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AXA XL, the new division of AXA Group, combines XL Group operations, AXA Corporate Solutions and AXA Art, to provide property, casualty and specialty risk insurance and risk management products and services for mid-sized companies through to multinationals, and reinsurance solutions to insurance companies globally. We partner with those who move the world forward.
Closing the gap: Why clients need to think about environmental coverage
By Daniel Alexander-Lothian, Environmental Underwriting Manager, UK & Ireland and Noelene McKenna, Senior Environmental Underwriter, UK & Ireland at AXA XL, a division of AXA
It has now been 15 years since the Environmental Liability Directive (ELD) came into force across the EU. The directive enforces the so-called “polluter-pays principle” and requires an operator to make good the environmental damage they have caused – whether that was deliberate or accidental. The ELD also requires operators to take measures to prevent damage to water, land and/or protected species if there is a threat of it occurring.
Prior to the introduction of the ELD, the UK had several fairly robust laws covering pollution, including the Environmental Protection Act 1990 and the Water Resources Act 1991. While the ELD certainly has teeth, it arguably made a bigger impact in certain other countries where environmental legislation had been lagging.
The ELD, however, did beef up the potential for regulatory action and broadened the scope of potential liabilities when UK clients suffer a pollution event.
While on the increase over the past 15 years since the ELD came into force, the take-up of specialist environmental liability insurance in the UK still remains fairly low, leaving many business owners / operators who have legitimate environmental exposures uninsured. There is, we believe, a compelling reason for this: companies simply are not aware of the potential liabilities they face.
Often, we find, clients believe they already have environmental coverage under their general liability policies. But there might be significant gaps in coverage, or differences in coverage, that could leave clients exposed if an event occurs.
For example, environmental impairment liability policies cover regulatory claims, first-party clean-up costs, gradual releases and emergency costs – all areas that a typical public liability policy will likely exclude.
Furthermore, an environmental impairment liability policy can cover investigation and monitoring costs and habitat restoration costs resulting from impacts to natural habitats, for instance.
Headline-grabbing fines only tell part of the story
There have been some headline-grabbing fines for large-scale pollution incidents. But overall, until recently, the level of fines imposed has remained fairly low.
This, therefore, might prompt mid-sized clients, who do not operate in obvious pollution-risk industries, to believe they can rely on existing liability coverages.
But while fines may appear low, or infrequent, in many cases they mask other costs that companies – understandably – might want to keep quiet about but, which can really cause a hit to the bottom-line.
We can use an example of a manufacturing company. Vandals come on to the company’s property and damage their aboveground fuel storage tank, which as well as causing onsite damage, results in pollution to a nearby river with kerosene. The company could be fined in the region of £20,000 by the Regulator, for causing a pollution incident. This is not an insignificant amount but is unlikely to cause a huge dent in profits. In addition to the fine that will appear in the headlines, there will be a clean-up operation that the Regulator will require the company to carry out at their expense, the cost of which can be very substantial. As an example, this could look as follows:
- Emergency/Containment costs £15,000
- Tankering costs - £28,500
- Flushing/clearing of drainage £3,000
- Site Investigation costs £8,000
- On-site clean up - £42,000
- Fish surveys - £20,000
- Environment Agency costs £2,000
- Restocking of river £62,000
In this claims scenario the clean-up costs would equate to £180,500 on top of the £20,000 fine.
Another area that companies need to consider is the potential for reputational damage that a pollution event brings with it. Often a company would decide to engage public relations support to help minimise the negative effects on its reputation, for example. This, of course, comes with a price tag attached, and clients need to be aware that this is another layer of potential cost.
Large corporations often will make so-called “enforcement undertakings”, whereby they pay a sum – often sizeable – to an environmental charity or non-profit organisation, as part of efforts to make-good a pollution event.
So, it isn’t just fines that can cost a company dear when a pollution event occurs.
And it isn’t just companies operating in industries perceived to be high-risk that need to think about this issue.
The pollution claims that make the headlines often involve water companies or those operating in the agricultural sector that might inadvertently pollute water courses. But clients also need to be aware that just because they don’t operate in those sectors doesn’t mean they won’t find themselves falling foul of environmental law.
For example, we have heard of a claim from a care home that suffered an escape of oil from an underground fuel transfer line resulting in damage both on and off-site. The incident meant that some residents had to be re-housed, as vapours from the leak posed a risk to their health.
As the incident was legally deemed to have been “gradual”, the care home’s liability policy did not cover the loss.
In another case, highlighted by the International Underwriting Association, a tree fell onto a village hall’s heating oil tank during a storm, resulting in several thousand litres of oil escaping into the ground – in a ground water protection zone. The total liability, according to the IUA, was a whopping half a million pounds.
Take another example of an exposure that would not typically be covered under general liability policies; frequently city-centre office blocks have heating oil tanks on their roofs or in their basements. We have heard of at least two instances where oil tanks have leaked, resulting in tenants having been moved out while significant remedial work was undertaken. An all-risks policy typically would exclude damage caused by pollution or contamination, while a public liability policy would not cover gradual or own-site clean-up.
AXA XL urge clients to think carefully about the potential gaps in their coverage. The risk of a pollution event may seem remote, but it could cost dear if it ever happens.
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