Environmental Liability Insurance (also known as Environmental Pollution Insurance, Pollution Liability Insurance or Environmental Impairment Liability Insurance in different markets) provides insurance covers with financial protection against liability associated with pollution releases and other events that harm the environment.
It was first introduced in Europe and the USA as an extension to the general liability insurance. Covering the third-party damage caused by pollution, environmental liability compensates for the restoration, clean-up and the potential liabilities arising from injuries and deaths.
It became a stand-alone policy in the 1980s when the number of incidences and the compensations awarded in pollution cases rose dramatically and, as result, cover for environmental liability was subsequently excluded from standard liability policies.
In most markets, environmental liability cover is on voluntary basis and is encouraged through a multitude of market mechanisms, if an enterprise engages in operations with a high exposure to environmental liability.
As pollution cases continued to increase, policymakers recognised the benefits of environmental liability as an efficient tool to improve corporate risk management and encouraged its use. By the 2000s the insurance was introduced to emerging economies like China.
While these economies expanded rapidly, the number of pollution incidents and environmental disasters also rose substantially. Simultaneously the government’s understanding and the public’s awareness for these risks increased, also reflecting heightened pressure to improve environmental protection and management systems, including the introduction of market-based control systems, such as environmental liability.
Environmental liability a rising concern
In 2006, the Chinese government decided to promote the idea of environmental liability insurance and initiated trial applications in specifically defined geographical areas. Two years later, approximately 700 policies had been issued with around RMB 12 million (US 1.87 million) in premiums written.
By 2013 China’s government introduced the testing for compulsory environment liability and by 2015 trials of environmental liability for certain highly exposed industry areas commenced, including mining and smelting as well as lead battery manufacturing or chemical factories. The market annual premium volume increased to around RMB280million (USD43million) in 2016. However, all the previous testing was limited to sudden and accidental pollution coverage, instead of covering gradual pollution. Finally, in 2017, the Chinese insurance regulator, China Insurance Regulation Commission (now China Bank and Insurance Regulation Commission), together with Ministry of Environment Protection (now Ministry of Ecology and Environment) issued a few versions of inquiry papers of the Compulsory Environmental Liability Insurance Rules.
The rule is aimed at companies with a high exposure to environmental pollution. Eight sectors have been identified, which again include enterprises involved in the extraction of oil and gas, chemical or harmful waste producers. What is more, the new rules will include coverage of gradual pollution and ecology damage, which are regarded as big challenges to the insurance industry.
One of the major challenges is how insurers can differentiate pre-existing pollutions before insurance coverage with new gradual pollutions. Capability of pre-insurance environmental assessment and loss control are very critical for the insurers.
In May 2018, the draft of the Compulsory Environmental Liability Insurance Rules was principally approved by Ministry of Ecology and Environment.
When the regulation comes into force is still open. It could be imminent as improving the environmental safety and a reduction of its pollution is high on the agenda of the Chinese government and also a growing concern to the population.
It has been recommended that companies purchase such an environmental liability policy to protect against potential liabilities and to address the accountability they already face as part of the Chinese Environmental Law which came into effect in 2015 and allows eligible non-governmental organisations to bring forward public-interest litigation against polluters.
The USA and Korea take different approaches to environmental liability
Until China’s Compulsory Environmental Pollution Insurance is enacted, a comparison with other markets might be helpful. During our seminars in Beijing and Shanghai this April, we introduced our clients to a comparison between the US approach and Korean approach towards environmental liability insurance.
Despite its long history in the US, environmental liability insurance is not compulsory. Legislation is strict and imposes liability on potential responsible parties for the presence of hazardous substances on site.
Many historically contaminated sites have been cleaned up through Superfund activities, financed by potentially responsible parties and levies on the petroleum and chemical industry, while many others Superfund sites are still left to be cleaned.
As a result, environmental liability insurance is only provided by some specialist insurers. Penetration is low because mainly those insureds, who have a significant exposure to the risk, while rates are high and insurers provide cover predominately to those which comply closely with regulation.
Korea by contrast has taken a different route to build up its environmental liability insurance market. It has become one of the few countries, where environmental liability insurance is compulsory since 2016. Specified polluting industries, such as those handling harmful chemicals, emitting air or water pollution, treating designated waste or potentially pollute the soil are forced to purchase a policy. The cover includes sudden and accidental pollution, gradual pollution under certain conditions and third-party clean-up cost.
Again, the law stipulates a strict liability where the burden of proof is based on the “substantial probability of causation”. Since the introduction of compulsory insurance, around 10,000 policies have been issued. The estimated premium volume per annum is around US$ 60 million. The loss ratio is said to be low at the moment, but it may need time to develop for such special liability business.
