Environmental Risks and Insurance: A Comparative Analysis of the Role of Insurance in the Management of Environment-Related Risks
Insuring the environment is a high-risk business; not only is it a gamble on whether and how one’s client will pollute, it also means having to pay increasingly high costs for cleaning up oil spills, detoxifying chemical leaks and decontaminating groundwater. Can insurance companies continue to afford such coverage?
Yes, says Environmental Risks and Insurance, but it will take coordination between the insurance industry and government policymakers.Unsurprisingly, many firms would rather not have to pay for pollution insurance. One of the difficulties in marketing environmental liability packages, according to Environmental Risks and Insurance, is that the risk of gradual pollution is too often a low-probability, high-consequences risk. Generally, such risks are felt to be easily under-estimated or even ignored. In a catch-22 for those marketing such insurance, once a potential client has been declared insurable, the policy may be turned down on the logic that if the company is insurable, it must be low risk and the insurance an unnecessary expense.It goes both ways, of course. Where purchase of pollution coverage is a condition to operate, the insurer may decide a firm is too high-risk and refuse coverage, turning insurance companies into de facto environmental policemen.Not necessarily a bad thing, as it enforces the polluter-pays principle espoused by the OECD. Furthermore, Environmental Risks and Insurance suggests that other financial instruments could be used to secure financial coverage for environmental damage, such as a bank-issued guarantee, an advance deposit in an environmental account or even with personal or collateral security.
Environmental liability regimes in OECD countries seek to both assure the availability of such insurance cover and compensate for damages caused by pollution. Until recently, according to Environmental Risks and Insurance, much legislation focused on simple negligence on the part of the polluter, which was often difficult to prove and put the task of suing for compensation on the injured parties. New environmental legislation imposes the standard of strict liability, which shifts that responsibility back to the owners and operators of environmentally dangerous activities. In the case of oil spills, this means that the owner of the tanker that pollutes is liable regardless of whether or not he was actually at fault. The claimants can thereby be compensated promptly, without the need for lengthy and costly litigation.© OECD Observer No. 240/241, December 2003