Industrial pollution risks

As the notions of error and liability have become wider, it is getting harder and harder to define them and thus to meet the need of bringing a swift compensation to the victims. This situation induced the legislator to come up with new appraisal criteria, for instance, the adoption of the precaution principle or that of the employer's automatic liability as regards asbestos pollution in Europe and in the USA.

The evolution of industrial pollution risks

The most common risks are in fact the classical risks that the structure of social life itself amplifies into higher scale and apprehension.

The mass urbanization and globalization of communication tools have prompted the emergence and the dissemination of some risks or geared down their damageable effects.

Through the use of new techniques, materials or molecules, technological progress itself carries the seeds of new risks, often more widespread as regards their causes and effects. That is why, among the most controversial issues, attention is currently focused on the problem of genetically modified organisms which is posing “virtual” threats on health and on the environment.

Industrial pollution

Typology

Pollution is synonymous of prejudice to the environment, that is, damage caused to nature, to public interests such as wild life, flora, air, ozone layer. It may also affect the property of those who started it, as well as persons.

In general, insurers cover only the pollution whose origin is accidental. Classical liability always rests on the notion of error.

Accidental pollution means a prejudice to the environment, whose grass root origin pertains to a sudden, fortuitous, unexpected event beyond the will of the insured, such as the explosion or the burst of a pipe, and which occurs in a relatively short lapse of time (a maximum of 72 hours) between the occurrence and damage evidence.
Any other pollution that insurers characterize as gradual can only be insured through specific contracts.

Gradual pollution means the discharge of wastes like liquids, smokes, gas or solid or continual or non-continual materials in the environment in the exercise of an activity. It also includes oozing moisture or flows caused by corrosion or wear and tear or to a faulty installation maintenance.

Historical pollution often draws its origin from the practise for long years of an activity which was initially legal. This type of pollution which preceded the stiffer regulations in the field of environment poses specific insurance challenges. For the already-caused damage can no longer be insured. But in case no harmful effects are conspicuously experienced, an insurance cover may be obtained following a detailed audit of the environment in return for compliance with strict preventive measures. Nonetheless, interpretations vary. That's why some facts are purpose-fully left out by the insured knowing that, otherwise, they will most likely lead to claims for damages.

The insurance of industrial pollution risks

Classical policies offer some kind of covers in case of environmental pollution, but remain insufficient. The insurers' reluctance towards the establishment of more accurate and sophisticated policies is accounted for by the lack of the statistical data that is used to assess the frequency and the scale of potential damage, the excessively-high cost caused by a loss, the uncertain and rapid evolution of the legal framework and the difficulty to incorporate this type of damage within the concepts of classical insurance.

The insurances concerned with the damage covers resulting from pollution are both property damage insurances and liability insurances.

In case of fire and allied perils insurance policies, the contracts cover the decontamination fees of insured goods contaminated during the progress of a covered event. The guarantee may be extended to touch on the fees pertaining to soil decontamination at limited amounts. They equally cover the third parties' and neighbours' recourse having sustained material damage during a loss mainly related to the flow of contaminated extinction waters.

It is estimated that 60% of pollution damages result from extinction waters used by rescue teams during fires or explosions.

The third parties' or neighbours' recourse to insurance against fire is limited to material and consequential damage. Bodily injury is accounted for by liability insurance.

Pollution may also trigger penal liability for managers and even for the company. In such case, the insurance cannot account for the fines.

To protect themselves, insurers make use of policies including different ranks: a policy of subsequent rank can be in force provided that the previous policy has been exhausted.

Insurance pools

Faced with the strains of coping with pollution risks and given the importance of the amounts to be covered, the insurers of industrialized countries have created insurance pools which provide covers for their members. The same hardships encountered by some activities have given birth to professional funds like that of the tankers ship-owners (P&I Clubs, etc.).

Industrial pollution risks and the pay-for-what-you-spoil principle

There is a growing tendency to replace regulations of common law liability by the pay-for-what-you-spoil principle and to levy specific taxes on the culprit in order to proceed to the settlement of compensations to the victims. The person whose mistake or negligence contributed to environmental damage is guilty, and thus, is made to pay damages for the victims.

