Is there a strategy behind the introduction of environmental insurance?
Environmental insurance has been created because most insurers exclude environmental liability from their policies. The exclusion is commonly phrased as the “Pollution Exclusion.” The Pollution Exclusion is commonly found under the heading “exclusions” or “what this policy does not cover.” To arrange for this exclusion to be reversed, insurers first need to know that the entity seeking cover understands what they need to do to demonstrate how their pollution liabilities or risks have been, or can be, abated.
Environmental insurance has been created so that we can provide the means to create a sustainable environment – built or otherwise.
There is great variance in international laws pertaining to damage versus reinstatement and restoration of the environment as a result of business practices. What is legal in one jurisdiction may not be legal in another. What is an acceptable level of environmental degradation in one country may not be permitted elsewhere. Furthermore, what we know to be safe today may well prove detrimental in the future.
Not all environmental damage is deliberate and willful, and not all conduct is deceitful. Environmental degradation may be unavoidable under certain accepted and lawful business practices. Many industries and businesses risk negative impacts on the surroundings: open-cut coal mining and gold mining create enormous scars on the earth and generate toxic waste; petrol stations require underground fuel storage tanks. Oil, gas and ethanol production, coal-fired power stations, sugar mills and many other industries risk environmental damage.
Deforestation, contamination and salination are common by-products of progress. Oceans have become sinks for waste from shipping, urban development and farming, and mining and chemical industries. Even desalination plants, which are considered vital in some countries, create increased salination due to ocean outfall affecting the ocean’s ability to act as a carbon sink (look up “absolute salinity”).
While certain activities may be legally acceptable today, environmental activists suggest that economic modelling may one day come to rationalise that the profits generated as a result of environmentally unsound practices, be in direct proportion to the expense related to environmental restoration. [Part of the carbon offset debate].
Many argue pollution ought to be avoided as a ‘fact’ rather than by measures ‘at law’, meaning it must be limited to a common standard not just local jurisdiction. In reality, even if a resource project is sustainable as a matter of law, it will arguably not be sustainable as a matter of fact because our current consumption levels of energy and water already exceed the sustainable yield thresholds for these resources.
Environmental consultants should be obliged to alert entities that are knowingly or deliberately contributing to environmental damage, as a matter of fact but not of law, that such damage may result in litigation. It would be advisable for those entities to get legal advice to reduce future liabilities associated with the potential environmental damage.
The present insurance climate
Many insurance companies have reacted to uncertainty over future liability regimes by limiting any claim resulting from breaches of pollution, environmental or climate change laws from their insurance policies.
Specifically, Directors and Officers (D&O) Liability policies exclude cover for the liability arising from the entity’s Pollution Law liabilities through the course of business, if cover ought to have been arranged under another policy of insurance. The exclusions are commonly referred to as “Absolute/Pollution Law Exclusions.”
Directors and Officers may not be aware that they are commonly not covered for the mistakes that their entity could contribute to or make, an exclusion that also means there may be no cover to restore the environment.
That is where environmental insurance comes in. Environmental insurance is designed to provide for the reinstatement of the environment where it may be required to respond to inherent yet unforseen liabilities that may befall stakeholders or their principal entities.
Without it, such businesses may be considered as conducting themselves with an element of reckless regard to the environment or “self insuring” which may result in their environmental liabilities exceeding the full extent of the liquidated asset value of the business.
Insurance brokers must go offshore to Lloyd’s to find an environmental insurance specialist to arrange covers as there is little resource locally available in Australia.
As being in business today carries with it the risk of a developing carbon footprint, environmental insurance covering any change in environmental, pollution or climate change law is a key measure in business sustainability. Who knows, the carbon tax regime may consider the collected tax is best invested in insurance companies prepared to cover environmental insurance.
If you are interested in accessing environmental insurance, contact your insurance broker today.