XL Insurance: Cover that Doesn't Cost the Earth - Simon White

While legislation requires that companies protect against polluting the environment, many don’t because they believe that their standard General Liability policy covers this area. However, as Simon White of XL Insurance explains, the harsh truth is, it doesn’t.

Companies secure their buildings against fire and theft, but still buy property insurance. Meanwhile, an increasing body of legislation requires that businesses also take measures to protect the environment from pollution during their daily operations, but many companies do not buy environmental insurance thinking they are covered under their General Liability policy.

‘General Liability policies cover mainly civil actions,’ says Simon White, environmental branch manager for XL Insurance in London. But environmental authorities are more frequently requesting or ordering companies to clean up contamination under legislation such as the Water Resources Act 1991 in the UK.

The claims are coming from companies that are incurring substantial costs – sometimes in the millions of Euros – due to such cleanups. In comparison, fewer claims are coming from civil actions.

The scope of statutory environmental liabilities has also increased due to the EU’s Environmental Liability Directive (ELD), which includes natural resource damages and interim costs whilst the damage is being remedied.

The Environment Agency (EA), according to White, is overseeing the clean up of pollution incidents, then prosecuting offenders, having them fined and seeking to recover its costs. None of this financial exposure, which in the case of middle market enterprises can be crippling, is covered by a GL policy.

Until the ‘polluter pays’ principle was introduced in 1991, GL policies provided protection, but not any longer. ‘Only specific environmental cover can protect a business from potentially catastrophic costs,’ says White.

UK commitment

The only good news about European environmental court cases is that authorities are not, as in the US, seeking punitive damages on top of their costs. ‘There is a lot of misunderstanding and grey areas over the GL policy and most people do not seem to grasp that the basis of GL cover is third party claims in the form of civil actions, and as confirmed by the Bartoline case, many GL policies do not extend to Statutory Liabilities.’ he explains.

‘The UK is one of a number of EU member countries that has not yet fully implemented the ELD insurance. But it will come. Unfortunately, the tendency among some companies has been to assume that when the new legislation does arrive, it is not going to make very much difference. But like it or not, it most certainly is.’

According to White, the second consultation paper with draft legislation from the UK Government makes it clear that tough new environmental laws to transpose the ELD into domestic law will shortly be in force, perhaps by the beginning of 2009.

‘Companies seem to get a bit lost on environmental issues,’ observes White. ‘They watch their carbon footprint and they consider their social responsibility. They look at how much money they are investing in abatement monitoring. There’s a lot of investment, which is quite correctly being directed at preventative measures against pollution and on environmental analysis. Managements are making sure that their companies are being as green as possible.’

Preparing for the inevitable

But after they have done their due diligence on environmental risks, why are many businesses then failing to insure against the costs that will arise if, despite their best efforts, something still goes wrong?

‘Companies spend a lot of time and effort looking after their properties, making sure the security is there and that in the event of a fire the sprinkler system is in place and the alarms are working,’ comments White.

‘They also complete the circle by getting property insurance, should things go wrong. They will also work with the engineers from the insurance company to help them better improve their facilities. Yet it is only now that businesses are appreciating that they need the same sort of advice and cover for their environmental risks.’

White emphasises that environmental protection cover is a specialist product. ‘Unless you have business dealings in the US, environmental insurance is a new concept, which is why I believe managements have been taking a while to work out what it means for their companies and how they should respond.

The ELD does not just change the potential financial impact on your company; it changes your behaviour as well. It introduces a duty where you have to report every single pollution incident that you have.

In Italy, it is a criminal offence if you don’t do this within a certain period of time. Boardrooms are becoming aware of the dangers. They need to be asking if they have sufficient crisis management in place in the event of a pollution incident. But, more importantly, what are they going to do if the crisis plans don’t work?

The fundamental issue is: are they protecting shareholder value if all their carefully crafted crisis plans go wrong? That last component is what is lacking within the environmental field at this time.’

Companies have embraced Corporate Social Responsibility (CSR), but they have yet to see the environment as a complete circle. Nor is thought always given to the reputational impact of an environmental disaster on a shiny CSR programme in which much management time and money has been invested.

‘Not only do you have to look at complying with the law and making sure that your emissions are up to scratch, you are reducing your energy use and being socially aware, but you also have to look at what will happen if it all goes wrong,’ says White.

Specialist focus

Environmental law is already complex and is almost certain to become more so as new legislation appears next year. Therefore, specialist focus on the risks is required. This is important because of the concern that some environmental risks may slip through the net because they have not been underwritten properly.

‘We don’t just tick boxes, our underwriters work closely with clients giving advice on risk mitigation and what they can do to improve their pollution controls,’ says White. ‘That work will be reflected in the premiums. And environmental premiums are a fraction of those for property or GL.’

Nevertheless, admits White, environmental insurance is still seen as expensive because the environmental risks are not appreciated.

‘Some CFOs view the product this way because they do not recognise their exposure,’ he says. ‘But what we are seeing is that where the ELD has been implemented in the EU and – this is important – well explained by the governments, environmental cover is being driven forward and is no longer perceived as being expensive. It is seen more as a good product in the face of the direct exposure that companies now have, which will cost them a lot of money if things go wrong.’

Growing competition among providers is keeping down the cost of environmental premiums, according to White. As insurers meet major pollution claims in the coming years, the full value of the cover will come to be appreciated as a sound investment to protect shareholder value.

Simon White Simon White, environmental branch manager, XL Insurance.