1203085136 environmental liability report

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The Environmental Liability DirectiveEnhancing Sustainable Insurance Solutions

February 2008


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Disclaimer and competition statement

The material, comments and information contained within this document are for information purposes only. The authors

offer no guarantee for the accuracy and completeness of its content. All liability for the integrity, confidentiality or timeliness

of this document or for any damages or loss resulting from the use of information herein is expressly excluded. Under no

circumstances shall the authors be liable either jointly or severally for any loss or damage arising in any way from or relating to

this document.

In preparing the material, the experts were aware of, and were committed to comply with all applicable competition laws

during the meetings held and during the meetings to come. All participants were aware of their obligations in this respect.

Minutes were taken at the meetings so that there is evidence that all restrictions under anti-trust law were duly observed.


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Environmental Liability

Table o contents

Executive Summary1. 4

Introduction2. 5

The requirement to prevent2.1 6

The defences2.2 7

Restoration of the environment2.3 7

Risk assessment, evaluation and decision on risk3. 8

T3.1 erms and elements of the risk assessment 9

Building the conceptual model3.2 9

Criteria to evaluate the risk 13.3 4

Making decisions on risk 13.4 7

Summary 23.5 1

Possible insurance options 24. 2

Existing insurance products - preventing gaps and overlaps 24.1 2

E4.2 nvironmental liability insurance new concepts 26

Summary 34.3 7

Claims management 35. 8

General remarks 35.1 8

Co-operation with the competent autho5.2 rity 38

Claims-handling under the insurance policy 35.3 9Questionnaire for steps to be taken 35.4 9

Future developments 45.5 0

Closing remarks 46. 1

Annexes 47. 2

Directive transposition update 47.1 2

Risk mapping exercise 47.2 8

Insurance options and underwriting checklist 47.3 9

Claims management questionnaire 57.4 2

Glossary 57.5 4

References 57.6 8

List of CEA-EEWG Members 57.7 9


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Executive Summary1.

Last year, the CEA Environmental Expert Working Group launched the White

Paper on Insurability of Environmental Damage. The purpose of the White Paper

was to stimulate and further deepen the discussions with the key stakeholdersIn the meantime the transposition deadline set in the ELD (i.e. April 30, 2007)

to implement this Directive into Member States law elapsed. The current status

(as per January 1, 2008) shows that less than half of the Member States have

enacted the Directive into their national law. Some States have adopted the

Directive with its full scope and some States did exceed its scope. The other

Member States are still in a transposition phase and, in most of them, draft

legislation is being discussed.

In Member States that have enacted legislation, a trend is beginning to emerge

for insurance solutions to come to the market. This is particularly the case where

transposition has followed the scope of the Directive very closely. There is a strong

indication that a clear legal framework and a close relationship to the Directive is

key to the development of sustainable insurance solutions.

The CEA paper on Enhancing sustainable insurance solutions is designed to

stimulate further the discussion with stakeholders on how to cope with the

challenges linked to the transposition of the Directive and highlights areas which

stakeholders might wish to consider in providing risk transfer solutions. This paper

covers issues in the risk selection and underwriting process which underwriters

may wish to consider when working on possible insurance solutions. Risk

selection and a sound risk assessment process are important steps in evaluating

and assessing a risk properly. A close co-operation between an operator who

wants to insure his liabilities under the Directive and the insurer is essential to

ensure that the insurer can assess the risk adequately.

Insurance should not be viewed as a substitute for risk management. Underwriting

a risk is not the only consideration. An effective claims management is also

essential to restore the environmental damage. Directive type losses require

new claims management skills, in particular for compensatory damage. Claims

managers may benefit in claims handling if underwriters make appropriate

inquiries to obtain relevant information during the risk assessment process.

The insurance industry also supports the development of an effective working

relationship with the competent authorities who are, according to the Directive,

responsible for either accepting proposed preventive or remedial actions by the

responsible operator or determining their own preventive or remedial measures.

Insurance companies have a significant interest to be part of that process, in

particular in cases of cross boarder damage.

This paper is also intended to support discussions with competent authorities

to develop methods to restore environmental damage in the most effective and

cost efficient way.

Trend is beginning to

emerge or insurance

solutions to come in the

market

Further discussions on

insurance-related issues are

needed

ELD-type losses require new

claims management skills

Building up efcient

working relationships with

the competent authorities


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Introduction2.

With the launch of the CEA White Paper on Insurability of Environmental Liability

in January 2007, the CEA Environmental Expert Working Group stimulated the

discussions with stakeholders. This paper is meant to further deepen the dialoguewith stakeholders, with a clear focus on enhancing sustainable insurance

solutions.

This paper deals with the most important issues the insurance industry has to

address when underwriting environmental risks, i.e.:

Risk assessment, evaluation and decision on risk

Possible insurance options

Claims management

Legal clarity and certainty is one of the prerequisites achieving that goal.

The section below highlights the greatest features of the Directive which have an

impact on the underwriting process.

At the time of writing this report, the transposition of the Environmental Liability

Directive 2004/35/EC (the Directive) across European Member States is ongoing

beyond the 30 April 2007 deadline. Therefore, currently many unknowns exist

concerning for example, the manner of transposition within Member States,

the designation of competent authorities, the outcome of transposition choices

concerning issues such as optional defences and apportionment of liability,

and the legal status of Non-Governmental Organisations (NGOs). An updated

table on the transposition status is attached in Annex 7.1.

The Directive specifically implements the polluter pays principle. Its fundamental

aim is to hold operators whose activities have caused environmental damage

financially liable for remedying the damage. It is expected that this will result in

an increased level of prevention and precaution. In addition, the Directive holds

those whose activities cause an imminent threat of environmental damage liable

to take preventive actions. Both requirements should result in a higher degree of

environmental protection throughout Europe.

For liability to be effective, polluters must be clearly identifiable. To this effect

the Directive provides for two distinct but complementary liability regimes. The

first one is a strict liability regime which applies to operators who professionally

conduct potentially hazardous activities, as defined in Annex III of the Directive.

The second liability regime applies to all other professional activities.

For insurers, the key features of the Directive are:

Administrative liability applies, i.e. it is not based on common law/civil

law. The party entitled to claim is not the injured or damaged third

party but the public administrator that has the authority to protect thedamaged natural resources and who holds an executive power to enforce its

decisions. Therefore, the position of the insured, hence that of the insurer, in

the claim is weaker than is the case with traditional liability insurance

This paper highlights key

insurance-related issues

Legal certainty remains a

key prerequisite

The Directive creates new

insurable interests and a

challenge or the insurance

industry


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The object of the claim is the remediation of damage to natural resources,

not to people, private property or economic interests. Where full repair

or replacement is not possible (i.e. primary restoration), the remediation of

the lost environmental service with identical, equivalent or similar natural

assets must be undertaken according to new procedures, rules and methodsthat still have to be finalised, i.e. complementary remediation measures

Natural resources can, at the same time, be res communes, third parties

or first-party properties

Liability includes actions to prevent imminent losses

The compensation of the claim is not monetary indemnity for the damage,

but remediation thereof. This is very likely to entail complex projectswith

long execution periods that require very demanding and specialised

monitoring activity.

Therefore, the Directive creates new insurable interests that the insurance industry

can respond to, via new products or by extending existing ones.

The Directive is not retrospective, therefore close up any damage caused before

30 April 2007, which is the expiry of the deadline for implementation of the

Directive will not be covered by its provisions.

Public authorities will play an important role under the regime. It will be their

duty to identify potential polluters and finance, or to undertake themselves the

necessary preventive or remedial measures that the Directive requires.

