The life cycle of an EIL claim

By Wilson Hull, Environmental Major Loss Adjuster, AIG

When it comes to pollution, Benjamin Franklin’s famous quote that says “if you fail to plan, you are planning to fail” holds very true. The decisions made in the first few hours of an environmental incident often have a significant impact and will influence the extent of damage, the resulting financial loss and the impact on a company’s reputation.

As such, having a Pollution Incident Plan (PIP) in place helps companies to anticipate environmental incidents and prepare for how they would respond. While it is neither realistic, practical or cost-effective for companies to plan for all potential outcomes, the PIP should be as comprehensive as possible. 

Among other information it should include logistical details on site sensitivity, foul/surface water drainage plans, storage location(s) and quantities/nature of chemicals, fuels and waste materials; and  location of emergency response kits. It should also include details of who to contact in the event of an incident, including emergency response teams, employees, regulators and, crucially, insurers.

Most importantly, the PIP needs to be practical, a living document that is actionable in a time of genuine crisis. Periodic test events should be undertaken to enable processes and procedures to be tested and familiar to all key stakeholders. A PIP that nobody has read or can deploy effectively is not worth the paper it's written on.

Managing an incident, maximising your insurer

In the event of a pollution incident, a company should be able to respond quickly, following the steps set out in its PIP. The insurer has a key role to play here, one that is often overlooked by policy holders.

This often links back to a fundamental misunderstanding about the role of insurance. Taking out a policy isn't just about indemnifying  losses, it's about entering into partnership with a risk management solutions provider that can provide referrals to a range of pre-qualified, invaluable emergency response services to help minimise damage, save time at a critical juncture and ultimately save considerable amounts of money.

Leading insurers can also provide referrals to environmental consultants, solicitors specialising in defence of environmental matters  and PR specialists to help protect a company's reputation. But they can only do this if they are aware that pollution incident has taken place.

Motorists involved in a Road Traffic Accident are likely to inform their motor insurer straightaway. In contrast, companies involved in a pollution incident might wait several days or weeks to notify  the same. Given that in many instances the size of the losses involved in the latter have the potential  to escalate and can reach into seven figures, this is somewhat surprising. 

Never too early to notify

When a pollution incident occurs it is impossible to know if or when claims will be made against the Insured. Depending on the circumstances it  may take several hours or even days before the true extent of any pollution manifests and  becomes apparent. But it is critical to notify your Environmental Impairment Liability (EIL) insurer as soon  as practical and during the Policy Period.  Insurers can offer referrals to environmental consultants to get boots on the ground to deal with the situation and assist in mitigating a loss in a rapid and cost-effective manner. 

Your insurer can also practically assist on strategies including how best to interface with regulatory authorities in the aftermath of a pollution incident. In this type of situation companies need to manage that engagement process in circumstances where it is important to notify the regulatory authorities in a timely fashion, but the details of the incident may not be immediately clear and will take time to investigate. It is important to stick to the facts. Confirm to the regulator that an incident has occurred but don’t speculate on the unknowns until you have a firm grasp of the details. It is quite acceptable to be clear that time is needed to investigate exactly what has happened.

Ultimately, the extent of regulatory interventions    and managing  reputational damage is heavily influenced by actions taken, effectively dealing with pollution incidents in a timely manner and managing communications with external stakeholders.  Financial penalties imposed will have an  impact on the bottom line but investors will also take notice of a company that is subject to repeated penalties, regulator intervention, or civil claims associated with pollution events with a potential impact on the share price and its reputation. Companies also have broader ESG responsibilities to consider.

A virtuous circle

The life cycle of an EIL claim doesn’t end once the clean-up has been completed and any regulatory measures have been complied with. It is important to conduct a post-incident review to understand what went well in terms of the response, what could have gone better and what has been learnt. Once any failings have been identified they can be corrected through appropriate measures such as training while the PIP – that practical, living document – needs to be updated with any learnings from the incident.  At the end of the day an EIL claim isn’t a straight line - it should be seen as a virtuous circle; an opportunity to better understand and mitigate risks, and learn how to better manage, and where possible avoid, pollution incidents in the future.

See the image below for the main stages, activities and timescales for an EIL claim.  

                         Phase                                                                                                         Timing                                   
Planning: Pre-pollution planning for realistic scenarios and prepare/update PIP. Liaise with EIL insurer to identify panel of experts

Varies greatly as all EIL claims are different.  

Time depends on complexity and scale of incident – from weeks, months or even years

Incident: Emergency response and mitigation measures. Execution of PIP and notification of insurers and regulators. Incident phase typically lasts 3-10 days.
Investigation: Investigation of causation by regulator, site investigation works and data collection, permissions and consents for works, risk assessments. Identify and evaluate remediation options
Remediation: Agree objectives with regulators and execute works 
Verification: Long term monitoring and reporting, obtaining regulatory acceptance
Post Incident Review: Lessons learned and feedback/update PIP