A sustainable strategy

A sustainable strategy | Insurance Business

A sustainable strategy

Awareness of environmental issues is growing fast. Businesses that play nicely with the world around them can no longer expect to receive a pat on the back; the public increasingly expects companies to do the right thing. Added to this is increased pres-sure from active regulators to make polluters pay. This means companies need to reas-sess their approach to environmental risk management, says Keith Gardner, environ-mental team leader, Pacific, at AIG.

“Organisations should stress-test their insurance coverage to ensure it responds as expected in the event of a loss,” he says. “Insureds think it will never happen to them, but quite clearly it can and does. We’re seeing a real gap in cover for insureds who may not believe that an environmental impairment liability  [EIL]  policy  is  necessary,  so  they  simply  rely  on  general  liability  cover,  which  often leaves them exposed.”This  gap  needs  to  be  filled  because  envi-ronmental  incidents  are  affecting  a  more  diverse  range  of  business  than  ever  before.  When  EIL  policies  were  fi  rst  conceived  and  issued,  Gardner  says,  the  primary  focus  was  on  heavy  manufacturing  industries,  which  were perceived to be more likely to face envi-ronmental  incidents.  However,  over  the  past  year, AIG has seen incidents and losses from restaurants,  universities,  service  stations,  environmental   consultants,   construction   contractors  and  transportation  companies,  as well as from fi re events at warehouses and depots,  plus  the  mismanagement  of  waste  across various industries.

“Claims  statistics  demonstrate  that  an  environmental incident can happen in almost any  sector,”  Gardner  says.  “It  is  therefore  critical  that  brokers  review  their  clients’  exposures  and  discuss  ways  that  the  client  can transfer their risk.”While  asbestos  has  traditionally  been  the  primary  cause  of  EIL  concern  in  Australia,  claims  trends  demonstrate  that  losses  are  also  coming from fi  re, importation of contaminated soils  and  leakage  of  hydrocarbons,  which  is  also contaminating soil and groundwater. Fire   continues   to   be   an   interesting   topic  for  environmental  risks,  says  Jason  Thoroughgood,  AIG’s  head  of  casualty  for  Australia. “If your insured is concerned about their  fire  risk,  they  should  also  be  concerned  about their environmental risk.”He  says  the  claims  trends  highlight  the  need for all contractors to have an EIL policy in place, as environmental damage can come about from any number of events.

“We  have  seen  a  number  of  incidents  arising  from  the  importation  of  contaminated  soil,  which  is  used  for  different  reasons  across  the  construction  industry,”  Thoroughgood  says.  “If  the  insured  does  not  have  proper  virgin  excavated  natural  mate-rial/excavated natural material procedures in place  and  something  goes  wrong,  the  cost  of  remediation can be signifi cant and damaging for a client’s reputation.”

“If your insured is concerned about their fire risk, they should also be concerned about their environmental risk” - Jason Thoroughgood, AIG

When costs spill over

So  why  is  general  liability  cover  not  fi  t  for  purpose  for  environmental  incidents?  First,  Thoroughgood  says,  environmental  insur-ance  is  a  specialist  line,  designed  to  handle  the complexity of environmental incidents.

“They are often complex, time-consuming and  include  dialogue  with  various  regula-tors,”  he  says.  “Second,  government  bodies  like  the  Environmental  Protection  Agency  [EPA]  are  becoming  increasingly  active  with  broadened  powers.  Their  enforcement  on  insureds  to  clean  up  or  remediate  a  site  is  becoming  a  lot  more  stringent,  meaning  claims costs are increasing.”

And  there’s  a  lot  at  stake  if  a  business  gets  it  wrong.  Thoroughgood  cites  the  case  of  a  fi  re  event  where  runo    from  the  water  used  to  fight  a  fire  at  a  manufacturing  site  collected  chemicals  then  spread  them  on-  and o -site. The client was issued a statutory notice  of  clean-up  by  the  EPA;  the  cost  to  comply was approximately $10m.

