Author: Shawn Alavi
As we enter 2025, the severity of environmental risks and their potential to disrupt regular business cycles can't be overstated. Organizations must ensure that their assets and operations are adequately insured against unexpected pollution incidents. This whitepaper explores the importance of Environmental Impairment Liability (EIL) coverage and provides key considerations for organizations, whether or not they currently have EIL coverage.
Key considerations for organizations without Environmental Impairment Liability coverage
Ubiquity of environmental risk
Environmental risk is universal, and its magnitude varies depending on the nature of the business and internal risk management practices. Organizations must recognize that environmental incidents can occur anywhere and any time.
Financial burden of environmental incidents
Environmental incidents can impose significant financial burdens, particularly in scenarios where defense costs escalate until the responsible party is identified. There are numerous documented cases in which the failure to mitigate financially has led to bankruptcy.
Limitations of liability transfer
Transferring liability isn't foolproof and often lacks proper vetting. Certificates of Insurance typically provide only a snapshot of an environmental program without detailing policy limitations.
Contractual indemnification
Contracts may require organizations to indemnify other parties in the event of an environmental loss, leading to increased costs and impacting the balance sheet.
Inadequate general liability coverage
Sudden and Accidental (S&A) coverage on General Liability (GL) policies only provides third-party bodily injury and property damage coverage, which is limited by a discovery and reporting period. Standalone environmental policies offer more comprehensive coverage, including gradual pollution incidents.
Insufficient Property policy coverage
Environmental coverage on Property policies is often limited and inadequate to address the extensive direct and ancillary costs related to an environmental incident.
Comprehensive coverage of standalone environmental policies
Standalone Environmental policies cover cleanup costs, bodily injury and property damage, emergency response costs, crisis management expenses, and fines and penalties regulators impose.
Increasing pollution exclusions
Insurance markets are increasingly imposing absolute pollution exclusions on Property and GL policies, making standalone Environmental policies essential.
Prevalence of first-party claims
In Canada, 80-85% of environmental incident claims are for first-party cleanup costs and business interruption, neither of which is covered without a dedicated environmental policy.
Long-tail bodily injury claims
Bodily injury claims are considered long-tail exposures that can take decades to materialize. The maximum loss potential in these situations is often unknown due to the potential scale of individuals affected.
Causes of environmental claims
Environmental claims often result from human error, subpar risk management or uncontrollable factors. An Environmental insurance policy should be integrated into a company's risk management framework.
Regulatory landscape
The regulatory landscape at all levels of government continues to place more responsibility on business owners, increasing organizational liability.
Lack of Directors and Officers coverage for environmental liability
Directors and Officers (D&O) policies don't cover environmental liability, leading many individual directors and officers to pay out of pocket. Standalone environmental programs cover all current and former directors and officers.
Key considerations for organizations with Environmental Impairment Liability coverage
Market selection and partnership
Many markets don't offer the broadest coverages or enhancements, leaving businesses exposed. Market selection and partnership are crucial for proper risk management.
Insurable losses
Uninsurable losses can sometimes become insurable through givebacks, such as limiting contamination to a median or insuring agreements.
Broker expertise
Organizations should ensure their brokers have dedicated resources specializing in the Environmental risk market.
Policy renewal
Make a commitment to revisiting policy terms and conditions at each renewal. Legislation changes, new risks emerge and underwriting appetites tighten, necessitating regular policy reviews.
Risk management integration
Environmental risk management should be embedded in the overall risk management strategy to minimize environmental incidents and enhance insurability.
Tips for effective renewal strategy
Multi-year term options
Multi-year term options are available for most environmental products, providing financial relief and coverage stability.
Pre-existing coverage
If environmental reports are available for owned or leased assets, pre-existing coverage can protect against unknown historical liabilities.
Coverage for divested assets
Maintain coverage on a divested site schedule to protect interests during the time on site when a location or asset is relinquished or divested.
Rate increases
Pending no changes or losses to the insurance program, rate increases are typically less than 5% annually and up to 10% on multi-year policies.
Coverage for discontinued operations
Ensure coverage is in place for the time businesses conducted work or services, even after operations or services are discontinued.
Conclusion
As environmental exposures continue to rise and contribute to both financial losses and reputational damages, a comprehensive environmental solution should be an ongoing consideration within an overall insurance program. Properly addressing pollution exposures in 2025 and beyond is crucial for safeguarding organizational assets, operations and financial stability whilst continuing to demonstrate a proactive position against potential losses in an increasingly volatile, global economy.
