Author: Paula L. Green

The threat of corporate environmental liability incidents is increasing as new regulations—and new risks—take hold.

Doing one’s homework may be the best insurance for risk managers aiming to protect their corporate assets against an expanding array of environmental risks.

These hazards may be as perennial as cleaning up property contaminated by aging garbage dumps or as new as toxic seepage from the hydraulic fracturing used to extract natural gas.  Extreme weather conditions are only making risk managers’ jobs tougher as storms, floods and tsunamis can spread pollutants into wider geographic areas.

Rubini, ANRA: "Now environmental risk could affect any industry."

“It’s difficult to predict what an environmental risk will look like,” says Chris Smy, global environment practice leader at insurance broker Marsh. “Insurance is a treatment of the risk. But there has to be appropriate due diligence beforehand for clients to manage the risk properly.  Environmental risks have to be part of enterprise risk management programs. “Corporate reputations are at risk no matter where you operate,” Smy adds.

Gregory Schilz, managing director of Aon Risk Solutions’ environmental service group, adds: “Every corporation has a footprint on the earth. You’re going to have some exposure to environmental risk. It’s just a matter of degrees.” For example, he says, take banks with a large portfolio of office buildings in urban areas around the globe: “You need cover for the indoor air quality of your buildings,” says Schilz, referring to the hazard of mold or other air pollutants that can make people ill.

Regulation has always been a driving force behind the development of this relatively new line of commercial cover. The passage in 1980 of the so-called Superfund legislation—the Comprehensive Environmental Response, Compensation and Liability Act—by the US Congress sparked greater use of pollutant legal liability coverage in the United States. It was needed to fill the gap in commercial general liability policies.

Companies with business operations in Europe have been wrestling with the looming fallout of the EU Environmental Liability Directive, or ELD, for nearly a decade.  Since its passage by the European Parliament more than five years ago, the directive
has been winding its way through the legislative and regulatory structures of member countries. It expands companies’ potential liability by including incidents that cause, or threaten to cause, water pollution or land contamination and mandates broader compensation from the companies causing the damage.

And it has directors at global companies worried. “In the past, such concern was limited to the petrochemical and pharmaceutical industries. Now environmental risk is deemed to interest any industry,” says Paolo Rubini, risk manager at Telecom Italia in Italy, and president of Associazione Nazionale dei Risk Manager e Responsabili Assicurazioni Aziendali in Milan.

The directive holds polluting entities liable for damage not only to people and property but also to protected species and natural habitats, which are now considered a public resource. Rubini says the law “...implies a very expensive process in case of pollution or environmental damage, very high costs for the restoration expenses. These first-party damages must be added to the indemnities for third-party liability, “ he says.

“We should also add [to the risks] very extensive reputational damages as a consequence of the increased sensitivity of the media on the issue,” notes Rubini.


Newmarker, Zurich: "More and more countries are requiring local underwriting."

Regulation is not yet playing a driving force in corporate purchases of pollution liability in Asia. But in countries such as China and other emerging markets, risk officers are coping with regulators’ growing demands for the use of local paper to cover all risks—including pollution. That means the global insurance program cannot be used to cover cleanup costs and third-party liability claims stemming from an oil tank spill, for example, at the British firm’s Chinese factory. Unless of course, the insurer writing the global program is admitted in the country where the incident occurred.

“More and more countries are requiring local underwriters,” says Robert Newmarker, head of site-specific environmental insurance products at Zurich North America. “But environmental insurance is a tricky cover. There is not a lot of local paper out there.” He is referring to pollution legal liability cover, which shields the risks associated with operating, owning or leasing a facility or site. It provides compensation for third-party bodily injury and property damage, as well as cleanup and legal defense costs.

John Gibson, senior vice president and environmental underwriting manager for insurer Chubb Group, urges corporate risk officers to carry out a rigorous due diligence process before buying or leasing property in any locale, whether at home or on the other side of the planet. Unfortunately, the sophisticated technology that has helped manage claims and losses from natural catastrophes such as windstorms, earthquakes and floods has not helped insurers and their corporate clients manage these environmental risks. “Each risk is very different. It’s a laborious process [to evaluate and underwrite],” says Gibson. Insurance underwriters still need to wade through an enormous amount of documents to gauge a risk’s severity and price it properly, he adds.

You're going to have some exposure to environmental risk. It's just a matter of degrees."
                                                                                                   - Gregory Schilz,                               Aon Risk Solutions

Contractor’s pollution legal liability cover, another type of insurance mechanism for environmental risks, is generating more interest among environmental companies carrying out cleanup operations and general contractors engaged in routine construction activities.  In addition to accidents at a job site, contractors can face liability claims if a waste disposal process goes awry or chemicals fall off a truck on the way to the work site. “You have to educate yourself about these risks,” says Jeff Slivka, executive vice president and chief operating officer at New Day Underwriting Managers. The firm acts as an intermediary between brokers and their clients seeking appropriate environmental and construction cover.


One welcome trend in the market is the substantial capacity provided by more than 30 insurance carriers. That is up from the six to eight traditional carriers, such as AIG, Zurich, Chubb, Excel Insurance Services and Ace, that originally wrote the cover. 

Another positive development is the greater cooperation between traditional carriers and newcomers, including Ironshore; Beazley, which manages five Lloyd’s of London syndicates; and Navigators Group. All insurers in this space are working together more frequently to provide structured layers of coverage for insureds that can reach $250 million to $300 million per claim, says Schilz. In these instances, the primary insurer continues to handle any claims. As always for this unpredictable risk, pricing depends on each insured’s industry, the number of insured locations and the limits being purchased.

Surprisingly, recent environmental disasters, such as the April 2013 explosion of a fertilizer plant in West, Texas; tsunamis and floods in Asia; and the derailment and explosion of oil trains carrying crude oil in Canada and the United States, have not yet dented the market’s capacity. In late April, for example, a CSX train carrying crude oil derailed in Lynchburg, Virginia. “You would have thought capacity would shrink,” says Schilz of Aon.  “But it hasn’t registered a heartbeat.”