The juncture between product and environment

There is no uniform definition of environmental liability and instead re/insurers must consider the variety of definitions provided by different jurisdictions, according to Ina Ebert, leading expert for liability and insurance law, at Munich Re.

Such definitions can be found in public statutory law, civil law or common law and some are broader than others, but they usually require that the causal chain between tortfeasor and victim somehow involves the “environment” – namely, air, soil, water, flora, fauna, biodiversity, local or global climate. Some definitions include indoor air, chemicals released by building materials or fire.

Similarly, the definition of “environmental damage” can vary, Ebert adds. Usually, definitions cover property damage, bodily injury and pure financial loss sustained by a third party. However, damage to land, water, natural resources, protected species or biodiversity might also be included.

Ina Ebert, leading expert for liability and insurance law, Munich Re

“While fault-based liability under tort law is an option in all jurisdictions, many jurisdictions have additionally introduced specific regulation addressing some varieties of environmental liability,” Ebert tells Insurance Day. Examples are the Comprehensive Environmental Response, Compensation and Liability Act and the Oil Pollution Act in the US or the Environmental Liability Directive in the EU.

Ebert explains: “Such specific regulation usually introduces some form of strict liability or shifts in the burden of proof. It might also broaden the scope of compensable losses, such as to biodiversity or loss of nature, or the scope of available remedies, such as abatement measures or compensatory measures for environmental losses that cannot be restored.”

Some jurisdictions, including France, Spain, Italy and the Netherlands, have also introduced pools for certain environmental losses. “Apart from that, thresholds for (potentially) hazardous substances and other limitations regarding their use can vary significantly,” Ebert says.

Finally, differences relevant for enforcing liability claims in general also affect environmental liability, she adds. This ranges from the existence of a loser-pays-principle, punitive damages or a jury system to provisions regarding litigation funding.

Environmental liability can be covered by a broad range of insurance products, Ebert notes.

Especially in less mature markets with no specific market solutions for environmental liability, liability for sudden and accidental pollution incidents could be covered under general liability policies. Certain professional indemnity policies, such as for engineers, could cover planning errors that caused environmental damage. Motor policies could cover environmental damage, like a leakage of fuel.

For mature markets, there is a variety of insurance products available specifically designed for environmental liability risks and adjusted to the specific jurisdiction, Ebert says. These products range from environmental impairment liability site policies to policies for storage tanks, contractors pollution liability and landfill closure/post closure. Some environmental liability policies may extend to first-party clean-up and remediation costs under public law.

Munich Re addresses environmental liability coverage by seeing careful risk selection as of “utmost importance”, Ebert stresses.

She explains: “Munich Re aligns and co-operates with expert environmental liability insurers, preferably with established environmental liability portfolios. We require a total or absolute pollution exclusion, with writebacks limited to named perils and/or a time element for US-exposed risks, and gradual pollution exclusions for non-US risks.”

Established environmental liability risks include, Ebert says, the accidental pollution or contamination of (ground)water, air, soil, property or wildlife with hazardous or potentially hazardous substances. This frequently involves landfills, superfund sites, waste incineration plants, chemical or petrochemical plants or refineries, pipelines, oil refineries or mining activities.

Ebert continues: “Both the pollution/contamination and the arising damage can be sudden, as for example when caused by a fire, explosion, collapse or flood. However, if unnoticed, the pollution can also continue over a longer period of time. After the accidental release of carcinogenic substances, it might take decades until the bodily injury caused becomes apparent.”

A lesson learned about environmental liability among re/insurers is to avoid hidden pollution conditions and shorten the development time of claims.

“This is not just about uncertainties related to inflation. Requiring a claims-made trigger shortens the latency period and avoids the stacking of multiple policy years for the same loss,” Ebert says.

“Methods to measure pollution change, the density of regulation increases, options to link injuries to specific substances improve and legal thresholds for (potentially) hazardous substances are lowered. You have to be able to adjust your policies to this,” she adds.

"Such specific regulation usually introduces some form of strict liability or shifts in the burden of proof. It might also broaden the scope of compensable losses, such as to biodiversity or loss of nature, or the scope of available remedies, such as abatement measures or compensatory measures for environmental losses that cannot be restored”

^{Ina Ebert
Munich Re}

Another lesson would be how crucial precise, unambiguous wordings are when defining what is to be covered, and how to allocate potential losses. The development of the pollution exclusion is a good example of the difficulties insurers can face in this regard, Ebert says, adding it is also essential to exclude gradual pollution from normal operations.

