Australia’s environment laws are world-leading, and are getting tougher all the time as governments look to regulatory controls to reduce polluting – and look to higher penalties and legal liabilities to recover costs of pollution.
Tighter regulations introduced in the last few years across most Australian states include a wider range of penalties, higher maximum amounts – and a reduced number of corporate defences, all of which should prompt at-risk organisations to make sure their insurance policy provides adequate cover for pollution incidents.
AIG Regional Vice President James Halfacree says worldwide, the environmental liability class is growing at about 10% per annum.
China is one of the most significant areas of growth for this insurance class, Halfacree says, and environmental pollution liability insurance is now compulsory in China for businesses in high-risk categories such as mining, chemical and oil and gas environmental risks.
In Australia, Halfacree says, there is a low frequency of claims against environmental insurance policies but the severity of claims is generally quite high.
“We see claims north of six figures. We don’t see many of them but when we do, liability can include property damage, third-party business interruption, clean-up costs and natural resource damage.”
Australian environmental regulations vary on a state-by-state basis, he says, and brokers need to be aware of the differences.
“In NSW, for example, there’s recently been an introduction of legislation around pollution from underground storage tanks, following big uninsured losses in that area.”
David Rogers is the Managing Director of Ironshore Australia, which is involved in significant environmental cover overseas.
“Australian environmental is under-penetrated versus the US, Canada and Europe and has a lot of room for growth, which is taking place and expected to continue,” he says.
At present, Ironshore is focusing on fracking exposure for the oil and gas industry but he expects that the local market will keep expanding.
ACE Group Environmental Risk Regional Manager for Asia Pacific and Far East Kane Bennett agrees with the growth potential and says businesses in Australia have to comply with stringent environmental regulations in place.
“There is also pressure and, commonly, motivation on the part of organisations to behave in a social, ethical and environmentally accountable manner,” he adds.
Liability can include property damage, third-party business interruption, clean-up costs and natural resource damage.
“In Australia, businesses may find themselves responsible for remediation of a site under the Contaminated Sites Act so that the responsibility is placed on them to clean up legacy pollution issues for which they were not responsible, because they acquired the contaminated site as part of the purchase of a business property.”
Bennett says that the market for environmental insurance is a very broad one.
“People generally associate environmental insurance with larger industries such as chemical companies and oil refineries, but the truth is that all companies have some level of environmental risk,” he says.
“The wordings that we and other major environmental underwriters offer don’t vary widely,” says James Halfacree, of AIG.
“The level of manuscripting that goes on is quite high though, as most policies will be tailored to the site that’s covered.”
ACE Group’s Kane Bennett says the company offers customised solutions to clients who do business across international borders and has recently launched several new products in the area.
The Broadform Liability and Environmental Protection Insurance Package targets small- to medium-sized businesses and combines an existing Broadform liability insurance with protection against environmental liabilities.
Australian environmental regulations vary on a state-by-state basis and brokers need to be aware of the differences.
“This includes gradual pollution, which is normally excluded under most general liability policies,” says Bennett. “The package also includes cover for first-party clean-up costs for pollution emanating from the insured location as well as coverage for remediation costs imposed by government agencies.”
Bennett says there are big opportunities in this product class for brokers at the moment.
“Brokers certainly need a base-level understanding of environmental risk to help clients identify their exposures and provide solutions to gaps in their clients’ existing insurance programs.”
He says that ACE is rolling out seminars for brokers on environmental insurance across Sydney, Melbourne, Adelaide, Auckland and Wellington throughout the rest of 2013.
Topics covered during the seminars will include how an environmental liability policy differs from general liability; how to understand and explain the risk factors that influence EIL premium calculations; typical environmental risk exposures; and case studies of real claims scenarios.
Mind the gap
The Supreme Court of Queensland recently ruled against a company that sued their insurance broker for negligence following a chemical fire in 2005 that cost the site owner, Binary Industries Pty Ltd, over $10 million in clean-up costs.
Water used in fighting the fire became contaminated and caused pollution on and off the site. Queensland’s Environmental Protection Agency issued a statutory clean-up notice to the landowners.
Binary’s public liability insurer rejected their compensation claim, stating there was no third-party claiming compensation, rather a claim for costs incurred by the insured under a statutory obligation to remediate pollution.
The Supreme Court ruling, in favour of the insurance broker, was made because costs to remediate an insured’s own property were not indemnified under the liability policy that the client claimed should have been in place.
The chemical manufacturing company argued the insurance brokers had been negligent because they did not place a primary and excess policy and industrial special risks policy and failed their duty of care to obtain appropriate policies of insurance. However, the court found these policies would not have covered such a claim either.
The case shows that brokers should make sure they consider a specialist environmental insurance product for clients at risk of environmental pollution and associated clean-up costs.
A spot of unauthorised show-and-tell shut down a school for two days after a student brought along a vial of mercury to show his friends.
When a teacher subsequently found a small amount of a substance thought to be mercury in the cafeteria, the school treated it as a possible mercury spill.
Under the school’s duty of care, 53 students were taken to a nearby hospital by bus and an environmental consulting company brought in to conduct a clean-up and undergo air testing.
The school was re-opened after air testing came back with a negative finding; meanwhile, the bus that took the students to the hospital also had to be taken out of service to be cleaned and tested for contamination.
The first-party loss claim was covered by a Premises Pollution liability policy, which covers pollution conditions at or emanating from the named location and applies on a gradual as well as a sudden and accidental basis, for both third-party and on-site environmental damage.
Environmental Liability – the nuts and bolts
Standard general liability insurance products usually limit pollution cover to third-party property damage and third-party bodily injury arising from sudden and accidental pollution incidents. Costs not covered can include first-party and third-party clean-up costs as well site remediation from serious pollution that has occurred gradually, emergency response, civil fines and penalties, damage to natural resources and diminution in third party property value.
Pollution costs not typically covered are those resulting from ongoing operations or from activities that took place on the business property in years past, even if the business did not own the property at the time the pollution occurred.
Environmental insurance is often viewed primarily as third-party liability coverage to cover pollution-related lawsuits excluded under general liability policies. However, a proper policy should also insure against the risks of pollution-related damage and clean-up costs to the client’s own property and to the property of others.
Source: ACE Group Insurance