Product Fundamentals: Environmental Liability Insurance
Preventing damage to the environment during your business operations is now a community expectation. Whilst in the past pollution was often disregarded or mismanaged, regulators are now seeking to ensure that pollution from current business operations is avoided and that existing contamination from previous operations are remediated over time.
With capital cities in Australia looking to re-use industrial and rural land holdings for residential use, brownfield developments are becoming increasingly common, and as such property owners need to consider the past uses at the site and the potential for contamination to exist.
It is generally accepted that in the past property owners and businesses would dispose of pollutants in a less than ideal way. Often this would be dealt with on site where the problem was “buried up the back”. When a new owner purchases the property, they are unaware of the contaminants underground. We have seen numerous property developers purchase rural holdings for subdivision, who have subsequently encountered landfill from the previous owners when undertaking construction activities. For example, underground fuel tanks which were decommissioned and left in situ are a regular cause of soil contamination.
Traditional general liability cover will not provide indemnity to insured parties for gradual pollution or contamination. Furthermore, whilst cover for property damage or personal injury arising from “sudden and accidental” pollution events may be indemnified, traditional liability policies have a number of shortcomings in terms of the following costs which could be incurred.
- Costs to remove any pollution relating to specific excluded contaminants such as asbestos.
- Clean up costs – the costs incurred to clean up new pollution conditions, or where you have exacerbated or disturbed existing conditions.
- Statutory Fines and Penalties.
Such costs above can be significant and can be insured via specific environmental liability insurance cover. Cover can be broadly split into two distinct categories.
Fixed Site Pollution
Such cover is appropriate for property owners and occupiers who operate from specific locations. Cover is provided for all locations and will respond to pollution conditions encountered on the site, including exacerbation of any existing pollution conditions.
The policy is intended to provide cover for legal liability arising from pollution conditions, costs of investigation, clean up of both sudden and gradual pollution, emergency response costs, statutory fines and penalties for breaches of environmental regulation (where allowable by law) and business interruption associated with a pollution condition.
Cover is particularly relevant where underground conditions are unknown. Given the enforcement powers of regulators to require remediation of contamination and the costs of doing so, property owners should carefully consider their exposure and discuss with their advisor whether a fixed site pollution policy is appropriate for them.
Fixed site pollution cover can also provide a useful tool for sellers and purchasers of land – a policy can be affected to alleviate the need for warranties or indemnities to be provided in relation to future pollution conditions.
Contractors Pollution Liability
As the name suggests, this cover is provided for the benefit of contractors who are undertaking activities at third party locations. Coverage can be arranged on a project specific basis or on an annual basis.
This form of insurance is intended to provide cover for new pollution conditions arising from construction activities as well as disturbance or exacerbation of existing pollution conditions.
Where a site is subject to a clean up order or Remedial Action Plan (RAP) as part of development conditions, cover can still be arranged for any exacerbation, however the policy will not respond to the clean up costs associated with the RAP.
Generally, principals and developers will look to transfer risk associated with environmental damage to contractors when agreeing contractual terms and conditions. Contractors should consider whether insurance cover can enable them to accept such risk being passed to them.
Both fixed site and contractors’ pollution liability provide a dovetailed solution to fill the gaps in existing traditional liability and property insurance policies. The definition of pollution is generally (and deliberately) very broad and can include not only specific contaminants but noise and dust which can impact on third parties.
After a tenant vacated an apartment, the owner inspected it and discovered the remains of a meth amphetamine lab. The equipment and chemical waste left behind required specialist cleanup which became the responsibility of the owner since the tenant could not be located. Cleanup involved neutralising contaminants which had been released into the room as well as safe removal and disposal of chemicals in containers. Costs relating to cleanup and disposal were in excess of $100,000.
A local council were involved in a landmark class action after residents living near a former landfill were affected by methane gas emissions. Residents were evacuated and relocated following the initial identification of explosive levels of methane gas affecting around 750 houses. Compensation costs totalled approximately $26 million.
A contracted plumber working on a second storey apartment was repairing pipes in the floor. Inadvertently the plumber broke through the floor and into the ceiling of the ground floor tenancy below. The disruption to the ceiling insulation containing asbestos caused contamination to the café below. Clean-up and reparation costs were around $250,000.
A school’s contractor discovered soil contamination while conducting excavation work for an expansion project. The source of the contamination was found to be an underground storage tank that the contractor had accidentally punctured during their activities. The tank was previously unknown to the school/council and the contamination spread to an adjacent property. The cost of the clean-up was $450,000. The owner of the adjacent property also sued the council for $300,000 for decreasing the value of his property and interrupting his business. The case settled for $195,000 and the council also incurred defence costs of $95,000.
Underwriting information required:
Generally the information provided to support other lines (property, construction and liability) can assist with preparation of an underwriting submission for environmental insurance. In addition to this, the following information is useful to insurers.
- Detailed business description including diagrams or plans of the site.
- Locations which require cover and surrounding land uses.
- Current and historical use of properties.
- All environmental licences and permits held.
- Activities of any current tenants.
- Any incidents which have occurred including unreported or uninsured events.
- Any environmental assessment reports applicable.
- Future site plans.
- Asbestos registers (if applicable).
- List of activities to be undertaken and insured.
- Emergency response procedures.
- Any environmental permits or licences held.
All business operations have some potential to expose the environment to damage. Bellrock can assist you to understand the potential claims scenarios applicable in your situation, provide examples of costs associated with specific events and explain what cover can be procured to protect you in the event of an unexpected pollution event. Please contact us for further information via the form below.