Environmental Insurance

Abstract

Business operates under environmental constraints. These involve commercial risks as well as operating costs. Green consumers, green voters and green government have raised the stakes. The risks are real and the sums are significant.

Risks derive from both legal and market processes and include: penalties, asset forfeits, cleanup costs, compensation claims, forced closure, and compulsory plant upgrades; and lost market share, lower share prices, higher finance costs, reduced credit and higher insurance premiums.

Liabilities and losses from poor environmental management can now reach several billion dollars: enough to bankrupt all but the largest companies. These risks do not only apply to operating corporations, but also to suppliers, customers, shareholders, arbitrageurs and financiers. Liabilities may also be applied to individual directors and staff. Environmental insurance is therefore an essential component of corporate risk management strategies.

To identify and quantify environmental risks, a company needs comprehensive environmental audits. To control those risks, a company needs good environmental management to minimise environmental damage for which it may be held liable; and insurance, to cover unforeseen environmental damage which may occur nevertheless. There is a rapidly growing environmental insurance industry in most western nations, but it will only underwrite some risks. For others, companies must insure themselves.

Because of legal uncertainties surrounding the application of comprehensive general liability (CGL) policies to environmental damage, specific environmental impairment liability (EIL) policies will generally provide more reliable cover. The wording of EIL policies can be quite restrictive, however, and requires careful scrutiny.

In the next few years, environmental insurance will almost certainly increase rapidly in importance for industry and commerce, insurers and lawyers, and the general community.