The environmental insurance industry has expanded significantly over the last four or five years and, as the risk landscape continues to evolve, environmental exposures continue to evolve with significant implications for companies of all sizes and from all industry sectors. When environmental impairment liability (EIL) policies were first conceived and issued, the primary focus was mainly on heavy manufacturing industries, which were perceived to be more likely to give rise to environmental incidents but, as the AIG claims statistics show, today an environmental incident can happen in almost any sector.
A comparison of our most recent claims data for 2017 against the previous year shows that notified events were received in sectors that had previously not recorded losses, including services, public administration and wholesale trade. However, the transportation, communications, electric, gas & sanitary services sector continues to see the largest number of EIL claims notifications although, as a proportion of the total number of loss incidents, they fell to 47% from 55% in 2016. Meanwhile, notifications in the construction sector showed an almost doubling of incidents from 5% in 2016 to 9% in 2017.
It is not just the impacted sectors that are changing; the types of claims are too. AIG’s upcoming second annual EIL claims report indicates that the key driver for the increase in claims from the construction sector is inadequate waste management processes. Indeed, losses associated with waste management activities (across all industry segments) accounted for 11% of AIG's 2017 notifications. Of these, almost three quarters were related to construction and demolition (C&D) activities.
This has resulted in part from the recovery of the European construction markets, with the sector emerging from recession after several years of restructuring. With more construction activity taking place and increased pressure on contractors, the potential for claims resulting from inadequate C&D waste management practices is heightened.
The main substances causing notified events are: petroleum hydrocarbons, wastewater and ‘emerging’ contaminants (i.e. pollutants that are new to AIG’s notifications). Petroleum hydrocarbons remain the primary contaminant, responsible for 31% of all pollution-related incidents in 2017. Wastewater can be a source of many pollutants and 9% of AIG's EIL claims incidents last year arose from the release of raw human or animal sewage, with a further 9% of incidents associated with treated wastewater releases. Emerging contaminants from sources other than wastewater accounted for 10% of the 2017 notified events, including ground gas, perfluorinated compounds, phenols, and polychlorinated biphenyls.
Spike in fire-related claims
Environmental impact as a result of fire is another emerging exposure for many clients. Fire events impacting property, facilities and habitats emerged as one of the leading losses in 2017 with 15% of all loss incidents documented as fire emergency response, compared with 7% in 2016.
There are various reasons for the increase in fire risk and the environmental exposures this introduces. It is a combination of climate change, which creates conditions ideal for a fire to ignite and spread, coupled with forest and habitat management practices that have not adapted to changing weather.
In addition to the impact on human life and property, fires can also cause significant environmental loss through degradation of air quality via the release of toxic gases and pollutants as well as direct damage to habitats and species. Pollutants from forest fires can affect air quality for thousands of kilometres and extinguishing waters may contaminate soils, surface waters and adversely impact habitats and species many kilometres downstream from the burning area.
In areas where hotter temperatures and dry conditions are more conducive to conflagration events, insureds can be held liable for fires which begin on their premises and then spread to the wider environment. In one example, we received a claim from a wildfire that was ignited when routine maintenance was taking place on an overhead power line, which fell, sparking a blaze.
Trends in enforcement
Against this backdrop, environmental regulators are showing a greater willingness to get tough with polluters. If there is an industry that is constantly causing a problem, and repeat offenders, then the regulators will throw everything at them. The record £20m fine received by Thames Water in March 2017 for releasing 1.4 billion litres of untreated sewage into the river Thames is evidence of this.
Regulators are more likely to enforce remediation using domestic legislation in countries such as the UK, where such rules existed before the European Environmental Liability Directive (ELD) came into force a decade ago. The reason for this is that, under the ELD, the burden of proof on the regulators is quite onerous so they are more comfortable using other legislation where it already exists. However, the ELD is more likely to be used in Eastern European countries that historically did not have mature environmental legislation.
At the end of the day, regardless of where they are operating, companies need to understand that even the best risk management practices do not, unfortunately, prevent events such as a fire taking place. They buy general liability and property insurance not because they think it will happen but because they want to responsibly protect their balance sheet in case the unexpected occurs. The same should be true for their environmental exposures.
By Peter Jarvis, Head of International Environmental at AIG