Public interest groups, such as NGOs, will be able to require public authorities toact and, if necessary, to challenge their decisions before the courts. Additionally,

the new Directive n 2003/4/EC on public access, which became binding on

14 February 2005, gives the European public better access to environmental

information.

The requirement to prevent2.1

One of the key provisions of the Directive is the requirement for operators to take

preventive action where there is an imminent threat of damage. Furthermore,

where the imminent threat is not dispelled despite preventive measures being

taken, the operator must inform the competent authority as soon as possible1.

Both of the liability regimes imposed by the Directive apply to the imminent

threat of damage occurring by reason of the relevant activities. Imminent threat

of damage means: a sufficient likelihood that environmental damage will occur

in the future2.

1 Article 5

2 Article 2(9)

It is expected that the

Directive will result in an

increased level o prevention


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The defences2.2

Third party and compliance with a compulsory order deences

As outlined in Article 8 (3) of the Directive, an operator will not be required to

bear the cost of preventive or remedial actions taken pursuant to the Directivewhere he can prove that the environmental damage or imminent threat of such

damage:

Was caused by a third party and occurred despite the fact that appropriate

safety measures were in place; or

Resulted from compliance with a compulsory order or instruction emanating

from a public authority other than an order or instruction consequent

upon an emission or incident caused by the operators own activities.

Therefore an operator will not be considered at fault or negligent for an emissionor event expressly authorised by, and fully in accordance with, the conditions of a

public authority order, as applied at the date of the emission or event.

Permit and state o the art deences

An exemption from liability under the Directive also applies where:

An emission or event expressly authorised by, and fully in accordance with,

the conditions of an authorisation given under applicable national laws

which implement the legislative measures specified in Annex III3

The operator can demonstrate that the activity was not considered likely

to cause environmental damage according to the state of scientific and

technical knowledge at the time of the event4

.

Restoration of the environment2.3

Remedial measures covered under the Directive mean any action or combination

of actions, including mitigating or interim measures to restore, rehabilitate, or

replace damaged natural resources and/or impaired services or to provide an

equivalent alternative to those resources or services as foreseen in Annex II5.

Annex II of the Directive sets out a common framework to be followed in order to

choose the most appropriate measures to ensure the remediation of environmentaldamage. These measures include:

Primary remediation: any remedial measure which returns the damaged

natural resources and/or impaired services to, or towards baseline

Complementary remediation: any remediation measure taken in relation

to natural resources and/or services to compensate for the fact that

primary remediation does not result in fully restoring the damaged natural

resources and/or services

Compensatory remediation: any action taken to compensate for interim

losses of natural resources and/or services that occur from the date ofdamage occurring until primary remediation has achieved its full effect.

3 Article 8 (4a)

4 Article 8 (4b)

5 Article 2 (11)


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Terms and elements of the risk assessment3.1

Risk is the core subject of insurance. In order to fully appreciate the characteristics

of an insurable risk, it is necessary first to understand the nature of risk.

Risk is often described as an event, a change in circumstances, a consequence, ora combination of these. Insurers have a particular way of viewing and analysing

risk. As insurers deal with most types of risk in society, from scientific to public

liabilities, it is more valuable for insurers to dissect the idea of risk and consider its

component parts. The main components of risk may be summarised as:

Uncertainty

Frequency/probability

Severity.

Risk assessment is the scientific process of addressing the informal questionshow risky is it? or what is the chance of a loss? Risk assessment may involve a

general or a very comprehensive investigation of all relevant sources, pathways

and receptors concerning an occupational activity.

The preliminary stage of the risk assessment may focus on the development

of an initial conceptual model of the occupational activity in order to evaluate

potential attractive and unacceptable risks. During this stage, the assessor

collects and reviews all available desk-based information and may also carry out

field assessments to assist with the preparation of a conceptual model. The main

stages of the risk assessment may be to:

Establish the context and objectives for the risk assessment (section 2)

Develop the initial conceptual model for the operator (sections 3 .2 and

section 3.2.2)

Evaluate/judge the risk (section 3.3)

Decide on any potential unacceptable risks and further appropriate action

(section 3.4).

The risk assessment is an iterative process that may require further investigation

and assessment to revise and update the conceptual model and/or to focus the

assessment as appropriate.

Building the conceptual model3.2

The main purpose of a conceptual model is to assist with an objective and

consistent assessment of the environmental risk associated with an activity and

to assist with the management of that risk.

Defnition3.2.1

A conceptual model may be described as a representation of a potential scenario

associated with an activity in diagrammatic or written form that shows the

possible relationships between source(s) of environmental damage, pathways

and receptors. An amended version of the definition of a conceptual model as

What is risk?

Understanding the various

stages o the risk assessment

that lead to the decision to

insure environmental risks

What is risk assessment?


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defined in BS8 10175 (2001) to encapsulate the requirements of the Directive

may be proposed as:

A textual and/or schematic hypothesis of the nature and sources of environmental

damage (such as contamination), potential migration pathways and potential

receptors, developed on the basis of information from the preliminary investigation

and refined during subsequent phases of investigation and which is an essential

part of the risk assessment process.

The model is initially derived from information obtained during the preliminary

desk-based investigation and is used to focus any subsequent investigation(s)

considered necessary. The results of additional field investigation can provide

data to further refine the conceptual model. Therefore, the conceptual model

is a working model to be refined and validated throughout all stages of the

investigation process. The elements as they pertain to the Directive are outlined

below.

Potential sources o environmental damage under the Directive

In summary, the potential sources of environmental damage covered in

the Directive apply to all occupational activities, whether private or public,

profit-making or non-profit making9

. A strict liability regime applies to those

activities listed in Annex III, whereas a fault-based liability regime applies to all

other activities.

Pathways and receptors

In terms of the Directive, a pathway may be described as a mechanism or route,

e.g. water or air, by which environmental damage to a receptor occurs.

Environmental damage as defined under the Directive means damage to receptors

identified as:

Protected species and natural habitats10

Waters covered by the Water Framework Directive11

Land contamination that risks harming human health12

.

8 BS: British Standard

9 In accordance with Article 2(7) the Directive applies to any activity carried out in the course of an

economic activity, a business or an undertaking, irrespectively of its private or public, profit or non-

profit character. Further Article 2(7) defines an operator as any natural or legal, private or public

person who operates or controls the occupational activity or, where this is provided for in national

legislation, to whom decisive economic power over the technical functioning of such an activity has

been delegated, including the holder of a permit or authorisation for such an activity or the person

registering or notifying such an activity.10 In Article 2 (1) and (3): The definition of protected species and natural habitats refers to species

and habitats listed in the Birds Directive 79/409/EEC, OJ 1979 L 103/1 and the Habitats Directive

92/43/ EEC, OJ 1992 L 206/7

11 Directive 2000/60/EC Articles 2(1) and (5)

12 Article 2(1)


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Elements o the investigation and development o the conceptual3.2.2

model

The circumstances and context of the risk assessment should determine the criteria

for evaluation, in order to achieve a practical and cost-effective assessment. A

focused investigation should be based upon a specifically designed environmental

brief that fits the underwriters basic model for hazard analysis. For example, BS

ISO 14015 (2001), Environmental Assessment of Sites and Organisations (EASO)

provides a detailed methodology to assist with the conduct of a systematic process

of identifying environmental aspects and environmental issues. Further, an example

of a basic model for hazard analysis is provided by Busenhart et al (2007)13.

