The risk of landowners and developers having to pay for the clean-up of their land and meet third party claims for pollution emanating from their sites - even where they were not the original polluters - has increased as a result of recent environmental legislation introduced in the UK and across Europe.
Environmental Liability Insurance

There is also an increased focus on new site development as a primary means of achieving remediation of historic contamination. In this article, Gallagher’s Environmental specialists look at how there are insurance options available for those at risk of third party claims of pollution.

The changing risks

Increasingly these risks are being passed on to contractors, through contractual allocation of environmental liabilities in project agreements. It is common practice for the risks associated with unexpected ground conditions, including contamination, and the risks of pollution from off-site sources to be taken on by the main contractor. In some instances, contractors have also been required to take on known contamination risks.

Whilst the frequency of environmental claims and regulatory actions remains relatively low, when they do arise, the costs and losses can be significant, especially when consequential losses, legal costs and management time costs are taken into account. Environmental investigations are typically required under planning conditions prior to property development – especially on brownfield land. However, whilst the investigations and risk assessments conducted by consultants provide important information, they are rarely conclusive (often due to tight timescales, access limitations, etc) and usually indicate some residual environmental risk associated with known and unknown historic contamination at the site.

Even if the project agreement contains provisions allowing the contractor to recover increased costs arising from discovery of unexpected contamination, the responsibility for any legal liabilities arising from the unintended release of such contamination will almost certainly rest entirely with the contractor. Typically the contractor will also be required to indemnify the employer against any costs/losses it suffers (including consequential losses) as a result of such releases, under the extensive environmental provisions contained in the project agreement.

This typical approach provides little in the way of effective long-term protection against potential environmental claims and regulatory actions for either the contractor or the employer. The contractor faces significant potential for uninsured losses, as their normal public liability cover is likely to provide only very limited cover for pollution. The employer still retains a significant long-term contingent liability, in the event that the transfer of environmental liability to the contractor fails, owing to, for example, insolvency. Also, disagreements between the employer and the contractor over the allocation of environmental liabilities in project agreements can result in contract negotiations stalling, or ultimately failing.

The role of insurance in deal closure

Environmental insurance is increasingly being used to support property development projects, by providing robust long-term financial protection against pollution and contamination risks for employers, contractors, lenders and other interested parties. The environmental insurance is either specified (usually by the employer or lenders) from the outset as a required insurance to be placed by the contractor or employer, or it is used as a means of resolving disagreements between the parties on allocation of environmental liabilities, by providing effective protection for the relevant parties.

In doing so, the environmental risks are transferred to an insurance company that is strictly controlled by a Regulatory Authority and has a strong credit rating. Opportunities in environmental insurance are at an all-time high with new insurers increasing competition on costs, providing wider cover and offering greater capacity. A further comfort is the fact that the insurance industry is one the most regulated industries for the transfer of liability; few other companies have specific requirements to keep long-term financial reserves in place for potential environmental liabilities. This means that transferring these risks to the insurance market can be a robust and reliable solution.

Range of benefits

Crucially, environmental insurance policies can provide cover which includes protection against change in law. Polices can cover third-party and regulatory claims and can include consequential loss, property damage, bodily injury and remediation costs, technical and legal defence costs. Cover can be provided for both the employer and the contractor and also extended to include sub-contractors, lenders and other interested parties with relative ease.

During construction, risks arise from possible creation of new pollution conditions. The exposure can be particularly heightened on brownfield site developments, where construction activities can create a ‘pollutant linkage’ causing existing contamination to be released and result in on-site and off-site injury and damage. Specific cover for legal liabilities arising from such releases, whether due to a sudden identifiable event or an unidentified gradual cause, can be obtained under a Contractors Pollution Liability policy.

In addition, several commercial benefits can be gained with an environmental insurance policy. These may include:

  • Avoiding the need to price uninsured environmental risk into contract values
  • Long-term policies that can be transferred with site ownership with assignable policies
  • High credit rating and protection can secure lenders and, in some instances, reduce the level of the lender’s risk rating and therefore loan interest rates
  • A long-term and sustainable approach - the insurance remains intact even if a member of the project becomes insolvent
  • Insurance policies are based on financial loss occurring and streamline the process should a claim occur; instead of chasing multiple parties

Growing awareness of the true financial impact of environmental liabilities, in terms of costs, losses and blighted property values and, the ability to obtain cost-effective long-term protection against such liabilities has resulted in a significant increase in the number of companies routinely using environmental insurance to facilitate property transactions where environmental risks are present.

With capacity increasing in the insurance market for these specialist risks, now is a good time to test the market, and see how this product can be strategically utilised for the benefit of your clients and their transactions.

Case study

During a large building refurbishment project, power for the site office and storage compound was provided by a power unit comprising a generator and integral bunded fuel tank.

Following several months of use a leak was discovered in the tank and base of the bund. The leaked fuel had seeped into the soil and groundwater and eventually migrated into the river, where it was spotted and the leak was eventually discovered. Actions were quickly taken to clean up the river and prevent further migration of the leaked fuel into the river. An extensive clean-up operation, taking several months, was then required to remove the fuel contamination from the impacted soil and groundwater. The contractor was liable for the significant resulting costs.