What you need to know about Environmental Impairment Liability insurance

Authored by AXA XL

Simon Harwood-Matthews and Philip Hogg are senior underwriters with AXA XL’s London-based Liability team specializing in environmental impairment liability (EIL) insurance. Fast Fast Forward recently talked with them about how this line-of-business supports property developers and why, without it, many of these sites would remain disused.

Who buys EIL insurance and why do they buy it?

Philip Hogg (PH): Many of our EIL clients are buying or investing in brownfield properties that had and maybe continue to have some environmental contamination. These property deals often stall because nobody is willing to assume the liabilities for pre-existing pollution at the sites. So, we facilitate these transactions with a policy, lasting 10 years, that covers the buyers and/or sellers for liabilities that could result from any pre-existing contamination on these sites, whether that happened two weeks or two hundred years ago. The policy covers first party liabilities, third-party liabilities, including consequential losses and diminution of third-party property values, as well as clean-up costs.

Simon Harwood-Matthews (SHM): We provide solutions to a wide range of clients. On one end of the spectrum, we have risk-adverse clients such as financial institutions and institutional investors seeking to lend against property transactions and secure long-term rental income. They may seek insurance to protect their interests directly, or require that the companies they lend to have the appropriate cover in place.

On the other end of the spectrum, we see property developers who regularly acquire, remediate and develop brownfield land. They are more familiar with the risks and liabilities associated with contaminated land; although they may be less risk averse, they also recognize how environmental insurance can add value to an asset.

Add value? How so?

SHM: These are 10-year policies that are assignable. Say, for instance, a developer spends three years remediating a former chemical works and builds a new office building or logistics centre on the site. When they’re ready to market the new property, they can highlight that the it will come with the benefit of a long-term insurance policy that will offset any potential liabilities related to residual historical contamination at the property. This can allay the concerns of risk-adverse purchasers who might otherwise think twice about buying or investing in a distribution depot on a former chemical works. And that benefit is built-in; clients only pay the premium once, at the beginning of the 10-year policy term.

PH: Also, people interested in buying properties like these almost always conduct an environmental assessment as part of their due diligence. And when a prospective purchaser inevitably learns about the prior contamination, they will try to negotiate down the purchase price because of concerns about potential environmental liabilities. But if the seller has an EIL policy indemnifying the prospective purchaser for the remaining years of the policy, that can neutralize the proposed price discount. And most of the time, the cost of the insurance will be significantly less than the price reduction the buyer is requesting.

Where is EIL insurance written?

PH: The EIL market developed initially in the US in the 1990s as the “polluter pays” principle came into effect via legislation and regulation. In fact, one of our predecessor firms, the XL Group, was one of the first companies to underwrite EIL insurance in the US. However, one challenge with the “polluter pays” approach involving old industrial sites is that frequently the companies responsible for the pollution are no longer in business. The prevalence of such properties where the polluter was no longer around to pay was an important catalyst for the development of EIL insurance in markets around the world; without it, many of these sites would remain disused.

Today, EIL is available in almost all countries. That said, the market is most highly developed in certain countries such as the US and Canada, as well as the UK, Germany, Australia, Spain and the Nordic countries. Our team here in London can provide EIL coverage in countries around the world excluding North America; our colleagues in the US look after those markets.

This type of EIL insurance is more prevalent in the UK compared to other European countries. That’s because there were a lot of industrial operations in the UK back when there were few if any restrictions on materials now recognized as being hazardous to people and the environment. Because of that history, the UK has implemented a strict statutory regime to apportion liability for historical pollution.

If a piece of land in the UK is found to be polluted, the regulators will first go after so-called Class A entities; they’re the ones directly responsible for the site’s contamination. But the reality is that these Class A entities often no longer exist because, for example, they polluted the site 60 years ago. In that case, the liability defaults to Class B entities who are the current owners or occupiers. That’s why acquiring a brownfield site typically also involves taking on the liabilities associated with historical pollution.

What happens if something new is discovered or something changes during the 10-year policy period?

SHM: Things change all the time. We’re regularly learning that certain chemicals are more dangerous than we realized. Or we’re discovering contaminants that no one thought were an issue but are now recognised as carcinogenic or posing other health issues.

Our EIL coverage applies not just to the conditions that apply when the policy is taken out but also to any new liabilities that arise during the policy period from either legal/regulatory changes or the detection of previously undiscovered contamination.

For instance, the UK Environment Agency not long ago upgraded the soil guideline value for mercury after concluding that the previous model was too conservative and mercury contamination is more harmful than we thought. In this scenario, if a developer acquired and developed a brownfield site that had previously been contaminated with mercury, they could find themselves needing to re-assess the current risk to human health; in the worst case, they would have to perform additional testing, monitoring and clean-up. This would be despite them having followed the best practice guidelines when the development first took place.

In this example, our EIL policy would cover the investigation, monitoring and clean-up costs, as well as any claims for third-party bodily injury or property damage.

Last question. What is it about this particular class of business that you find most interesting?

PH: That it’s so multi-disciplinary. First there is the technical element, i.e. geology, hydrogeology, chemistry and public health. Then there are the legal/regulatory dimensions, including environmental, land use, and contract laws and regulations. And that’s before we even get into the insurance knowledge needed to underwrite a particular site.

SHM: I agree with Philip. It’s also interesting to see these policies coming off cover at the end of 10 years. We are fortunate to have been writing this line of business for over 20 years now and it’s interesting to evaluate the claims picture as, with more and more data, it comes into clearer focus. That growing body of experience, in turn, is giving us greater insight into how we can improve our proposition so that it continues to offer value to our clients in the face of new requirements and changing market conditions.

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