“Polluter pays” is increasingly becoming the law of the land. Legislatures around the world are doling out new environmental standards left and right, with risk managers tasked to shore up their companies’ compliance. As the environmental liability landscape evolves, multinational firms are left exposed to an increasingly complex set of challenges.
Environmental damage is a top-ten cause of liability loss, according to Allianz’s Global Claims Review 2017. Claims caused by environmental liability, like pollution, are becoming costlier – it’s not uncommon for losses to total over US$1bn. The average value of claims caused by environmental damage is nearly US$3m – the second highest average out of all categories (terrorism took the highest spot), according to the report.
Expanding legislation is the driving force behind the claims, as risk managers around the world face an increasing number of complex regulatory standards related to environmental liability. Cleaning up an environmental mess can cost companies big not only on the balance sheet, but also in the court of public opinion. In response to a changing global climate, there has been a greater focus on green building, sustainability, and corporate responsibility. Those sentiments have translated into legislation around the world enshrining the “polluter pays” principle into reality.
Levels of regulatory risk exposure vary by country. Historically, the US has been home to one of the most stringent regulatory standards. Noncompliance with the US Environmental Protection Agency’s standards comes with high costs, though risk managers ought to keep an eye on President Donald Trump, who has threatened to roll back some of the agency’s regulations. However, spillover from the unresolved, highly publicised water crisis in Flint, Michigan, which left residents with lead-contaminated water, remains a flashpoint for increased scrutiny.
In Europe, the European Liability Directive (ELD) has raised the stakes for would-be polluters. The legislation, which came into effect in 2010, holds companies causing environmental damage liable and responsible for the costs of clean-up and remediation. General insurance programs generally won’t cover everything included in the ELD, forcing risk managers of organisations with operations throughout the EU to consider other options. Regulations in some countries, like Spain and Portugal, for example, go so far as to require firms to have financial guarantees like environmental insurance.
Risk managers in the real estate industry are especially concerned with environmental liability risks. Almost 100% of real estate investment trusts (REIT) cited environmental liability, placing it in the top five threats and far outpacing other factors like construction risks, according to accounting and consulting firm BDO’s 2017 RiskFactor Report for REITs.
“The risks are moving extraordinarily quickly, and you do have to lean very heavily on your external partners to get it right,” says Josh Lintern, director, risk and insurance at Dream Unlimited, a Canadian real estate company with about US$11bn of assets in North America and Europe. Some of his many responsibilities include managing risks for Dream’s “brother” companies: Dream Industrial REIT, Dream Global REIT, and Dream Office REIT.
To navigate the changing landscape, risk managers may need to look for solutions from their external partners beyond their general insurance policies. Environmental liability coverage is one such option. “Rules and regulations dealing for environmental conditions can change over time,” says William McElroy, global head of environmental lines at Aspen Insurance. “A developer can plan for what is known, but the uncertainty surrounding future government action is significant.”
He also notes that environmental insurance can offer companies valuable leeway. “These insurance policies typically cover the cost of corrective action that may become required during the policy period, even if conditions did not require corrective action when coverage was initially put in place.”
“Typically,” he says, “liability insurance covers the consequences of an accident, but environmental contamination from the past can often lie undiscovered or unrecognized for many years, and discovery of a latent pollution condition is typically excluded by traditional liability insurance. Clean up of an old environmental problem is generally not a covered peril in property insurance. Environmental coverage exists to specifically fill this gap.”
Based on his experience managing the risks of three REITs, Lintern points out that carrying out extensive due diligence on a property is usually a prerequisite to buying environmental liability insurance. “In the traditional insurance world, it’s relatively straightforward to transfer risks like fire, flood, wind, or hail,” he says. “Environmental insurance is a very different thing. To say you’re just buying the insurance simplifies the issue, because there is a certain level of due diligence required to assess a property before you even qualify to buy the insurance.” By the time you’ve gathered enough intelligence about the property to qualify, you could theoretically have all the information you need to mitigate risk without insurance.
“That said, we still carry environmental insurance across the portfolio,” says Lintern. “It’s not that you don’t need the insurance. It’s a very useful tool, but it’s just one of many components in a comprehensive risk management program.”