ENVIRONMENTAL SECURITY: WORTH THE RISK?

Anthony Saunders, Environmental Insurance Specialist, EnviroSure.

All insurance brokers have an important community contribution to offer by providing insurance to create a sustainable environment. This assertion raises a question: should environmental engineers highlight in their reports the potential of limited liability based on the cover they may hold?  

When discussed, the topic of environmental insurance often invites responses that emphasise the high expense – even in the absence of costing. But why do we say this? Commonly we associate pollution clean-up costs with the cost of insurance. It is important to recognise that the cost to include environmental insurance is not the stumbling block; instead, it is the cost of environmental security, and the risk management procedures that need to be deployed to satisfy the insurer that risk has been minimised.

Consider the 2010 Gulf of Mexico oil spill, one of the worst environmental accidents in human history. Many an argument has posed that the spill could have been avoided had a sufficiently robust ‘blow-out preventer’ been deployed. This would have been a material condition if an environmental insurance policy had been in place. Without insurance, however, environmental risk prevention systems are commercially selected by the immediate stakeholders. With insurance, essential risk management criteria lead to best-practice operation and reduced community concern.

In this light, we must remember the distinction between the cost of the unexpected and the cost of insurance. If environmental liability insurance was compulsory, it would increase community risk awareness and improve material protection strategies. For example car manufacturers continue to improve safety features as a condition of compulsory insurance to protect drivers, occupants and the greater community. Is our environment worth the risk of being uninsured?
It is on this subject of risk, however, that corporate social responsibility is challenged. Corporations face difficulty in perceiving the difference between those risks that we are certain can occur (such as the Japanese nuclear reactors being built to withstand earthquakes of up to 7.9 on the Richter magnitude scale), and those that we imagine could never happen (such as the 2011 Japanese earthquake that resulted in a massive tsunami and flooding critical generators used to cool nuclear reactors, releasing radioactive material into the atmosphere and contaminated water into the groundwater and ocean). Had adequate insurance been a prerequisite for erecting the reactors, the location may have been deemed unsafe for the chosen reactor design.

‘Certainty vs. uncertainty’ translates in insurance terminology to ‘Foreseen vs Fortuitous’. Fortuitous events – events that occur by chance – are insurable, and the robust methods that insurers apply to calculate a risk premium, are logical. Moreover, simply identifying the two ‘effs’ can encourage more transparency in commercial contracts, and demarcate between the commercial disputes and those that are fortuitous (leading to less contractual obligation ambiguity).

Let’s summarise the important points:

1. Foreseen vs fortuitous (the two effs distinguish between certainty and uncertainty)
2. Self insurance invites reckless behaviour (imagine if we drove around in cars without any insurance in place to cover injury to the public)
3. Risk assessment may not identify environmental risk (the kind of risk associated with total environmental degradation beyond which advisers have not foreseen nor can they afford to self insure)
4. Environmental insurance is commonly available (fortuitous events are insurable subject to an environmental security review and risk recommendation).

Is our environment (built or otherwise) worth the risk of being uninsured?

Communities would be well advised to appreciate the contribution that insurance can make to determining what society collectively values – but how is this connection made? Climate change appears to be increasing the frequency and severity of a range of environmental phenomena including floods, tsunamis, tornados, hurricanes and earthquakes. Such events place higher demand upon our (already) rapidly growing need for resources and result in a significant loss of environment. Would the story change if environmental insurance was widely accepted?
 
When insured, individuals are more likely to act responsibly, as they can be accountable and transparent without fear of financial loss. For example, without legal protection (professional indemnity insurance) in place, a service station owner may prefer to avoid having to report a leaking underground storage tank.
 
The ability to address environmental risk is an intrinsic role that insurance brokers need to develop, or they may find themselves exposed to risk if a client remains uninsured. Environmental protection is a two-way street, one for the remediators and the other for those who need to learn how to stop contaminating. Insurance can be used to mitigate the costs
 
In the case of environmental contamination, the best way to reduce liability is to admit to it. Sharing such knowledge with an insurance broker (or an experienced adviser in environmental risk) can be an important part of an effective remediation and financial strategy.
 
Many professionals perceive themselves to be environmental experts, but not all are licensed to advise and insure pollution risks. For example, environmental risk managers identify foreseen risks, and (unless advised otherwise) can assume the fortuitous is covered by insurance. The same may also apply to an environmental accountant, who accounts for the contributing factors that result in an existing or potential impact to the environment but could be exposed to fortuitous risk. Knowing that fortuitous environmental risk is covered creates certainty.  
 
By expecting policies to be issued that respond to the laws governing the protection and sustainability of our environment, correct insurance may help educate communities and environmental advisers about the importance of respecting those laws. Thus, it is critical that insurance brokers understand the inherent environmental risks when arranging cover.
If risk managers learn to distinguish between the ‘effs’, they can inform their clients about the fortuitous risks associated with environmental liability that must be insured. For environmental insurance to be coordinated, a key factor is to recognise that insurers must also understand the risks. Never assume that you are covered until you obtain a letter of confidence from your licenced insurance broker attesting to the adequacy of the cover arranged, and never agree to accept a disclaimer from an insurance broker. Is our environmental security worth the risk? To play its part in a better environmental future, the insurance sector needs environmental insurance advisers who are able to interpret – and cover – the fortuitous components of potential environmental liability.

Anthony Saunders is an Environmental Risk Broker at EnviroSure. This article has been adapted from an opinion column at Insurance Business Online, published 28 May 2012.

The Pollution Solution: Water worth the Risk

Anthony Saunders, Environmental Insurance Specialist, EnviroSure.

In an ideal future environment, matters affecting our  ongoing (environmental) sustainability will be addressed responsibly and be underpinned utilising insurance.

In an uncertain financial climate where consumers are looking for the best “deal”, the trade-off can be ambiguous clauses, exclusions and pollution limitations. These may cause uninsured losses leaving our precious water resources diseased. Is water worth the risk of being uninsured?

Pollution exclusions on Legal Liabilities covers in Australia may not apply where the escape of a pollutant is due to a sudden, unexpected  and unintended occurrence. This may give rise to arguments where an insurer could deny liability on the grounds that the conditions of the claim do not quite meet the cover conditions. Here are some examples:

• Was the cause of the matter that gave rise to the incident a gradual release or was the first moment of the release sudden and unexpected? E.G; it can take years to detect the aftermath of a sudden and unforeseen “leak”.
  

• Do we accept that most underground storage tanks (UST) may leak over time? Can there be “sudden and unforeseen” exposure, other than say in a major fire or other catastrophe.
  

• Is ignorance a defence for the responsible party of a UST or a pipeline that is leaking?    
  

• Do we understand that the term “polluter” can actually refer to a known and registered producer of contaminants produced in monitored and controlled amounts, which are subsequently released?