But given the difficulty encountered when establishing evidence for mistake or misconduct by a given perpetrator, a plain evolution towards the principle of objective or error-free liability is noticed.

Objective or error-free liability: the person who is behind the emission is held responsible whether a mistake has been made or not.

Industrial pollution risks: major disasters

At the core of today's concerns are big man-made disasters associated with hazardous human activities that threaten the planet such as greenhouse gas, global warming, acid rain, nuclear risks, toxic waste processing and industrial wastes including pesticides.

Bhopal plant © Julian Nitzsche, CC BY-SA 3.0

But the headlines remain regularly marked by spectacular as well as destructive accidents. Due to precarious safety measures, a poor command or ignorance of risk, and to a high exposure of populations, these accidents have been recorded as major 20th century industrial catastrophes which have resulted in dramatic repercussions on man and environment.

Seveso (Italy), July 1976: Explosion of a chemical reactor producing herbicides. The spread of dioxin wastes in the atmosphere seriously affected more than 37,000 people and led to the emergence of peculiar forms of cancer. The accident legally won following and gave rise to two European directives called Seveso1and Seveso2 which label companies or installations according to a risk scale.

Bophal (India), December 1984: Explosion of Union Carbide factory producing pesticides. The toll: 5,000 deaths, 250,000 injured and 300,000 cases of sickness. Following the amicable settlement reached with the Indian government, Union Carbide paid up in 2004 the entire sum of 470 million USD (250 million USD of which supported by insurance companies), while the damages were valued at 3 billion USD. Driven by the conviction of being the injured party, the victims filed a complaint in penal liability against the company and its management.

Toulouse(France), September 2001: Explosion of AZF TOTALFINA factory set up in an urban zone. The toll: 31 deaths, 5,000 injured, 35,000 dwellings affected.

Jilin (China), November 2005: Following the explosion in a chemical mill which claimed many victims, benzyl wastes in the Songhua river resulted in a serious water contamination which spilled over to affect neighbouring Russia.

© Lvivian, CC BY-SA 3.0

Buncefield (England), December 2005: The explosion followed by a huge blaze that broke out in a hydrocarbon warehouse released a thick cloud of smoke over the country. The amount of damages was estimated at 223 million USD. The material used to combat the fire has aroused serious concerns over water quality and farming production.

The amount of damages resulting from technical disasters occurring in the course of 2005 has amounted to 5 billion USD as far as insurers are concerned. About two thirds of these incidents were caused by fires and explosions in the industrial and energy sectors.

While in Europe, and especially in France, farming remains the primary source of pollution, the developing countries are faced with the threats of industrial pollution made worse by obsolete installations and the absence of risk prevention mechanisms and devices. That is, for instance, the case in the Algerian Sahara where a project is currently under study to relocate the town of Hassi Messaoud, Algeria's main oil centre, on another site because of the proximity of oil field exploitation to Nigeria, where fires and deadly accidents in the hydrocarbon sector are common practice.

Development constraints to Industrial pollution insurance

At the level of demand

Recourse to insurance is not the only way to get cover against pollution risks. Some groups set up captives in countries with low tax system in order to cover such risks. The financial markets have also created tools designed to transfer risks to which industrialists may have recourse. Demand has dwindled down due to the scarcity of victims' damage complaints, the complexity and length of procedures and to the low level of compensation. The lack of information and reliable data available to companies stands as an additional obstacle to the growth of cover requests.

At the level of supply

Cover supply is constrained by:

• The legal uncertainties surrounding the cover in the old days, the amount of future damages and the possible doubting of some exclusions by the tribunals.
• Qualification difficulties resulting from the confusion over the different types of pollution: unintended (covered by contracts), or historical (excluded from the contracts).
• Tarification difficulties: insurers have little data on claims.
• Reinsurance capacity: very few reinsurers venture in pollution risks.