As part of the conceptual source-pathway-receptor model development,

the elements that may be considered for review are outlined in section 3.3.1

and the development of the conceptual model may require a detailed desk-top

investigation concerning the occupational activity and may, following furtheranalysis and at the discretion of the underwriter, be revised and updated with

further investigation. The primary objective of this exercise is to compile and

review information from which possible source-pathway-receptor relationships

can be identified, as covered in the Directive. This would include an evaluation of

the potential for and/or imminent threat of adverse environmental impact from

current activities to water, land, protected species or natural habitats.

Some key benefits gained from the development of the conceptual model may

be to:

Evaluate the liability status of the activity, i.e. whether the operator may

be a responsible party under the Directive and if so whether they may be

subject to a strict or fault-based liability regime14

In the case of providers of goods or services, evaluate whether they may

be exposed to claims issued by a responsible operator using their right of

recovery according to the Directive

Document the ownership and operation history of the activity according

to the Directive

Evaluate details of any pre-existing conditions and associated environmental

liabilities, i.e. retrospective liabilities in respect of the Directive transposition

date.

Key actors to be considered

There are a number of factors that may influence the risk of an activity. The

overall risk may be a complex issue to assess, given that it may arise from a

wide range of possible sources. In summary, an assessment may also include

factors that may be largely inherent to the process. The main factors to be taken

into consideration can be described as technical and environmental, legal and

corporate and other factors relating to management and processes. These are

described in more detail below.

13 See Busenhart, J., Baumann, P., Schauer, C., Orth, M., and Wilke, B, Insuring environmental

damage in the European Union, Technical Publishing Casualty, Swiss Reinsurance Company. (Swiss

Re Publications 2007).

14 It is proposed by Swiss Re that the differentiation between strict and fault-based liability facilitates

an initial separation of risks. The main differentiating factor is that activities that are not cited in

Annex III have a lower risk potential, Busenhart et al, 2007, section 5.

There are some key benefts

in the development o a

conceptual model

Key actors gathered during

the risk assessment process

may also provide useul data

or claims management


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Technical and environmental actors

The location and geographical extent of the operation

The specific nature of the activity, i.e.:

Processes and associated resource requirements, for example

types of raw material, by-products and products used and stored,

material storage and handling, waste generation and handling,

transportation, etc.

Specific details of major raw materials, by-products and products

used, stored or transported, transport mechanisms, toxicity effects

and attributes as appropriate

Details of emissions and discharges to air, water and soil

Environmental information concerning the site(s) of the occupational

activity and the local setting, including for example:

Land use

Layout of site(s), including any natural (e.g. waterways) and

man-made features, (e.g. gas, electricity, water, sewage,

telecommunications, railways)

Site setting/local environment(s), including, for example, local and

regional hydrology, geology and hydrogeology, geochemistry and

ecological system

Details concerning current environmental damage mitigation and

prevention measures present on-site, e.g. storage and spill containment

features

Information concerning any pre-existing conditions and any associated

remediation or monitoring and compliance and current status, i.e. whether

completed or ongoing

Identification of potential pathways and receptors as defined in the

Directive, i.e:

Protected sites and habitats

Protected species

Water

Land damage that creates a significant risk of human health, taking

into consideration the current and future land use

Identification of human receptors

15

Nearby residences and recreational facilities

Nearby industrial, commercial and retail areas

Schools, hospitals, institutions and other places of public assembly

Evaluation of the preliminary source-pathway-receptor model scenario

based on the additional information review.

15 Annex II (2) requires that the remediation of land damage shall ensure that the remediated land

no longer poses any significant risk of adversely affecting human health, subject to risk assessment.

Further, Article 7(3) states that the competent authority, in making a decision regarding potential

remedial measures (i.e. including natural resources/services) shall take risks to human health into

account. On the basis of these requirements it is recommended, that potential human receptors be

included in the development of the conceptual model.


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Legal and corporate actors

Local regulatory environment within the area of operations

The identity and status of the operator(s) as defined in the Directive

The corporate and management structure of the operator. This may include

the quality of the management of the risk and the competence and

authority of the person/people in charge. The higher the seniority the risk

management function is within the organisation, the greater influence it

will have to instigate actions and obtain adequate funds

A chronology of the site/facility ownership and operation dates at least

since 30 April 2007 or the effective date of the transposition law

History of risk assessments, understanding of the environmental risks

associated with the activities and plans for actions to minimise the risks

identified

Implementation of a formal Environment Management System (EMS)

as described in EMAS or ISO 14000 and commitment at all levels to

implementing risk improvement measures

Work procedures and practices

Regular audits to monitor performance on a continuous basis and

subsequent corrective actions

The extent to which the EMS has been externally certified or verified to

recognised standards

Financial strength of the organisation. Companies need to be financially

sound to implement a proper risk management policy. Companies that are

struggling financially are unlikely to invest in new equipment or to maintain itproperly. Experience has shown that in difficult times risk management can

be one of the first things to be dispensed with, as it may be seen as not

adding to the profit of the organisation. The most attractive companies

for insurers will be those that are successful and will continue to invest in

safe and modern facilities and equipment

Employee training: all employees should be given proper training in

awareness of all aspects of environmental protection; best practice needs

to be shared and implemented throughout the organisation. It is also

important for refresher training to be given so that employees can keep

their knowledge up to dateWritten procedures, widely communicated in the organisation, including

general policy, standards, templates, etc.

Emergency plan that sets out in detail what to do in the event of an

emergency, who has responsibility for each action and stage and associated

training of employees to respond to emergencies

Licences, permits or other environmental regulatory authorisations

pertaining to the activity

Compliance with statutory requirements and regulations. If applicable

dates, time-frames and details concerning previous emissions, non-

compliance events, notifications or warnings from the regulatory authority,fines or court proceedings

Contingency plans

Adequate testing and maintenance of plant equipment to ensure it is in

good working order.


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Other actors

In addition to relevant items that may be covered above, particular operational

aspects that may require evaluation in respect of organisations that manufacture

or distribute products or provide services such as architects, engineers etc. may

include:

Whether any pending legal action exist and if so the nature of warranties/

representations being made

Compliance of labelling and design standards with relevant trade or

professional standards and legislative requirements

Product testing procedures and standards

Experience of the manufacturer or service provider and the level of

experience of key employees

Details of any subcontracting arrangements

Details of discontinued products, why they were discontinued and when

Identification of any producer responsibility issues that may arise.

Criteria to evaluate the risk3.3

This section is intended to provide an overview of risk evaluation tools taking

into consideration the requirements of the Directive. The aim is to help insurers

to evaluate whether unacceptable exposure risks exist and, if so, what further

investigation or action may be needed.

Risk context3.3.1

As we have seen, risk is usually expressed in terms of a combination of thefinancial consequences of an event (severity), and its likelihood (probability).

Environmental risks are no exception and the underwriter will have to try to

quantify both aspects for pricing and reinsurance considerations.

Probability o exposure3.3.2

There are three types of key factors to assess:

Geographical data which will lead to a threat potential for water and

soil. Items to be considered are the number of protected areas in the

vicinity and distance to them, density and proximity of water bodies and

classification of areas of concern

The transport/media

Type of contaminant (ecotoxicological effects) and storage volume.


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Examples of rating tables are shown below:

Soil rating table

Rating PotentialNumber oprotected

areas

Descriptions

Suraceshare oprotected

area

0

small noneUrban area without significant natural areas.Bad lands, deserts or similar areas withoutsignificant protected species.

0-1%

0.1 1-2%

0.2 belowaverage

very fewUrban areas with semi-natural areas. Meagerlandscapes with a small diversity of species.

