Prevention best insurance policy – Mining and the Environment

The Alaskan oil spill destroyed fragile ecosystems and created a mammoth cleanup bill. It also raised the tricky question: “Who’s going to pay for all this?” Polluter pays, most people would say. This means that companies risking environmental mishap must protect themselves through insurance and preventive measures.

The main vehicle for corporate risk transfer is Environmental Impairment Liability insurance. EIL covers bodily injury, property damage and cleanup expenses resulting from environmental releases originated on the company’s premises. Limited to pollution emanating from identified sites, EIL will not cover any pollution on the insured’s premises, or fines or punitive damages.

Under most EIL policies, property damage must be claimed before cleanup costs will be covered. EILs are generally claims-made policies with no coverage for pollution that took place prior to the effective date of coverage and a brief period of continuing coverage if the policy is not renewed.

There are other types of environmental coverage. Property, boiler and machinery policies generally exclude the dispersal of pollutants unless the loss or damage results from otherwise covered perils.

Directors’ and officers’ liability is an important consideration. In general, most policies providing coverage for this type of liability have an exclusion for seepage, pollution or contamination of any kind.

Automobile exposure is often overlooked as a potential for environmental liabilities, even though spills from vehicles as well as exposure from automobile petroleum products represent risks that need coverage. Fortunately, most automobile insurance policies do provide some coverage for such environmental liabilities at present.

Yet another source of pollution coverage is found in the catastrophe insurance markets. This coverage is generally extended on a named-peril basis for sudden and accidental losses. It would not cover gradual pollution occurring over a period of time. Carriers offering this coverage, usually based in Bermuda or London, impose substantial underlying limitations.

Some other risk transfer alternatives exist. Among them are captive insurance companies serving a parent or a group of related companies; self-insurance, which is similar in nature; and an “aftermath” method, whereby a negotiated cleanup settlement can stretch when paid with a lump sum annuity.

Nevertheless, preventive measures to reduce the likelihood of mishap are probably a company’s best insurance policy. The most important initiative is an environmental risk assessment to identify and document all operations that present potential liabilities.

Companies should also establish an internal environmental risk management program. These programs may be required for certain types of insurance or levels of coverage.

It is time to examine all the options for risk management and adopt a balanced approach to the issue of environmental liability.005 0000,0500 This series has been compiled by Ernst & Young’s mining industry group, directed by Randy Billing. This article was contributed by James Morrow, principal of Morrow & Associates, environmental insurance consultants.