How to protect against environmental pollution and contamination risks

Local Authorities have to manage a wide range of services such as waste and recycling through to developing land for housing, creating space for employment and increasingly developing renewable energy projects. Often these projects will be a joint venture and are likely to have external funding as part of the mix.

As with all large scale or complex projects identifying and managing potential liabilities and risks can be a hard task. Who is liable, who is best able to manage the risk, respond and pay for potential claims can be a matter of much debate and contractual wrangling.

Another recent development is the growing move towards Environmental, Social and Corporate Governance (ESG). Evaluation and reporting of ESG criteria is becoming increasingly important for all organisations and, as part of the ESG agenda, organisations need to show how they will consider, manage, mitigate and protect themselves against a wide range of environmental risks.

An important component of ESG is that an organisation should have a strategy to ensure the sustainability of its business and have demonstrable measures in place to be resilient.

Professional Indemnity (PI) Insurance – Issues for consideration

The traditional route of using contracts to transfer liability is understood, but there is a key limitation in this approach – insolvency. Simply put, if the company to which the liability is transferred is no longer there any financial settlement is unlikely and importantly nor is their PI insurance.

For land and other project developments, clients often seek the consultant’s and contractor’s PI insurance as a safeguard against potential long term residual pollution problems, often under the misapprehension that such PI insurance offers the client a direct benefit. Points for consideration are provided below:

• PI insurance is negligence-based cover, incepted primarily for the protection of the consultant/contractor against claims that they have been negligent in their work or professional duties. The burden of proof for negligence is extremely onerous.
• If a contract is in breach of the terms of the PI policy then the cover can be invalidated and the contractor or consultant will be left to defend and settle the claim themselves. Most consultants/contractors will have a very low credit rating when compared to insurers.
• Warranty agreements usually require PI insurance to be in place for a period of 12 years, provided it remains "available at economic cost". PI insurance is usually placed as annual cover rather than a one-off cover for the period of the contract, the policy is ‘claims-made'. This means that any claims have to be made during the policy period. If the insurance is lapsed, cancelled or non-renewed at any time, then there is no cover.

The majority of environmental PI policies are placed on an ‘aggregate limits’ basis and are not ring-fenced to a particular project, so if the consultant\contractor has entered into a number of agreements and suffers one or more claims during a policy period, there is a possibility that the aggregate limit of indemnity has been exhausted.

How can you secure a project?

Selecting technically capable and experienced advisors and contractors is of course a key element of risk management for clients, this should include using a qualified insurance professional to undertake due diligence of the insurance offered by consultants and contractors before they are appointed.

The consultant’s and contractors’ PI insurance and other insurances, along with the contractual arrangements, should hopefully afford some protection for the client, but PI insurance and warranties are primarily based on fault and negligence occurring, which can be difficult and costly to prove. Often consultants have to rely on incomplete Regulatory guidelines. What is ‘definite' may yet to be resolved to any degree of confidence in both scientific and legal fields with the shifting sands of liability through scientific discovery and case law adding to uncertainty.

Ultimately, trying to protect your organisation against the wide range of risks just through reliance on someone else’s insurance and contractual provisions alone is not the only option available.

Explore Project Specific Insurance

Project Specific Pollution Insurance

A number of Councils and a wide range of clients have used Contaminated land insurance to protect against the potential risk of claims from historic contamination rather than putting it onto another party (tenant, JV, funder) or retaining the risk. Policies have also been extended to cover the risks new pollution being caused and historic contamination being released during site (re)development works.

Increasingly a wide range of policies have been put in place for both operational and project specific developments ranging from waste services/operations through to renewable energy projects.

Polices can cover third-party and regulatory claims and include consequential loss, property damage, bodily injury and on and off site remediation costs.

Benefits can include:

• A site specific ‘ring-fenced’ policy with long term duration of cover
• Project specific cover (contractors pollution liability cover) for the development phase based on a long term occurrence based policy wording
• Cover for change in law and applicable regulations
• Cover for Legal and technical defence costs
• Cover to include landowners or tenants business interruption costs
• Flexibility to add additional insureds to include other stakeholders, funders, tenants and others.
• The policy can be assigned with the ability to stay protected as an additional insured
• Secure credit rating with a Regulated Insurance company
• Accountability in the risk transfer
• Crisis management and emergency response costs.

The coverage and cost is highly dependent on a range of factors, such as the quality and extent of technical information, structure of contracts, etc.

EIL can protect business operations from interruption caused by pollution/ contamination and cover property investment income such as loss of rent, to protect landlords and lenders/investors. This can be combined with contingency plans showing a robust and demonstrable management and mitigation of risks.

Policies can cover any past or present Directors/Employees and Officers of insured parties, multiple insureds and their benefits can also be assigned to a new purchaser and investors. Cover can be obtained for ongoing commercial/ industrial activities, thus protecting a company’s business operations and employment.

Conclusion

Reliance for your own protection against environmental risk issues solely through contractual arrangements and/or insurance provided by others will always bring with it inherent limitations and consequently residual risks.

The insurance industry is highly regulated for the transfer of liability and places extensive requirements on insurers to maintain adequate financial reserves to cover claims.

Environmental insurance can help to facilitate transactions and loans/investments, by transferring known and unknown environmental liability risks in an open and transparent way for a known cost to an environmental insurer, thus demonstrably providing effective management of environmental risks and adding value.

This article was originally published in stronger, the ALARM journal. ALARM is a not-for-profit membership association that has supported risk management professionals for over 30 years. They provide members with outstanding support to achieve professional excellence, including education, training, guidance, networking, and industry recognition for best practice across risk management and related services.

These are brief product descriptions only. Please refer to the policy documentation paying particular attention to the terms and conditions, exclusions, warranties, subjectivities, excesses and any endorsements.