2-3%

0.3 3-5%

0.4average few

Mixed man-made environment with averagediversity of species.

5-7%

0.5 7-10%

0.6 aboveaverage

someMixed man-made environment withsignificant nature areas included.

10-15%

0.7 15-20%

0.8 large many Natural landscapes, large forests or similar. 20-50%

0.9very large a lot

Primary natural environment with largebiodiversity.

50-75%

1 75-100%

Water rating table

Rating PotentialNumber oprotectedareas

Descriptions

Suraceshare oprotectedarea

0small none

No waterbody or river near the site. Nosignificant waterbodies in the vicinity.

0-1%

0.1 1-2%

0.2 belowaverage

very fewNo waterbody or river near the site. Someinsignificant waterbodies in the vicinity.

2-3%

0.3 3-5%

0.4average few

No waterbody or river near the site. Somesmaller waterbodies in the vicinity.

5-7%

0.5 7-10%

0.6aboveaverage

some

Several smaller water bodies nearby or onesignificant waterbody in the vicinity. Riverwith no protected area downstream passessite.

10-15%

0.7 15-20%

0.8 large manySeveral waterbodies nearby. River on sitewhich finally leads to smaller protected areasdownriver.

20-50%

0.9very large a lot

Many water bodies in the area and on site.Several and significant protected areasdownstream.

50-75%

1 75-100%

Severity o exposure3.3.3

The severity in terms of environmental damage is expressed generally in monetary

terms. For many lines of business, generally two factors are considered: the

expected average claim amount when the law of large numbers can be used

and the maximum foreseeable loss (MFL), or the most probable loss (MPL), for

underwriting considerations.

However, neither are possible because there is no claims data from which to

calculate an average cost or predict a MFL/MPL.

It was therefore decided to look for sources of data in the United States, becauseof the earlier involvement of US corporations in defining acceptable methods of

cost quantification. Information contained in a report was used as a source of

reference to assist in the preparation of this paper16.

16 Total cost assessment methodology (the TCA report) published in July 1999 by the American

Institute of Chemical Engineers Center for Waste Reduction Technologies.

Underwriters may wish to

consider tables o this nature

in assessing the risk and

determining the expected

loss to assist with the

calculation o premiums

Expected costs are still

difcult to assess due to the

paucity o claims data in this

feld


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Remedial costs

Remedial (site clean-up) costs could be associated with process-based releases,

transportation-based releases, and waste handling, storage and disposal practices

proposed for the new process or product. In general, remediation liability items

include site investigations, remediation of specific areas of soil contamination or

waste areas, and remediation of ground water.

A literature search was conducted by the authors of the TCA report to locate

remedial costs for sites with contaminated soil and groundwater. Average site

costs, expressed in 1997 US dollar figures, are listed in the table below and

should be adjusted for inflation.

US EPAs estimated average site costs

Site Estimated Average Site Cost ($)

Superfund - EPA lead 10,000,000

Superfund - PRP lead 8,500,000

RCRA 14,900,000

UST 125,000

DOD 3,400,000

The first two lines refer to Superfund sites when remedial work is done by the

Environmental Protection Agency (EPA) where there is no potentially responsible

Party (PRP) or when it is done by a PRP. Although these costs do not directly relate

to the Directive because they mostly relate to historical pollution, they are a good

indication of what to expect for remedial costs.

The third line referring to remedial costs under the Resource Conservation and

Recovery Act (RCRA) is more pertinent to the Directive. It is particularly interesting

to note that these costs are in the same order of magnitude or even larger than

standard remedial costs.

The other lines indicate costs related to underground storage tanks (UST) and to

Department of Defence/military sites (DOD).

Natural Resources Damage (NRD)

There is a variety of methods to assess economic damage. NRD restorationgenerally includes the cost of:

Damage assessment

Planning

Restoration (to the condition that would have existed had the release not

occurred)

The loss of the resource and/or the benefits or services derived from the

resource from the date of the damage until the full restoration of the

resource and/or the benefits or services and periodical monitoring of the

restoration progress.The TCA report mentioned above studied a sample of 79 NRD claims in 1996. As

many as 20 sites have NRD claims in excess of $20 million (1998 figures); another

40 sites have claims between $5 million and $50 million.

The US experience as a

starting point: the TCA

Report 1999


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Making decisions on risk3.4

This section focuses on the approach insurers may wish to take when evaluating

environmental liability and the influence of the Directive.

Current insurance approach in respect o environmental liability3.4.1

Although there are regional differences in Member States in the provision of

cover, environmental liability is effectively covered either by a GTPL policy or an

EIL policy. Generally GTPL cover is provided for sudden and accidental events

whereas under EIL policies cover usually extends to include events that are

gradual in nature.

Underwriters from the GTPL and EIL markets take a differing approach to risk

evaluation. GTPL underwriters tend to take an actuarial view based on past losses/

claims and hazard assessment associated with the applicants operations. On the

other hand, the majority of EIL underwriters have a background in environmentalconsultancy or engineering that imparts a level of professional judgement that

they use to assist in the determination of coverage and pricing.

The two approaches are described in more detail below:

A GTPL underwriter will review the frequency and severity of past sudden and

accidental events, extrapolating that experience in an effort to predict the scale

of future losses under the policy and the probability of those losses occurring,

from which a maximum possible loss can be established. This process cannot be

extended to include ELD type liabilities at the present time due to the absence

of data.

The EIL underwriting approach is based primarily on environmental risk

assessment (source/pathway/receptor) as described in section 3.1 and 3.2 above

rather than attempting to quantify the likely impact associated with a particular

event. With reference to section 3.3.1 above, it is true to say that a greater

emphasis is placed on assessing the probability of a particular event occurring,

than attempting to calculate the severity of an event. Underwriters will take the

information provided in environmental surveys supplied by the applicant and

review the risks associated with each case on its own merits. The risk assessment

approach means that there are certain key questions that underwriters will haveto satisfy themselves on, for example:

Sensitivity of surrounding area both human and ecological

Applicants risk management procedures

Types of materials used on site

Ground, groundwater and surface water conditions

Sites historical usage

Financial standing of the applicant

Details of any known claims or circumstances.

The insurance approach in

respect o environmental

liability is twoold

GTPL underwriters will ocus

on requency and severity o

past events

EIL underwriters will place

a greater emphasis on

assessing the probability o

a particular event


18/6218 | CEA


Implications o the Directive or underwriting methodologies3.4.2

At present, it is commonly accepted by GTPL and EIL underwriters that the

techniques, approaches and therefore costs associated with the remediation of

environmental damage are well understood. Consequently, once the nature of

the incident is known, it is possible to have an idea of the likely scope and cost

of any potential primary remediation as well as the related costs associated with

evaluation of the size of the claim, i.e. environmental consultants/engineers

fees and legal costs.

Following the introduction of the Directive, there is a degree of uncertainty in

respect of the costs of compensation for:

The inability to remediate the damaged resource to baseline through

primary remediation alone, i.e. complementary remediation and/or

The loss to the environment between the point of damage and attaining

baseline conditions, i.e. interim losses associated with compensatory

remediation

The expenses required to evaluate the extent of compensation.

This uncertainty will affect the underwriting process.

General third party liability

As discussed above, GTPL underwriting is based at least partly on loss experience

to establish the MPL as well as the insureds risk management practices. The

creation of compensatory and complementary remediation in the Directive createsissues for the GTPL market in that the loss experience to be able to understand

the MPL is not readily available and therefore the approach of extrapolating from

past losses will not today produce accurate loss estimates.

