Expert Risk Articles
The changing risk and liability landscape - Environmental Impairment Risk rising
Modern corporate risk and liability exposures can arise from many sources, including third parties, supply chains, products, IT security, new technology and the environment. Global Risk Dialogue examines current and emerging risk management and insurance issues across a number of trends.
An explosion at a refinery causes a release of petroleum into the aquifer. A flood leaves a building infiltrated by mold. Environmental impairments can bring severe damage, threaten health and are costly to remediate. Insurance helps, but coverage gaps can leave companies vulnerable.
The growth of the global economy has led to a rising concern among the public, media, businesses and politicians about environmental damage and its effects. When human activity causes damage to the environment, protection is needed for nature and health. Companies bear environmental risks and can be held liable for damage, even in the case of not acting negligently.
Some companies bear higher environmental risks than others due to their industries. An example is a company with facilities that produce or store toxic substances like chemicals which, despite all security measures, might leak into the environment. In other areas, such as the pharmaceutical or oil and gas industries, companies can be held liable for damage due to waste discharge activities, emissions or disposal practices – environmental impairment ranks as one of the top business risks for the oil and gas sector in the Allianz Risk Barometer 2018. The same is true for industry segments such as commercial and residential real estate, where damage can arise from indoor air quality issues, contractor negligence, or even neighboring redevelopment activities. Furthermore, environmental issues are also arising from increasing natural catastrophe activity. Last year, Hurricane Harvey’s estimated 15 to 20 trillion gallons of rainfall resulted in a sharp increase in mold claims. Mold can take months to remediate and clean-up can cost millions of dollars. Exposure can cause health problems ranging from throat irritations to pneumonia. Losses are currently exceeding expectations in terms of frequency and severity in areas exposed to weather-related catastrophes.
Industrial activities can have a significant impact on environmental threats such as climate change, pollution, water shortage and loss of biodiversity - the estimated annual cost of the top 100 environmental impacts for the global economy in social costs, lost ecosystem services and pollution is $4.7trn. For businesses, the consequences from environmental incidents can vary greatly depending on scale, size or location, but the common denominator is potential liabilities, such as penalties and fines from regulators and having to pay significant disposal, remediation and clean-up expenses after contamination and spillages. They may also need to implement costly improvements or defend against third-party injury allegations. Other associated costs after an incident could include significant business interruption (BI) or supply-chain disruption, due to being unable to operate or provide products or services.
“Regardless of opinion on ‘climate change’, damages arising from natural perils have recently increased. What often isn’t reported in the media are ensuing environmental damages or pollution incidents stemming from these events – flood damage in subsurface spaces like basements causing releases of petroleum products from underground storage tanks and underground piping; mold growth from water intrusion which can take months to cultivate and be discovered, or business interruption expenses as a result of lengthy remediation, reconstruction and project delays. What should concern any risk manager is how these damages and liabilities are treated under a property insurance policy, a commercial general liability (CGL) policy and/or an environmental impairment liability (EIL) policy. Are there any coverage gaps left behind in these programs?
A commonly overlooked aspect of business interruption (BI) risk is environmentally-related. This extra cover is often left unpurchased or under-purchased. This potentially large coverage gap could result in very meaningful impacts on any company's balance sheet.”
Arthur Lu, Global Head of Environmental Impairment Liability Insurance, AGCS
Based on analysis of 100,000 insurance industry liability claims over five years, the average cost of an environmental damage loss is $2.71m (€2.34mn), according to AGCS, but this total is impacted by a number of small claims, which reduces the average value. The reality is that large environmental liability losses, such as pollution, are increasing, with the mining and construction sectors particularly impacted. Large environmental losses can be complex, costly and take a long time to settle. A notable recent loss involved the breach of an industrial dam at the Samarco mine in Bento Rodrigues, Brazil in November 2015, which ranks as the country’s worst environmental catastrophe. It killed 19 people and left a trail of destruction for hundreds of miles. Samarco, and its parent companies Vale and BHP Billiton, have been in negotiations with Brazilian authorities ever since, eventually signing a deal to settle a 20bn reais ($5bn) lawsuit in June 2018. However, this agreement sets a two-year timeline to reach a settlement over a separate 155bn reais ($38bn) lawsuit, which will remain suspended while the parties negotiate. Samarco’s operations have been halted since the disaster.