A third lesson is that some environmental insurance products turn out to be so unprofitable, they are hardly offered anymore, Ebert says, adding that cost cap policies, which cover the over-run of estimated costs for individual remediation policies, would be a good example of this.

Traditional environmental liability risks are limited to a certain region and a recent trend is the attempt to use liability to address threats to society on a global scale. An example of this is climate change litigation.

“While the vast majority of such claims is about raising public awareness or pressuring legislators into action, there is a growing number of claims for some kind of payment,” Ebert says. “As far as these claims are based on legal and intended activities, GHG [greenhouse gas] emissions as such, tort law is not an adequate tool, let alone liability insurance,” she stresses.

Intentional wrongdoing – such as greenwashing – is also not covered. However, claims based on negligence, ranging from non-compliance with reporting duties to not sufficiently considering the consequences of climate change when designing a product, might be covered. “The complicated, constantly changing, legal framework for these issues and increased public awareness add to the risks involved,” Ebert says.

Munich Re is “closely monitoring” all relevant developments to evaluate which actions are needed. For this, it uses its extensive global network of internal experts and external counsel.

Ebert explains: “We check wordings for clarifications that might seem useful. For example, Munich Re promotes climate change litigation exclusions for the general, product and environmental liability policies of large fossil fuel producers and power utilities. It might also become necessary to reconsider the appetite for certain risks. Finally, we ensure that our clients are aware of any emerging risks.”

Tighter regulation

Environmental liability is moving in one direction – to a world of tighter regulation – and underwriters must be ready for new claims “cropping up in unexpected places”, warns Neil Beresford, a partner at Clyde & Co. A fellow traveller on that journey is the widening scope of this risk.

Beresford has been handling environmental claims since the mid-2000s when, he says, some insurers started issuing “mass market” environmental liability policies. Head of the law firm’s global product liability and recall practice, Beresford has observed the emergence of a “juncture” over the past decade between product liability and environmental liability.

This juncture is clearest of all with US climate litigation. “These claims are being presented in product liability, based upon allegations that fossil fuels have been fraudulently sold, advertised and marketed because they have side effects like any other defective product,” Beresford says in an interview with Insurance Day.

Neil Beresford, partner, Clyde & Co

Another “defective” product at the border of environmental and product liability is polyfluoroalkyl substances (PFAS), Beresford continues, adding he has been doing a lot of work on claims related to polychlorinated biphenyls, a group of man-made organic chemicals consisting of carbon, hydrogen and chlorine atoms.

He also has a number of “pure” environmental liability cases now at an international level. He is involved in $7bn of claims in Peru, following the escape of 11,000 barrels of oil in January 2022. As well as overlapping environmental and produce liability, these claims have the “side effect” of requiring careful policy wording for insurers, an area where Clyde & Co is “looking to dabble in”.

Directors’ and officers’ (D&O) liability is “another juncture and increasingly so” for environmental liability. Again, the most obvious example is climate risk. Beresford highlights the legal action getting under way in France, involving the directors of Total and alleged criminal liability arising from environmental torts. Another example, he adds, is the claim brought by ClientEarth against the directors of Shell.

“Environmental liability now overlaps with product liability, D&O and also public liability because, if you take the Peruvian incident, there are several hundreds of millions of dollars of clean-up involved. On top of that there are several billion dollars of alleged liability to fishermen, restaurants, hotels, and people living in the surrounding area,” Beresford says. “And because environmental liability insurance is an unusual beast, it creates overlap with first-party coverages such as all-risks property insurance,” he adds.

Clyde & Co is working on a claim involving a government Beresford declines to identify, where the firm’s client is “responsible for utilities which have become polluted”.  He explains: “There’s an interesting discussion to be had. Is the utility infrastructure ‘damaged’ for the purpose of a property policy, or does it require clean-up for the purpose of an environmental liability coverage?”

Environmental liability is therefore becoming “increasingly difficult” for insurers to define. The origin of this trend Beresford points to, is the Environmental Liability Directive (ELD) that entered into force in 2007. The directive established a comprehensive EU-wide liability regime for environmental damage based on the "polluter-pays" principle.