A number of GTPL insurers are looking to use geographical information systems

(GIS) and hazard/industry risk assessments as a means of assisting with determining

pricing, terms and conditions but this approach, as described by Busenhart et al

(2007) and comprising the analysis below, has yet to be widely formalised:

Assessing of the applicants risk management practices

Deriving process hazardsIdentifying hazardous substances

Identifying sensitive receptors

Developing of incident scenarios

Quantying of the results of those scenarios.

Environmental impairment liability

There will be a greater need to understand the sensitivity of the site environs in

terms of the types of species and the uniqueness of the habitats present but this

represents an extension of existing practice as opposed to something completely

new. Information systems such as geographical information systems are commonly

used, and other criteria such as the applicants risk management and the ability

of ground and groundwater conditions beneath the site to act as pathways for

pollution are already assessed as part of the underwriting approach.

Some concepts in the

Directive create an

uncertainty that aects the

underwriting process

Use o new inormation

sources or risk assessment


19/62CEA | 19


The approach of the competent authority should also be given consideration in

those Member States where the environmental regulatory environment is less

well established; for instance in some of the newer EU accession countries. A

number of EIL insurers are already issuing policies covering pollution-related

losses arising from the Directive in a number of European territories where theregulatory environment is well understood and the likely volume of ELD type

losses, at least in the short term, is such that those cases are unlikely to result

in any great change in regulatory behaviour/approach. However there are

exceptions to every rule and these will have to be understood when approaching

the provision of ELD coverage across Europe. In particular, Member States that

have gone beyond the scope of the Directive in transposition may well find they

have a higher number of losses.

Section 3.2.2 Key factors to be considered lists a range of technical and

legal criteria that underwriters are likely to require an understanding of whenconsidering the types of industry most likely to be affected by the Directive,

however the reader should not assume the list to be exhaustive, nor that the

whole list of requirements applies to every risk.

Case-specifc underwriting

What is apparent from the types of liabilities covered by the Directive is that each

risk will have to be considered on its own merit. While it would be easier if an

average premium existed for a certain type of exposure, in reality this is unlikely

to be the case as there are too many variables involved in the assessment

process, for example:

Type of habitat/species

Nature of operations

Nature of release: sudden, gradual, emissions to air, land or water

Potential pathways: groundwater, surface water, air

The nature of the incident that results in environmental damage: pollution

release, explosion, flood.

Risk assessment provides an appropriate framework to assess these types of risk.

However, over time it can be anticipated that there will be a fusion between

the methods adopted by the GTPL and EIL underwriters. If, as hoped, insurance

for liabilities introduced by the Directive becomes widely available, it will not be

practical for a detailed risk assessment to be undertaken in every case, especially

for less hazardous activities where the surrounding area is not particularly exposed.

It is likely that these less hazardous risks will be more suitable for underwriting

along the traditional GTPL methods while the larger and more complex cases will

be dealt with through the EIL approach.

Implications or deence costs

It is understood that both lines of insurance provide cover for costs incurredin the defence or evaluation of loss. While this may not influence how to

decide on a risk directly, it is likely to have a bearing on the terms, including the

premium, that an underwriter will apply to a risk. As losses associated with the

Future trends in case-specifc

underwriting

Evaluation o costs are anissue or underwriters


20/6220 | CEA


more subjective elements of the Directive (compensatory remediation) are less

well understood, it follows that determination of that loss may take longer and

have greater expense associated with it. Again, we refer to section 3.3.3 and,

in spite of the experience of NRD type losses in the US, the absence of any clear

information as to the expense required to evaluate an ELD claim. This will be anissue that underwriters will have to consider as part of their overall view of a risk

when defining coverage and pricing.

There is always a danger that if costs threaten to spiral out of control then insurers

may offer to settle to avoid protracted litigation and evaluation. The absence of

any indication of legal and evaluation costs in section 3.3.3 suggest that this may

already be happening, which one imagines does not mirror the original intent of

the Directive.

3.3.3 Implications or operators

It should not be forgotten that while there is a degree of uncertainty among

insurers regarding how the Directive will work in practice, this sense of

uncertainty also exists for operators in terms of their liabilities and the extent

of coverage available for their liabilities. Ultimately, the insurance coverage

available for a specific risk and the risk management obligations that this may

impart to an operator are a matter for private discussion between insurer

and operator. However, it is suggested that where insurers identify elements

of coverage associated with the Directive that they know will require significant

improvements/investment on behalf of the operator, or indeed a specific sector,

then these are made known to operator/industry associations at the earliestopportunity to enable appropriate consideration.

Sel-assessment o liabilities

On the basis that this paper focuses on quantification of the liabilities under the

Directive from the perspective of insurers and policy-makers, it is easy to forget

that one of the most important elements of insurability is industrys assessment

of its own risk and the management protocols that result. A key question for

industry will be what to self-insure and what to seek insurance for? from which

stems the question what is the extent of my liability?.

In attempting to understand the question regarding the extent of liability,

frameworks for environmental due diligence exist that could be used to assess

environmental liability associated with sites or organisations. An example of

such a framework is the BS ISO 14015:2001 on Environmental Management

- Environmental Assessment of Sites and Organisations (EASO), which provides

guidance on identifying environmental issues and their business consequences.

While it should not be confused with regulatory compliance audits or impact

assessments (dealt with separately in the following section on risk management),

EASO covers the roles and responsibilities of the parties to the assessment and

the various stages of the assessment process: planning, information-gathering,validation, evaluation and reporting.

Guidance is already available

to operators to assess their

liability and better manage

their environmental risks


21/62CEA | 21


Risk management

Once an operator has established the extent of their own liability, then the

question of what to self-insure/manage and what to seek insurance for?

becomes relevant and the operators risk management will be a central part of

this assessment. To echo the comments made in section 3.3.1 and 3.3.3, risk

management requires an understanding of both probability and severity through

the operators ability to prevent incidents occurring but also their ability to

contain releases from a given site, should an incident occur. In broad terms there

should be an indirect correlation between the level of risk management and the

potential to incur ELD - type losses - as the level of risk management improves,

the probability of an event occurring reduces, and vice versa.

Again, guidance is available on best practice and emergency response through

Seveso II and IPPC schemes, and the related SHAPE-RISK programme

coordinated by INERIS on behalf of the European Commission, which acts as

a knowledge-sharing forum in the health, safety and environment fields. We

would refer the reader to these and similar local guidance on the implementation

of these two Directives for further information.

Summary3.5

The preliminary stage of the risk assessment process may focus on the development

of an initial conceptual model of the occupational activity in order to evaluate

potentially attractive and unacceptable risks. The main purpose of a conceptual

model is to assist with an objective and consistent assessment of the environmentalrisk associated with a site or organisation and to assist with the management of

that risk. In particular, the development of the conceptual model should enable

identification of the major factors that may contribute to the environmental risk.

Consequently, the assessment should also assist with identifying and focusing on

improvements that may be implemented as part of the risk management process,

thereby reducing the probability of a loss from occurring17.

Once an understanding of the environmental risk is reached, a judgement as

to the severity and probability of the risk is necessary to enable the insurer to

evaluate the key indicators, MFL and MPL. The severity is generally expressed in

monetary terms and currently a paucity of data exists in respect of environmental

damage costs in Europe. Some limited information may be gained from the US

experience.

For the insurer, deciding on the risk requires an evaluation of, in the first

instance, whether to insure, what elements of the risk may be insured and

the best insurance approach that may be applied, i.e. GTPL or EIL approaches.

Uncertainties in respect of the Directive may also have to be factored into the

insurers evaluation.

