Reducing risk in environmental liability policies

Reducing risk in environmental liability policies

Source: https://www.propertycasualty360.com, January 7, 2018
By: Suzanne Englot, Esq.

Resilience is defined as the ability to recover from natural disturbances. In the context of the environment, the word “resilient” is often used to describe a system or structure that has been constructed to withstand the unique environmental conditions that exist in the area in which it is located.

As global temperatures continue to rise, the intensity of storms and other natural disasters will increase, and the resulting conditions will disrupt people’s lives more and more, particularly in vulnerable areas like coasts, arctic ecosystems, and water-scarce population centers. Resilient property management will decrease the risk of damage to, or destruction of, a property that witnesses a natural disaster.

The role of insurance

The insurance industry, especially entities issuing property and casualty insurance, as well as environmental policies, can take steps to reduce the risk of issuing property insurance for a vulnerable property, and also reduce the necessary payouts for any business interruption by incentivizing resilient property management practices. Many companies that issue property insurance require the evaluation of properties, homes, and land to determine the risk involved before insuring them. Sometimes, as part of those assessments, requirements are set in order to reassure the company that the property is resilient before a policy is issued.

For example, in order to obtain pollution legal liability insurance, a property owner can be required to commission a Phase I site assessment, conducted by a trained professional with a scientific and/or engineering background, who can determine if there is any evidence of previous or potential future releases of pollutants at the site. This helps the underwriters of the policy accurately rate the risk of insuring the site, and ultimately leads to the issuance of a policy that offers the appropriate amount of coverage for the site based on what could happen in the future.

Insurance providers can reduce the risk of insuring properties located in areas vulnerable to natural disasters by creating requirements preceding the issuing of a policy that incentivizes resilience.

Some other examples of policy requirements that could help reduce the risk of insuring a site include:

(1) Requiring the use of resilient materials in construction;

(2) Conducting an energy assessment for existing buildings to evaluate their weather readiness and identify available upgrades that can be financed (often with substantial rebates); and

(3) Developing a sustainable design alternative to any new construction planned to offer interested parties an option to protect their investment from future environmental conditions.

Taking this idea one step further, insurance companies particularly concerned about the risk inherent in insuring a vulnerable property could create rules for the types of property that the company will insure. Sea level rise and increasingly dangerous natural disasters make certain types of coastal properties very risky to insure, so developing criteria identifies the level of environmentally related risk a company is willing to assume.

The role of data in identifying risk

Collecting and analyzing data on the different types of environmental risks properties in meteorologically vulnerable areas face can help insurers develop criteria for the level of resiliency risk they are willing to accept, while highlighting incentives for increasing a property’s resilience.

The insurance industry already has access to some of the most precise data available on property damage caused by natural disasters because it collects that information through the claims process. By mapping the data collected to show what types of natural disasters, and the resulting types of damages, are prevalent in the area of a property the insurance company is evaluating, it can both increase the accuracy with which it rates the risk of insuring the site. The company can also structure an incentive scheme around the types of resilient property management needed to reduce that risk.

Some examples of resilience incentives for insurance policies include reduced premiums offered after completion of a resilience project; broader coverage for the resilient infrastructure present on the property; and fixed-rate, multi-year insurance contracts offered for resilient structures.

Shaping property owner behavior

Insurers can make resilience a fundamental principle of risk management in the issuance of environmental liability policies. The steps outlined earlier will both minimize carriers’ risk in insuring properties and also benefit society by incentivizing resilient building and property management, thereby minimizing future damage due to natural disasters. This reduction in risk would feed into the claims and litigation processes as well.

By imposing resilience requirements up front, insurance companies can avoid providing support to property owners or managers more likely to be named a Potentially Responsible Party (PRP) or hit with administrative violations by a regulatory body. Property owners who tend to cut corners and do not ensure their property is safe, pollution-free or optimally constructed to withstand conditions existing in their area would effectively be screened out of the process by resilience requirements.

Suzanne Englot, Esq. is an associate attorney at Boston-based CMBG3 Law LLC, and focuses on asbestos, toxic tort and environmental defense. She has conducted in-depth research on clients’ domestic and international work sites, and compiled legal registers on environmental and occupational health and safety laws in preparation for internal and external audits and inspections. Contact her at senglot@cmbg3.com.

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