There has been a significant increase in environmental exposure and claims in countries such as Brazil, as environmental laws are clarified and regulators become more robust. Recent years have also seen other costly environmental losses - in Australia following bushfires and floods, oil pipeline spills in Peru and construction site flooding in Chile - all of which resulted in large claims. Irrespective of location, large pollution liability claims are among some of the largest claims AGCS has seen in the past five years.
Newer perils that companies are increasingly confronted with include public health microbial or fungi/bacterial/spore outbreaks, non-owned liability in which spills occur on leased-property, waste-disposal liability and impact of climate change which may cause increased mold and subsurface spillages due to excessive flooding. While not a new peril, agricultural run-off, such as pesticides and fertilizers seeping into soil and groundwater, causing environmental damage and other related exposures which can have adverse health effects, are increasing; as seen in the recent August 2018 US ruling for a $280mn settlement for a defendant, who alleged that one of agribusiness giant, Monsanto’s weed killer products, containing glyphosate, caused him terminal cancer. Monsanto is appealing but this award could potentially lead to heightened product liability litigation.
Environmental damage arising from a cyber event is also a plausible future loss scenario. For example, if an oil refinery is disrupted by a cyber incident, leading to storage failures or fires or explosions, ensuing damage to the environment could be one of the consequences.
Another future exposure is companies’ ability to adequately manage natural resources or so-called “natural capital” risk. Failure to do so could bring new liability scenarios, which could wipe-out profits and impact business models, as resource scarcity, regulatory action and pressure from impacted communities grows. For example, if a local mine has an excessive impact on the watershed, in terms of water use and pollution; it is likely to face growing social and political pressure. Over time this could translate into a stricter regulatory regime and significant clean-up costs, demanded via a court ruling. In addition, the company then has to invest in costly technical measures to ensure it keep its license.
RISK MANAGEMENT AND INSURANCE IMPACT
Damage to the environment, human health, and legal expenses are costly and complex problems for which companies should be prepared. Environmental liability specialists and insurers can provide services to help businesses review, design and coordinate a well-planned response to an incident, such as pollution arising from natural perils, for example.
In addition, specialist environmental impairment liability (EIL) coverage includes pollution insurance and excess cover for contractors or premises of all sizes, as well as BI – covering loss of profit and extra expenses. The latter is important as traditional BI cover under property insurance programs, typically doesn’t address an environmental incident. Other types of insurance that may respond to an environmental claim are professional liability insurance, for example where a professional service provider, such as a contractor failed to guard against proper disposal of solvents, fuels and other chemicals or waste byproducts; errors and omissions (E&O) insurance, in which for example the insurance agent or broker failed to make companies aware of their environmental and pollution exposures; and directors and officers liability (D&O) insurance, in which company officers could be held liable for not protecting the health of workers or failure to comply with waste collection and disposal regulations – all of which typically would exclude pollution, which EIL would address.
Download AGCS’ recent report, Measuring and Managing Environmental Exposure: A Business Sector Analysis of Natural Capital Risk.
 AGCS, Allianz Risk Barometer 2018
 Risk & Insurance, Hurricanes leave a moldy legacy in their wake, December 14, 2017.
 Trucost, TEEB for Business Coalition, Natural Capital At Risk: The Top 100 Externalities of Business, April 2013
 Reuters, Samarco, Vale, BHP sign deal with Brazil authorities over dam disaster, June 25, 2018
 The Economist, A Shock Verdict Against Monsanto’s RoundUp, August 18, 2018