Ultimately, a robust assessment of environmental liability by an applicant/operatorwill make the insurers decision on risk easier but this in itself does not make a

risk insurable. An operator wishing to insure against an ELD - type of liability

17 In the context of this document, a loss may be described as an environmental damage event as

defined in the Directive.

Building a conceptual model

as a frst step

Paucity o data still an issue

or underwriters as regards

environmental risks


22/6222 | CEA


will need to reassure insurers comfort that the probability of an event occurring

is low enough for insurers to at least consider the risk. Such reassurance is

difficult to quantify specifically but as long as the applicant can demonstrate

good risk management practices on the basis of their environmental assessment

that not only reduces the probability of a loss occurring but mitigates theseverity of an event should something happen, then it is li ke ly that favourable

insurance terms will be the result. Insurance should not be viewed as a substitute

for risk management.

Possible insurance options4.

Existing insurance products - preventing gaps and overlaps4.1

Insurers may wish to include part or full coverage for the new liability withinthe scope of existing products. However, entities that decide to do so should be

aware of the possible dangers of mixing civil liability and administrative liability

within a single contract and other conflicts such as the policy triggers issues

described below when making strategic decisions that could include redefining

the boundaries of coverage.

The aim of this section is to help the insurance industry to identify the potential

overlaps, gaps or inconsistencies of coverage within the scope of the most

common products in the various European markets, to enable everyone to make

informed decisions.

The Directive does not follow the traditional lines of business definition of the

insurance markets. This is not surprising as it was not designed with insurance

in mind. All insurance solutions that potentially provide coverage for claims from

the competent authority and arising from environmental damage are under

focus, e.g. GTPL, professional indemnity, motor, aviation, marine and property

insurance.

General third party liability insurance4.1.1

In GTPL insurance, the object of the insurance is the insureds civil liability to

compensate third parties for injury or damage to property suffered by them, andin some cases for financial losses incurred by them, arising from the business

activity or property ownership of the insured party.

Strict liability on the operator or damage caused by third parties

According to the Directive18, where the damage has been caused by a third party

the operator of an Annex III activity is strictly liable but can recover the costs

from a third party. There will be circumstances where environmental damage

arises due to defects in premises or equipment operated by the insured but

where the defect is due to errors in manufacture or installation by a third party.

The rights of recovery for the liable operator against the manufacturer or installermay well be subject to different legal systems, e.g. civil liability or principles,

18 Article 8.3

Getting a goodunderstanding o the

state o the art o existing

insurance solutions in

various lines o business

A robust assessment is

needed and insurance

should not be viewed

as a substitute or risk

management


23/62CEA | 23


resulting in the operator not being able to recover fully the loss for which he is

liable under the Directive.

Where the insured is the manufacturer or installer of a defective product or

equipment installed in third party premises he may be pursued by the operator

in civil law for the recovery of losses incurred as a result of the environmental

damage.

Liability or damages to insureds own land

Pollution to land owned or occupied by the insured or by a third party is one of

the main areas of environmental liability. This must be considered with the fact

that GTPL insurances usually exclude damage to property owned or controlled

by the insured. This is relevant both for deciding on the coverage for costs of

remediation and of prevention of imminent damage to soil.

Where the insured operates on third party land he can be pursued in civil law

by the owner (who is liable under the Directive) for the cost of remediating the

environmental damage but only to the extent that the civil liability system in the

country concerned applies.

Position o the insured in the claim procedure

Claims conditions in GTPL policies usually impose certain duties and respon-

sibilities on an insured, according to which he has to refrain from acting in a way

that could imply he is liable. In the Directive, there are some mandatory provisions

relating to behaving and informing the competent authority that conflict with

GTPL policies but need to be recognised within a policy that applies to ELD losses

to ensure that the insured is not in breach of his contractual obligations.

Multiplicity o claims rom the same event

As stated above, some events can generate environmental damage according to

the Directive and, at the same time, traditional damage to a third party property

and/or bodily injury, e.g. a fire within a privately owned forest affecting protected

species and material property.

Drafting proper provisions would help to:

Prevent dual insurance that could lead to double recovery

Control possible duplication of exposure in the policy(ies); even though the

two categories of claims are probably subject to different legal procedures

and come at different moments in time or even in different insurance

periods.

Proessional indemnity4.1.2

The Directive is applicable to all occupational activities. Therefore, professional

indemnity policies, which cover claims for negligence against professionals, might

be affected by the liability based on the Directive. The services rendered can

be distinguished between low exposed ELD activities like the work of lawyers,

accountants and those which pose a higher environmental damage risk like

architects, engineers or environmental consultants. Errors in planning, design or


24/6224 | CEA


supervision as well as in consultancy might lead to environmental damage which

could result in recourse to claims by the operator. Therefore, special attention

should be paid to the existing pollution cover in the current policies offered.

Motor insurance4.1.3

Motor third party liability insurance (MTPL) may be exposed to claims arising from

the Directive, particularly with respect to the transport of dangerous goods or

waste specified in Annex III. MTPL policies usually cover only damage caused to a

third party on a civil law basis but not all MTPL policies are precise in that respect.

In most European markets there is still uncertainty on whether ELD exposures are

covered under MTPL policies or not. Countries where policy wordings contain a

clear provision that claims based on public law are not covered, e.g. Germany,

or where court decisions confirm such an interpretation of the wording, e.g. UK,

seems to be the exception.

It is unlikely that the transposition of the Directive will result in an increase in

claims frequency, i.e. accidents with dangerous goods have always happened,

but higher claim payments can be expected in this respect, due to the greater

emphasis on restoration in the Directive.

Policyholders most at risk are enterprises and freight forwarders dealing with the

transportation of dangerous goods or waste, as specified in Annex III. Insurers

may wish to study the impact of the Directive on MTPL insurance and decide to

what extent it may affect the coverage provided and insured persons informed

accordingly of the decision.

In any case, coverage designed for this purpose should be in line with GTPL/

EIL solutions, in order to avoid other gaps/overlaps. Special attention should be

paid to activities that may be borderline in terms of which policy is the most

appropriate, such as loading/unloading operations. Similar attention should be

paid to professional or commercial activities performed using non-industrial

vehicles and even private ones.

Aviation insurance4.1.4

Article 4 of the Directive does not mention any exception or limitation regarding

aviation activities. General liability and aviation departments could underwrite

the different activities of the aviation companies through separate policies and

should consider the impact and special nature of this liability regime when

assessing the risks attached to them and particularly try to identify potential

overlaps or accumulation of risks. It may also be necessary to draw these issues

to the attention of all transport operators, including air transport, and should be

encouraged to identify the extent of their potential liabilities, with those of the

owners of the transported goods.

Marine insurance4.1.5

Marine activities are not fully subject to the Directive according to Article 4,

paragraphs 2 and 3, but they can be subject, to the same obligations, including

prescriptions in Annex II, within the quantitative limits of their respective

conventions. GTPL and marine underwriters should make clear the boundaries of

some operations, such as loading and unloading, port manoeuvres and discharge


25/62CEA | 25


of brown waters, in order to avoid duplications or overlaps and adequately take

into account the Directive with its specific peculiarities. In any case, offshore

facilities and activities are not excluded from the Directive.

Nuclear insurance4.1.6

It should be remembered that, even though nuclear insurance is not part of the

Directive, nuclear power plants also create non-nuclear risks, such as changes

in the quantity, quality or temperature of water, that are very likely to result in

potential exposures to environmental liability damage within the scope of the

Directive. Coverage designed with this purpose should be in line with GTPL/EIL

solutions in order to avoid other gaps/overlaps.

