Pollution solution

Like the Roadrunner, who happily rushes along, always oblivious to a giant pile of rocks overhead planted by Wile E Coyote, so too are most UK policyholders blissfully unaware of the European Environmental Liability Directive (ELD).

The Roadrunner always manages to escape without a scratch. But the environmental directive has been in force since March, and lack of awareness could lead to mammoth liabilities. In other words, the rocks will fall unless brokers take action to warn policyholders.

“Brokers need to educate clients on the increased potential requirements of the ELD and then offer them some sort of protection,” Joanna Newson, a director at broker Gallagher London, comments.

Getting tough

The directive’s been a little slow to arrive in the UK, having first hit the EU’s statute books in April 2007. It’s been in force in other countries for a year or more, but it’s still not in place in Scotland or Northern Ireland.

It’s also not entirely new. Under various pieces of UK law, companies have always been responsible for the pollution they cause – the EU directive just brings it all together, harmonising liabilities across member states to a minimum level. But the potential impact is far greater.

Previously, if a company caused, say, a fuel-tank leak into a local river, the Environment Agency would clean it up and then bill the offending company for the remediation. Now, the Agency has the power to demand additional improvements to damaged areas.

The legislation also makes the polluter responsible for reporting incidents to the local authority or Environment Agency. And it encourages third parties to report pollution and compels the authorities to investigate every report they receive. “We fully anticipate increased claims,” Newson says. “Some interested green groups will be looking at certain polluters, and we’re in a ‘green environment’ where penalties are only going to get tougher.”

Until test cases hit the courts, there’s no telling what kinds of demands the Environment Agency will make or what kind of resources they will devote to investigating it. In Spain, where the directive was implemented much sooner, there are several active claims, but they are still working their way through the legal system.

“There’s no precedent whatsoever,” Newson says. “In theory, the liabilities are potentially greater, but no one knows until the first cases go through what scale they will be on.”

Filling the holes

Companies usually expect that their public liability or property cover will protect them in the event of pollution. So it can come as a shock when they discover – at the worst possible time – that it’s excluded.

Since the early 1990s, public liability policies have limited cover to sudden and accidental pollution, and pay out for damage to third-party property only. Meanwhile, property policies only kick in when pollution results from an ‘insured peril’ such as fire or flood, and is sudden and accidental.

The policy may also exclude the removal of contaminated soil – unfortunate since most pollution claims arise when damage occurs gradually. In such a case, the clean-up will often involve removing large amounts of contaminated soil at considerable expense.

Specialist pollution cover has traditionally been a headache for brokers. Policies were aimed at the property industry and linked to land transactions, to cover any historical pollution they may later discover on the site.

“Solutions have been expensive and difficult to obtain; you probably need a site survey, and then you get the premium an­­d the client couldn’t afford it,” Newson explains.

The new directive, on the other hand, applies to operational pollution. The good news is there’s clearly an opportunity here for insurers and brokers.

Ace Europe has offered premises pollution liability cover for about two years. The policy is worded to cover exactly those liabilities companies are exposed to under the directive.

These include legal costs arising from sudden, accidental and gradual pollution, remediation costs, and the costs associated with investigating the incident and legal defence.

Meanwhile, Newson recently devised a preferential scheme to help Biba members explain and sell premises pollution liability cover to their clients. It aims to help brokers explain and sell what has historically been a high-cost and complex product. So far, Ace and Gallagher are the only players behind the Biba scheme.

Shaping the market

Insurers are understandably reluctant to take on indefinite liabilities after their experiences with asbestos, which has left them exposed to unknown damages for years to come.

Like other new classes launched in recent years, then, cover for operational pollution is only written on a claims-made basis – that is, insurers will only pay out for claims made while the policy is valid, rather than for later losses that could be proven to have occurred during that period.

But the policy also has a retro-inception date, which means that, if it is renewed annually, it will still pay out for gradual pollution losses that have taken place any time since cover was first taken out. Newson says this makes the policy more valuable the longer it is in place.

Wayne Harrington, Ace Europe’s manager for environmental risk in the UK and Ireland, believes this type of product could make the leap to the mainstream within a few years.

“The operational risks have always been there, but the environmental insurance market hasn’t been focused on them,” he says. “That has changed over the last three years, as the legislation came in, but there still remains a huge amount of ignorance out there. The risks are real and, though the market has done well at transactional insurance, there’s a bigger market out there.”

Harrington’s team was set up in late 2005, to build on Ace’s success in America selling separate annual pollution policies.

“It took a lot of time and effort to come up with the right solution,” he says. “Using the same business model wasn’t going to work. We needed to open up the market for smaller companies, to simplify the product, and make it accessible and cost effective. You can’t expect people to buy cover when they can’t afford it and they don’t understand what it is.”

One of the biggest hurdles to expanding pollution cover was the sky-high premiums traditionally associated with the product. Making the cover easier to obtain will be key, says Harrington. “If you write enough of it, you have a spread of risk, different geographies, different businesses, a good mix of liabilities and cover.”

Covering operational rather than historical pollution may be uncharted territory in the UK, but it’s actually cheaper, he adds. “When you look at historical pollution, there’s a large amount of historical information, and a lot of due diligence to do. For operational risk, it’s a lot more about looking at risk management of the company.

“Some industries create more risk than others by the nature of their business. There needs to be a much more commercial approach applied; it’s been far too

How to sell it

Biba members can access premises pollution liability cover via a preferential scheme from environmental insurance specialist Gallagher London and underwriter Ace Europe. At the BibaEnvironmental.com website, brokers can get quotes within just three screens and bind cover on the spot with policy documents issued immediately.

For UK-registered companies, the vast majority of business is written online, using postcode profiling. Only 5% of cases, covering limits over £2m or excluded industries such as waste, for example, are referred offline. Premiums start at £650 for £500,000 aggregate limit of indemnity and £2,500 retention.

To use the system, all you need to know is:

• Title of company to be insured
• Current and prior use of each location to be insured (selected from a drop-down list)
• Address and postcode for each location (up to five in total)

But the system doesn’t only produce quotes. There’s also a raft of useful documents to demystify the new legislation and terms of cover – ideal for swotting up before talking to clients. heavily engineered.” Online quoting and binding also cuts costs out of the distribution channel, reducing premiums still further, he adds.

Harrington believes there is no reason why annual environmental insurance shouldn’t become as commonplace as directors’ and officers’ is. But, first, clients need to understand the need for and availability of such products.

“We are going to rely heavily on brokers to do that,” he says. “They’re there to understand clients’ risk and advise them of the products available. If they don’t do that, they’re not doing their jobs.”