As businesses and individuals become more conscious about the environmental impact of their actions, one type of insurance is gaining prominence as it seeks to cover and remedy incidents that cause pollution or other types of environmental damage.
Jota Shohtoku (pictured), senior vice president, deputy regional head for Asia-Pacific at Allied World Assurance Company, spoke to Insurance Business regarding the importance of environmental liability insurance and the prospects for this line of business.
According to Shohtoku, environmental liability insurance, as the name suggests, has two sides – environmental and liability. In the case of a business encountering an incident that causes a release of pollutants into the environment, the insurance policy will cover the remediation costs associated with cleaning up the pollution. As for the liability element, if the pollution causes third-party bodily injury or third-party property damage as a result of those releases, then the client can use environmental insurance to provide cover for those liability situations.
However, a number of clients still do not realise the importance of environmental liability insurance and think that all their risks are covered by their standard general liability and property policies.
Gaps in cover
“There are multiple gaps in cover when it comes to general liability or property insurance,” explained Shohtoku. “General liability may have some component of sudden and accidental pollution cover that is often associated only with third-party bodily injury and property damage. Meanwhile, environmental insurance policies don’t really define what’s a sudden event or a gradual event. That’s why environmental insurance policies are designed to cover any type of pollution incident, whereas general liability would define or limit the definition of pollution to only the sudden events and may not cover clean-up costs or remediation costs.
“On the other hand, property policies may cover business interruption, but they won’t cover business interruption associated with contamination,” he added. “Or there could be a contamination or clean-up sub-limit, so they might get some amount of cover, but these property and general liability policies are not designed for environmental incidents. Therefore, environmental liability insurance fills a lot of the gaps that are in the existing insurance programs that clients have purchased.”
Shohtoku also shared two incidents in which environmental liability insurance was able to remedy pollution incidents, as well as compensate individuals that were directly affected.
“We had a client that had a release of oil from a pipeline into an underground garage,” he said. “The pipeline was going next to an apartment building and it caused the seepage of oil and other contaminants through the soil and into the garage, causing damage to third-party property, in this case, people’s cars.”
According to Shohtoku, environmental insurance was able to provide remediation expenses as well as cover the damage to the vehicles that were parked in the garage.
The second incident happened in a hotel.
“When people think about hotel risk, they don’t necessarily consider environmental liability as something of the highest concern,” he said. “But this hotel had a release of microbial matter or mould, as well as other contaminants, through their ventilation systems due to maintenance work being done on the HVAC facility. Guests at the hotel fell very ill due to the contaminants and the hotel had to shut down a portion of their facility to do some decontamination work.”
The affected guests had to be given treatment, resulting in medical expenses. The client’s reputation was damaged and business was interrupted, resulting in loss of income. According to Shohtoku, environmental liability insurance ended up covering a large portion of these costs incurred by the insured. However, businesses must not end up overly reliant on this cover.
“Environmental liability insurance should not be the end-all, be-all of insurance,” he said. “It should be part and parcel of any company’s risk management needs… and I always say that environmental insurance policies are a complement of the existing insurance purchased by the client.”
Market trends
Shohtoku believes that the environmental insurance market has come a long way. He recalled that 15 years ago, almost no-one had heard of it in Asia and no-one was selling it, as well.
“As time progressed, more markets were starting to offer cover, starting to offer a higher limit through a lot of education and awareness building to brokers, agents, and clients around the region,” he said. “As a result, submissions started trickling in. Back then, only developed markets such as Australia and Japan had a market for these types of products. Now, they are selling even in emerging markets such as the Philippines, Vietnam, and Indonesia.”
Alongside the rising number of submissions, regulations regarding environmental cover are now coming into force, especially in emerging markets. According to Shohtoku, more companies are starting to pay attention to these types of risks and asking their insurance brokers and agents how they can protect themselves.
“I anticipate this product to grow further, with awareness of the product increasing across Southeast Asia and North Asia,” he said. “Regulation will be heavier when it comes to environmental incidents in the future. If you look at China, they are very serious about having to clean up their air and soil pollution. As countries develop, people are going to demand more corporate responsibility from businesses.”