Property insurance4.1.7

The Directive includes liability for environmental damage caused by an operator to

his own soil. Property insurance policies can be found that include some coveragefor this kind of damage. They include first-party clean-up cost insurance and

decontamination cost clauses, which provide insurance cover for the remediation

measures necessary on a companys own site after an insured event has occurred,

e.g. a fire.

The covered scope of remediation is usually broader than the Directive requires,

i.e. restoring the original condition as opposed to the necessary measures to

eliminate any danger to human health.

Even so, in order to avoid potential gaps - and overlaps, e.g. GTPL or EIL - the

classes of events in which consequential soil pollution is covered should beclearly determined and compared against all potential risks that could result in

soil pollution.

It should also be understood that own soil pollution can be caused by a third

party. In order to evaluate the risks, possibilities of recovering costs and potential

coverage for these claims, the third party analysis should include surrounding

activities, as well as subcontractors, tenants and clients, e.g. service company

works on oil tank and causes pollution the soil. Fire authorities can also create

soil pollution as a result of the run-off of water used to extinguish a fire.

Prior to binding the insurance cover, the risk assessment should include a closeexamination of these and other risks when the clean-up of first-party premises

and property is included in the cover.


26/6226 | CEA


Environmental liability insurance new concepts4.2

The section below outlines possible insurance options. Underwriters may wish

to consider the proposed underwriting checklist in Annex 7.3 highlighting core

elements to identify and assess environmental risks properly.

Stand-alone versus integration in GTPL products4.2.1

Insurance markets generally offer coverage for pollution events in two ways:

GTPL insurance: integrated pollution extension clause or separate section

EIL insurance: stand-alone environmental impairment liability policy.

Both approaches can be effective in binding a satisfactory level of coverage,

provided that product designers and underwriters are conscious of the implications

highlighted in the introductory remarks.

Stand-alone insurance concept

This approach allows insurance solutions to be developed without the need to

interfere with established pollution/environmental third party liability covers,

provided that the latter are properly drafted to avoid misunderstandings that

could lead to the possibility that both policies could be claimed against, in the

event of damage to natural resources.

The advantages of this approach are:

A clear distinction between civil and public law-based insurance cover,

which should increase transparency in insurance markets

It facilitates the development of insurance solutions that can be adapted

quickly and easily in response to emerging trends without hampering the

established client relationship

The development of innovative, specialist and flexible solutions is more

likely as stand-alone insurance products than other solutions.

However:

This approach could still result in the duplication of claims in cases where a

concurrence of environmental liability with traditional third party pollutionliability covers exists in the event of a loss. This would be the case if the

same pollution event triggers third party property damage and bodily

injuries as well as environmental damage

Insurers have to take into consideration their accumulation potential - see

section 4.2.9 - in order to put in place the proper controls or establish the

proper loss accumulation limitation clauses as appropriate

Increased administrative expenditure can be incurred by the insurer having

to issue and manage specific policies on a separate basis.


27/62CEA | 27


In any case, in order to properly define their scope of coverage, stand-alone

policies should state clearly:

Whether they cover only claims based on public law (e.g. Directive) or also

third party pollution/ environmental impairment based on civil liability

Whether they cover only liability claims arising from pollution events or

from any kind of environmental impairment/damage. Most of the EIL

policies limit the coverage to pollution events at present.

Integration into existing insurance solutions via endorsement

The integration of the ELD coverage into an existing policy allows the insurer to

provide coverage for all potential claims for the same event(s) into one single

policy.

The advantages of this approach are:

Insurers will avoid potential accumulation problems if policies state clearly

the maximum amount of cover offered for all liabilities, including such

extensions of cover

The development costs of such a solution and the administrative expense

incurred by the insurance company in managing the policy are likely to be

much lower than in the case of stand-alone insurance products.

However the lack of statistical details, e.g. no separate premium allocation

to the ELD coverage, no separate tracking of ELD claims and no differentiation

of liability concepts may hamper proper risk assessment of claims developments.

In addition, insurers need to be alert to the dangers of mixing different policy

triggers within a single wording.

In any case, endorsements should deal clearly with the features of the Directive,

namely:

Public law regime only; not third party liability

It may not be possible to provide full cover for the liabilities under the

Directive

The obligations of the insured and the rights of the insurer in the claim

procedure will be different.

Also, it must be made clear whether the coverage is limited only to pollution

events or whether it includes all kinds of environmental impairment/damage.


28/6228 | CEA


Insured events4.2.219

A basic principle of an insured event is that the time of occurrence or its discovery

must be unpredictable, and the occurrence itself must be independent of

the will of the insured. Therefore, the natural scope of insurance coverage is

usually limited to identified, unintended and unexpected incident(s). Where the

emissions do not meet these requirements, they can be regarded as occurring

within the normal operations of a given activity, for example:

Authorised emissions: liability of this kind should be attributed to the

competent authority and thus be irrelevant to the insurance

Emissions regularly above authorised limits: when this happens in the normal

course of operations, it represents a management style that shows a disregard

for responsible behaviour towards the environment. Insurance is not a

substitute for poor risk management and is not intended to apply in such

circumstances when the cause of pollution is unexpected and unintended, itmay be classified as accidental and suitable for insurance coverage.

An accidental event causing pollution/environmental impairment can be classified

in two categories:

Sudden and identifiable in time, like fire, explosion, collapse, flood, etc,

commonly known in the insurance market as sudden and accidental

Unintended and unexpected remaining unnoticed, including its

consequences, over a period of time, e.g. seepage, and gradually causing

pollution up to the moment that it or its consequences are finally

discovered, usually described as gradual although market practice in

Member States varies.

Sudden and accidental losses display some positive features that reduce some

of the difficulties of environmental risks:

The precise timing of the event causing the emission is almost always known,

so the timeline of events leading up to the loss, and thus the coverage

period, can be objectively determined

Putting in place measures to limit, control and repair the damage is easier

and the economical consequences are likely to be lower

The estimation of frequency of loss events, based on existing accident data

from traditional damage, is possible for sudden and accidental events.

Where an accidental event causes gradual emissions, the conditions for claims

management can become much more complicated if it is not addressed in the

policy wording that:

At the moment that pollution is discovered, the damage caused is likely to

be much more severe

It may be difficult to allocate the emissions to a definite point in time

and this can lead to disputes over coverage and which insurance contract

should bear the claim.

19 Sudden and accidental, gradual emissions, normal operations.

Apart rom identiying

gaps and overlaps in

existing insurance products,

underwriters might review

key elements o the

underwriting process


29/62CEA | 29


In any case, when designing and underwriting pollution/environmental

impairment insurance it is important to bear in mind the following:

Sudden and accidental is not a legal term

Both terms sudden and accidental should be properly defined in the

policy in order to avoid allegations of unclear wording

As an alternative, to add clarity to the sudden and accidental policy

wording, the use of a time-based clause could be considered, i.e. to limit

the covered emission to a defined period (e.g. seven days) or a named

perils clause (i.e. coverage limited to named events like fire, explosion)

The required loss experience is unlikely to be available in sufficient detail,

which means that adequate risk pricing levels will be very difficult to set

or, at least, subject to considerable uncertainty

In accordance with the general principles of insurance, the coverage for

gradual emission is unlikely to include any liability as a result of authorisedemissions and is likely to be limited to unintended and unexpected

emissions.

Covered costs4.2.3 20

It is anticipated that policies generally will state which prevention and remediation

costs are covered and those that are not. It may also deal separately with

investigation and defence costs.