“Under a general liability policy, a statutory notice  of  clean-up  issued  by  the  EPA  is  not  a  trigger,  because  it  is  not  a  claim  for  third-party damages,” Thoroughgood explains. “The insured had to cover this loss. If the client had held an environmental policy, they would have had  appropriate  coverage  and  would  have  avoided having to fund the loss.”

So  how  can  brokers  ensure  appropriate  coverage  for  their  clients?  While  any  good  EIL  insurer  should  work  with  the  broker  to  mitigate the client’s risks ahead of fi nalising a policy, incidents can and will happen. In that event,  Thoroughgood  says,  the  policy  should  promise  to  do  more  than  just  pay  the  claim;  it should also ensure an e ective response to the  pollution  incident  itself  that  minimises  environmental harm.

“The  client  and  broker  should  have  24/7  access to their insurer in order to seek assitance  from  qualified  experts  to  respond  e ectively,” he says. “The insurer should then be  able  to  assist  by  coordinating  clean-up  experts and advising the client on next steps to ensure the safety of everyone involved.”

This  kind  of  service  from  an  insurer  will  ensure  that  even  if  the  client  does  not  have  specialist  environmental  capabilities,  they  can  access  expertise  to  successfully  manage  the  event.  And  given  the  high  level  of  public consciousness around environmental damage, reputational  risk  is  a  huge  concern  with  any  claim, Gardner adds.

“By outlining how traditional policies would react versus how an environmental policy would react, the broker ensures the client is equipped to make their own fully informed decision on environmental risk” - Keith Gardner, AIG

“Providing  clients  with  access  to  profes-sional  PR  consultants  at  no  extra  cost  with  any EIL policy is a benefi t that brokers should seek when comparing products,” he says.

The broker’s role

Many clients might not be aware of the envi-ronmental  risks  they  face,  much  less  the  extent  to  which  those  risks  are  insurable.  Because  EIL  is  a  lesser-known  product,  and  the  exposures  are  complex  and  some-times  di    cult  to  explain,  education  for  both  brokers  and  clients  is  paramount.  A  broker  with  specialist  knowledge  can  consider  the  client’s environmental exposure, whether the coverage  they  already  have  (such  as  general  liability and industrial special risk policies) is adequate and, if not, whether environmental insurance is a solution.

“By  outlining  how  traditional  policies  would  react  versus  an  environmental  policy,  the broker ensures that the client is equipped to make their own fully informed decision on environmental risk,” Gardner says.

Brokers  can  also  help  clients  pick  their  way through the ever more bewildering maze of regulation and legislation governing envi-ronmental liability, which can vary from one state or territory to another.

“Some  local  state  environmental  regu-lators  also  have  the  power  to  issue  envi-ronmental   protection   orders   to   parties   connected  with  the  holder  of  an  environ-mental authority – so-called ‘related persons’ – meaning that related corporate bodies and fi  nanciers  may  also  become  liable  for  the  environmental  authority  holders’  environ-mental obligations,” Gardner says.

Recognition  of  the  need  for  environ-mental  cover  is  growing  in  some  sectors,  particularly  construction,  Gardner  says.  He  attributes this to two factors: fi rst, increasing legal  requirements  for  contractors  to  have  an  environmental  insurance  policy  in  place,  and  second,  pressure  from  large  contractors  wanting  to  protect  their  own  insurance  placements  on  lower-tier  contractors  to  also  take out their own cover.

While  this  is  a  positive  trend,  Gardner  stresses that the broker’s role remains pivotal –  especially  when  a  company  might  be  tempted  to  cut  costs  by  ditching  their  environmental  cover.  “It  is  crucial  for  brokers  to  be  able  to  highlight  the  critical  need  for  EIL  insurance  and  the  risks  presented  if  they  were to opt out of cover.”