“Environmental liability had a clearly defined meaning: it was spills, it was releases, it was pollution, and, in insurance policies, it was built around the idea that environmental liability is something that happens locally,” he says.

Beresford says the big difference between geographically limited liability and public liability was always twofold. “Firstly, environmental liability had a first-party element to it, so it covered your own clean-up as well as your liability to other people. And secondly, it covered long-term incidence, so gradual pollution. Public liability insurance was limited to sudden and accidental events.”

The ELD has meant that, over the past 20 years, “everything now has an environmental angle to it”.

“In the context of product liability, if NGOs [non-governmental organisations] are suing Big Oil, is that a product liability or is it environmental liability? They are suing in respect of consequences which have a global impact and based upon allegations of a defective product.”

The eight plaintiffs in the case against Total are from a range of different countries and are arguing they have lost relatives because of climate change. Notably, their claims are being presented by environmental NGOs.

“Not only has the geographical extent of environmental liability spread out, the substantive nature of it has also expanded because you're no longer looking only at the primary polluter – the guy who empties the hydrocarbon into the aquifer. You're also looking at the manufacturer of the hydrocarbon, which is making environmental liability much more expansive than it was when the ELD came in.”

Widening coverage

As the concept of environmental liability widens, the scope of coverage has been expanding outwards. “Now you're seeing policies with all sorts of bells and whistles,” Beresford says, pointing to the mitigation costs that accompanied the Covid-19 pandemic.

“Certain policyholders were arguing that Covid was a form of pollution because it contaminates premises, and that daily cleaning was required to effect decontamination. They were looking to pass off daily sanitation regimes as ‘mitigation’.”

Other additions for underwriters of environmental liability are business interruption, cargo, contractor’s liability and premises pollution liability. “So, the coverage has evolved into being much more complicated than it was when the Environmental Liability Directive was first passed,” Beresford says.

As for differences between jurisdictions on what constitutes environmental liability, Beresford says there has been “no real attempt” to harmonise legislation. “When you look around the world, you see just how divergent environmental laws remain.”

China’s work on environmental regulation is “often underestimated”, Beresford stresses, because that country “now has some of the world's strictest environmental laws governing local pollution to air, water and land, as well as very strict enforcement mechanisms”.

“Much of that was introduced after the Beijing Olympics, when the smog was a real source of public concern,” Beresford explains. “The government introduced a triangular enforcement mechanism where local government, central government and licensed NGOs – think of that, NGOs! – all contribute to environmental enforcement. The three of them supervise each other and make sure nobody takes the foot off the pedal in terms of enforcement.”

This means companies and their directors may be held criminally responsible for environmental damage and “10s of 1000s” of them have been prosecuted. China also introduced supply chain environmental liability “before the Europeans did”.

The "polluter pays" principle is being established around the world, but differences persist between jurisdictions. “One of the more radical claims arising from the Peruvian oil spill is from a consumer regulator. They have presented a claim for $4.5bn, on the basis that 700,000 people living within roughly a 100-km radius of the incident are all consumers of the environment. And therefore, the consumer regulator argues that it has the jurisdiction to bring an action on their behalf, seeking damages for their loss of amenity of the environment,” Beresford says.

He also highlights another claim that is being presented by the criminal prosecutor. “They've said, ‘You didn't incur the clean-up costs that you should have and so we're going to work out what it should have cost you to do that. We're going to compare our loss with other big events of the last 50 years, and use them as a comparator.’”

He continues: “Although there are certain basic principles about protecting the environment and that the ‘polluter pays’, the divergent variety of claims, and the divergence of quantum, really is quite striking. Each jurisdiction approaches the valuation of environmental loss in a very different way. That means it's very difficult to have policies which are universally applicable.”

“Although there are certain basic principles about protecting the environment and that the ‘polluter pays’, the divergent variety of claims, and the divergence of quantum, really is quite striking. Each jurisdiction approaches the valuation of environmental loss in a very different way. That means it's very difficult to have policies which are universally applicable”

^{Neil Beresford
Clyde & Co}

As a result, more master local insurance programmes are emerging in environmental liability, which is a trend that got under way in property liability “years ago”.

Beresford explains: “This is where a multinational company has its master policy issued in its home state, and then local policies issued around the world where it does business, to be compliant with local laws, which feed into the master policy. The advantage of doing this with an environmental programme is to ensure that the local policy is properly responsive to local law.”