Costs or preventive measures

These are any measures taken in response to an imminent threat of environmental

damage, with a view to preventing or minimising that damage, includingemergency measures. According to the Directive, the operator is obliged,

without delay, to take the necessary preventive measures even without any prior

notification to the insurer.

The underwriter may wish

To consider whether or not he intends to cover these costs in these

circumstances

To apply a requirement for simultaneous notification to the insurer

To distinguish measures that the insured should always take, as part of

his normal activity, to prevent accidents by means of using best available

techniques, performing proper maintenance and avoiding improper

procedures.

Remediation o land damage

Since land in most Member States belongs to private individuals and enterprises,

or is in public ownership, under the existing civil law liability regime these parties

are normally able to demand reimbursement of the cost of cleaning up their own

land and consequential losses in the event of contamination by a third party.

In most EU countries, GTPL or stand-alone EIL policies already provide insurance

coverage for damage to land owned by third parties, and individual insurers

20 Preventive, primary, complementary, compensatory remediation measures.


30/6230 | CEA


and reinsurers have access to statistics and expertise in claims settlement for

this category of risk.

The same applies to measures for the prevention of impending insured damage

to persons and property when an accident has occurred (prevention21 and/or

mitigation22 costs). In practice it is anticipated that remediation measures will be

similar.

Primary remediation

This instrument is already known to public authorities as a result of existing

environmental legislation. Despite this, primary remediation of species and

habitats can be very controversial and lead to much uncertainty in terms of cost

efficiency. Exhaustive remediation programmes can be extremely expensive with

marginal environmental improvement. Therefore, in order to achieve a proper

risk assessment, premium calculation and conscious underwriting, technicalcriteria should be developed to decide on the methods to be implemented and

the objectives to be achieved in case of environmental damage.

One of the alternatives to be fully or partially considered for primary remediation

is natural recovery, which can entail important cost savings in recovery cost, but

lead to longer recovery period with increasing compensatory restoration bill, as

explained below.

Complementary remediation

This is basically a new instrument for the remediation of environmental damage

but it is already known in respect of infrastructure projects (moving of existing

habitats). There are major issues still to be resolved and legal grey areas which

could well result in disputes with the authorities in the event of a loss, like those

regarding:

The establishment of a relevant threshold

The assessment of the damage or the appropriate remediation measures

The determination of the extent of the loss, which also depends on how

well the baseline condition (the state of the natural resources before the

loss event occurred) was documented, or

The evaluation of the various loss patterns in monetary terms.

21 Expenses for measures prior to occurrence of an insured event to avert or mitigate an otherwise

unavoidable instance of insured damage.

22 Expenses for measures after the occurrence of an insured event undertaken by the insured or

those acting on their behalf in order to avert or minimise insured losses (salvage expenses or loss

mitigation expenses).


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Compensatory remediation

These measures are not connected with the cost of restoring the baseline

condition or the original environmental benefit, but with compensation of the

loss of availability of the environmental services for the period of time needed to

recover the baseline conditions. There are no guidelines for calculating the levels

of this kind of harm so far. Insurability will be enhanced through the creation of

clear and consistent guidelines that can be applied to all Member States and all

cases of environmental damage.

As a result, the insurance industry finds a wide field of uncertainty when trying

to estimate reliably the amount of compensatory remediation due, and the

costs thereof, as a basis for premium calculation. The insurance industry awaits

the completion of the REMEDE project; the delivery of the tool box hopefully

will go a long way towards removing much of the uncertainty. However in the

meantime, the uncertainty should be considered when deciding upon binding

coverage for this category of restoration by using the various underwriting tools

at the underwriters disposal.

Temporal scope o cover4.2.4 23

As latent claims are a widespread issue in environmental liability, it is extremely

important to structure the cover trigger so that a particular loss can always

be clearly attributed to a specific point in time and insurance period. The use

of present-event triggers such as first discovery/manifestation or claims

made may be appropriate. A causation trigger, sometimes referred to as acts

committed, which relates to a point or several points in time in the past whenthe damage had its origin (i.e. manifestation of environmental damage today,

caused by an emission in the past) is not appropriate. The example illustrates that

there may be years between the action or omission which caused the damage

and its manifestation. With such a causation trigger in place it might happen

that policies that have been claims-free for many years can become very claims

productive from historical activities and consequently underlying assumptions

made in assessing the risk and in calculating the expected loss turned out to be

fundamentally wrong.

Occurrence-based triggers could be appropriate to cover sudden and accidentalenvironmental damage if a precise definition of occurrence is used in order to

ensure that the coverage trigger date is about co-incident with the first discovery

date of the loss.

Although the Directive is applicable for events that occurred after 30 April 2007

only, it is possible that some Member States might expand the liability regime for

earlier events. Therefore it is important to understand the extent of the exposure

and it may be advisable for the policy only to cover claims arising from an event

that occurred on or after 30 April 2007, regardless of the trigger used in the

policy.

If retroactive coverage is provided, it is suggested that the retroactive date is

fixed, taking in account the inception date of transposition law, in order to avoid

23 Causation, occurrence, first discovery/manifestation, claims made.


32/6232 | CEA


covering events that happened before 30 April 2007 to be in accordance with

the Directive.

Where the first discovery/manifestation or claims-made principles are applied,

insurers need to decide to what degree cover will continue to be provided after

the expiry of the policy for insured losses which occurred during the policy period

but were not known, had not manifested themselves or for which claims were

not made by the expiry date (extended reporting period).

Geographical scope4.2.5

Many operators have activities in more than one Member State or even further

afield and may wish to arrange their insurance on an international basis rather

than have a separate policy in each country. In addition, environmental damage

can cross international borders and therefore be dealt with wide a variety of legal

regimes.

Cross-border damage

The Directive transposition law applies to the Member State territory only. However,

potentially liable operators are not only responsible for damage occurring in their

home country. Environmental damage might also occur on a cross-border basis

involving neighbouring countries or an insureds activities could result in liability

involving many European countries, e.g. trans-boundary pollution of watercourses

or services provided outside the home country. Underwriters may wish to consider

this fact by determining the geographical scope of an insurance solution.

According to the most recent status update on Directive transposition (see

Annex 7.1), most Member States have not yet enacted the Directive into

national law. Therefore there is a lack of legal certainty for all key stakeholders,

i.e. will Member States adopt the scope of the Directive or exceed it (e.g. non

applicability of the permit defence, introduction of proportionate liability). This

fact should be evaluated in the risk assessment and pricing process. An extension

of the geographical scope beyond the home territory has results in an exposure

to foreign laws and court practices in a field where there may be a lack of legal

clarity or certainty.

Pan-European policy/International programmes

When designing Pan-European policy/international programmes, the fact that

many of the Member States have not yet enacted the Directive has to be

taken into consideration, mainly when the Directive coverage in the master

policy includes difference in limits/conditions coverage.

Below are some questions regarding the design of products that need to be

answered when drafting this kind of programme:

How is the geographical scope of cover defined in the master

agreement?Does the insurance solution cover the liability of the Directive only or does

the scope of cover goes beyond?

What is the scope of coverage in local policies covering particular country

specific Directive transposition legislation?


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This is of particular relevance if an insurance solution has a reversed difference

in conditions24 provision in place to avoid going further than the intended scope

of the international programme. One should avoid importing country-specific

coverage into the pan european policy/international programme.

Losses arising rom deective products4.2.6

Insurers underwriting GTPL policies covering liability for defective products may

wish to consider the potential risk to the manufacturer in case is where the

insured is expose

1203085136 environmental liability report

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