the policy will also have limitations and exclusions from cover. The regulator may therefore retain the option to approve the policy wording or provide a pro forma.

All such policies come with an excess level which is the responsibility of the policyholder to cover. Policy premiums generally reduce if a higher excess is chosen. The regulator should be careful to ensure that the level of excess is manageable for the size of the company purchasing the policy or require payment of the excess by the insurer (for subsequent re-imbursement from the insured).

ADVANTAGES

DISADVANTAGES

✓ Does not require collateral so may be more accessible to small and medium businesses and does not tie up capital.

✓Should not be affected by negative changes in the operator’s financial strength or its dissolution provided the policy provides that it is payable in the event of the operator’s insolvency or dissolution.

✓ Should incentivise the operator to reduce the risk of incurring environmental liabilities, in order to reduce premiums or avoid increases due to claims.

✓ Available from the start of the policy (unless otherwise specified).

X Must be renewed annually or at some other interval.

X Cover may be invalidated by non-disclosure or misrepresentation.

X Limits/sub-limits to indemnity, deductibles, conditions, exclusions, specific policy periods and triggers may restrict which environmental liabilities may be covered.

X Intentionally caused harms, criminal activity and intentional violations of statutes or regulations are usually excluded from insurance policies.

X Delays and legal expenses may be incurred if there is legal challenge when a claim is made against the policy.

Important considerations – Environmental liability insurance

Basic considerations	Whether the financial provision provides for the estimated environmental liability. Whether the financial provision is payable to the regulator on demand. Whether the financial provision provides protection against insolvency or dissolution of the operator and is protected from inflation. The insurer must be authorised to provide the insurance in the jurisdiction. The insurer’s financial strength. Ring-fencing for environmental liabilities. Policy excesses.
Documentation	The following documents are generally required: Legally binding financial provision document, details of the amount of cover and the cost profile, evidence of authorisation of the institution or parent to provide the financial provision and evidence of any supplementary cover required to cover gaps in the primary cover. Template documents can help ensure the key aspects are covered. Insurance policy or certificate of insurance, evidence of financial strength and payment of premium.
Documentation specification	Generally, the documents will specify the triggering event, that the regulator may make a demand in the case of a triggering event or insolvency or winding up, requirements in relation to reporting, notifications of cancellation/expiration and replacement and inflationary adjustment and specification that the regulator may require provision of alternative financial provision upon cancellation/expiration.
Reporting and monitoring	This will include triggering events, developments that affect ability to ensure provision, withdrawals or demands, performance of the institution/fund/asset, environmental compliance, the level of the liability against the value of the financial provision, notification of cancellation, expiration, intent to renew, renewal or non-renewal and expiry dates.
Enforcement	A demand will be made on the financial provision if the triggering event arises. The regulator may need to take enforcement action in the event of declining financial health, value or performance or where the required reporting is not provided. The regulator will need to make sure that the financial provision is maintained/renewed/acceptable or require a replacement provision.