So rather than harmonisation of regulation between jurisdictions, is it more a case that lawyers and insurers are having to offer more bespoke and more localised coverage than they needed to before?

“Absolutely and it's just inevitable,” Beresford replies, “because what you see when there's an environmental incident, is that a large number of regulators will want to become involved, and there will be a lot of different claims under different laws from different sources.”

Beresford’s advice is that underwriters should “engage fully” with the technical nature of environmental liability policies, such as marine and engineering.

“The quality of the consultant first on site makes a huge difference. Claims involving ecology or hydrogeology usually require niche expertise and it is often worth consulting more than one expert,” he says.

“Some years ago, we were involved in a large discharge into a UK river, which killed more than 100,000 fish. The original proposals for restocking the river included the purchase and introduction of five million fish. An alternative team of experts was able to design environmental improvements that promoted a natural recovery of the population. This experience shows that there is no ‘one-size-fits-all’ panel of experts, and it pays to spend time finding the best expertise.”

Underwriters must also understand the “local sensibilities” of a claim. “Often, the very last thing you want is someone turning up with a truck and pump,” he adds.

Beresford illustrates this point with his observation of river pollution claims against farmers in the UK, which show that the first technical question to ask is, what is the background level of contamination?

Homing in on the emerging risks with environmental liability, Clyde & Co classify environmental risks as technical and regulatory.

Beresford explains: “In our view, the most important emerging technical risks are around chemicals, such as heavy metals and PFAS, and end-of-life products, such as solar panels and lithium batteries. Regulatory risks are all around us, but clearly the most important is the green energy transition. This is important because, as legislators, regulators and judges get younger, the direction of travel will favour increasing controls.”

But there is more opportunity than risk, he stresses. “As lawyers, we tend to look only at risk, whereas insurers look for the opportunity for risk transfer. For example, when solar energy technology was a new thing, many banks wouldn’t lend against it because they didn’t know if it would comply with product standards. Some insurers went out of their way to understand the new technology and backed performance guarantees which were a very successful product.”

Crucial across sectors

Environmental liability provides coverage for pollution and environmental damage caused by a company’s ongoing activities or their liability for past pollution, Emma Bartolo, global segment leader for environmental risk insurance at Scor, tells Insurance Day.

This includes both first-party and third-party liabilities, as well as regulatory imposed clean-up or liabilities. Additionally, it covers business interruption, transportation liability, crisis management costs, and more, focusing on pollution and environmental damage resulting from insured operations.

Environmental liability coverage is crucial for businesses across various sectors to manage the financial risks associated with environmental damage and regulatory compliance.

Emma Bartolo, global segment leader for environmental risk insurance, Scor

Bartolo explains: “Activities like oil refineries and other heavy industry such as chemical manufacturing may be the first that come to mind – and ensuring that any environmental damages arising from these operations can be mitigated and the ecosystem restored is a great example of why this coverage is so important – but every business can have an impact on their local environment to a greater or lesser extent: supermarkets, hotels, manufacturing and construction projects being just a few examples.”

“Environmental liability is a key lever for ensuring the protection and integrity of important ecosystems around the world,” she continues, “ensuring not only the rehabilitation of ecosystems in the case of a risk event occurring but also preventing these risks from being realised in the first place.”

Most markets now have robust environmental regulations, but the effectiveness of these regulations often depends on the budget and resources allocated for enforcement. For instance, Bartolo points to Europe, North America and parts of Asia having strong regulatory frameworks that are well enforced, whereas in developing countries, such as those in Latin America and Africa, enforcement tends to be weaker because of broader societal challenges.

“The variation we see from one market to the next means the re/insurers must tailor their offering, not only to each industry and their immediate ecosystem but also to the market itself,” Bartolo adds.

Scor stays informed of regulatory changes across different markets by collaborating with lawyers in key countries and through long-standing relationships with external risk engineers who specialise in the specific countries where it operates. Additionally, its participation in the International Underwriting Association’s non-marine environmental committee helps it stay updated with changes in law, regulation and standards. Monitoring emerging risks, such as PFAS and climate change litigation, and adapting its underwriting process and policies accordingly, is also a critical part of the company’s approach, Bartolo says. “This comprehensive strategy enables us to adapt to the dynamic regulatory landscape across different markets effectively,” she adds.

Bartolo identifies the three types of environmental liability products. The first is site-based, where specific locations are insured against pollution or environmental damage resulting from current or past activities on those sites. This could be, for example, a policy that covers a specific oil refinery or it could be a supermarket, hotel, or other business operation.

Then there are contractor-specific policies, which can be project-specific, such as insuring the construction of a bridge over a set period of time or an annual contractors' policy. It works similarly to construction market policies, covering either annual contractors or project-specific activities. Finally, there are insured business products, which are a hybrid of the first two.

“Each business will face different risks and because – importantly – the same type of business may face different risks in different locations based on the unique local ecosystem, there are variations of these products,” Bartolo says.

Policies are therefore tailored for each client’s needs, dependent on the risk specifics and may combine coverage for site risks, contractors' pollution, and specific coverage extensions for business interruption, transportation liability, crisis management costs, and coverage for non-owned disposal sites.

“At Scor, we work to bring innovative coverage solutions to our clients to better protect them and the ecosystems in which they operate. This means rethinking the role re/insurers can play in prevention and restoration,” Bartolo says. For example, Scor recently announced the launch of NatReCo, a nature restoration and conservation insurance initiative that supports ecological restoration projects.

Another example can be seen when Scor, along with its partner Howden, launched a first-of-its-kind carbon-capture facility that covers the leakage of carbon dioxide from commercial-scale carbon capture and storage facilities. Scor is also active in renewable energy, having launched a new offshore renewable energy consortium earlier this year. Bartolo says these initiatives show, through a combination of creativity and technical expertise, Scor can play an active role in helping its partners and clients reach their environmental, social and governance (ESG) goals.

“Each business will face different risks and because – importantly – the same type of business may face different risks in different locations based on the unique local ecosystem, there are variations of these products”

^{Emma Bartolo
Scor}

“At its core, environmental liability risks are about pollution,” Bartolo says. “It all comes down to the release of contaminants into an environment. This can, of course, be metals or chemicals – and PFAS is a very topical example of that. But what we consider a ‘contaminant’ also depends on the industry.”

In some cases, a substance may already be present naturally in the ecosystem and Scor considers anything which raises this above the background level is pollution. In other cases, the release of water into the local ecosystem can be an environmental liability risk, Bartolo says, even if not otherwise contaminated. Releasing hot water can kill micro-organisms in the environment, she adds, in which case the hot water would be considered a thermal irritant.   

With momentum growing around ESG, companies are focusing much more on understanding what their risks are and how to mitigate them. Bartolo stresses the importance of keeping in mind that nearly every business or industry will have an environmental exposure. The question, she says, is how best to mitigate these risks.

“Re/insurers have an important role to play in better understanding these risks and helping our clients to identify preventative measures, in addition to recovery,” Bartolo says.

“Scor is deeply committed to addressing both established and emerging environmental risks,” she continues, adding the group takes a multifaceted approach, “focusing on offering comprehensive coverage, staying abreast of regulatory changes, and innovating to meet the evolving needs of our clients.”

Bartolo notes that PFAS, or “forever chemicals”, have garnered significant attention recently because of their persistence in the environment and potential health risks. “We are closely monitoring the science and regulatory landscape to ensure our coverage reflects the latest understanding and protections against these risks,” she adds.

“The pervasive issue of microplastics in waterways and ecosystems is another area of concern and is one of the risks included in Scor’s Emerging Risk Radar. While pinpointing specific sources can be challenging, we are exploring ways to address this through our policies and industry engagement,” Bartolo says.

Phthalates also represent a complex risk that is not yet well understood though these chemicals pose potential health and environmental impacts. Bartolo says the industry is working to understand the implications for clients and how best to incorporate this into environmental liability offerings.

The rise in litigation related to climate change impacts is a growing area of focus and Scor is evaluating how these legal trends may influence environmental liability and how it can support its clients in navigating this evolving risk.

“For these emerging risks, just like other established and better-understood risks, prevention will always be better than mitigation,” Bartolo says, adding it is important the re/insurance industry contributes its knowledge of these risks to inform ongoing conversations and support prevention initiatives.

Bartolo concludes: “We continuously adapt our underwriting processes based on the latest information, claims data, and insights from both the insurance and reinsurance sides. Our goal is to respond effectively to the evolving landscape of environmental liability risks, ensuring that our company remains at the forefront of innovation and risk management in this area.”