Environmental Impairment Liability is a specialist form of insurance developed in the London Market in the 1970s in response to the introduction of a pollution exclusion in Commercial General Liability Policies. This excluded all pollution that was not the result of a sudden and accidental cause. This was based on the realisation that pollution due to a gradual cause might continue for many years and so might involve the aggregation of policy limits issued over many years. It was quickly recognised that environmental incidents might require clean-up or environmental restoration and that these would need special coverage provisions outside the normal scope of General Liability Policies.

Following the advent of the Superfund legislation (CERCLA) in the USA the market transformed from one providing cover for the environmental liabilities arising from day to day operations to one providing cover specifically for the responsibilities to clean-up waste disposal sites imposed by CERCLA. At the same time redevelopment of Brownfield sites was being delayed and in some cases cancelled because of the risks of further remedial work for as yet undetected contamination. Coverage for both these risks was necessarily entirely site specific and required intrusive and expensive site investigation. In the process the provision of coverage for the environmental exposures from the day to day operations of normal business became rather overlooked.

Over time the General Liability Policy Pollution Exclusion has been strengthened by limiting coverage to pollution caused by a “sudden, identifiable, unintended and unexpected incident which took place in its entirety at a specific time and place during the Period of Insurance.” In two recent cases months the Court of Appeal has awarded damages for nuisance as a result of odours and other pollutants. In the first case the Appeal Court commented on the discrepancy between the damages of a few tens of thousands of pounds and a legal bill of £6 million[1]. In the second total damages for all 132 claimants are estimated at around £1.4 million[2]. Persistence is characteristic of Nuisance and in both of these cases the odours had persisted for several years. They would not pass the test of taking place in its entirety at a specific time and place during the Period of Insurance and so be excluded by the pollution exclusion.

The implementation of the EU Environmental Liability Directive (ELD) and the beginnings of enforcement action by Local Authorities and The Environment Agency under the Contaminated Land regime in the UK have led to renewed interest from brokers and insureds in the environmental liabilities arising from day to day routine business operations. There is a renewed appreciation that environmental liabilities are not restricted to high profile polluting industries. In England the Bartoline decision[3] held that the costs of clean-up and environmental restoration required by Regulation are not damages covered under a General Liability insurance policy, in effect restricting cover to tortious liabilities. Some General Liability Insurers have responded by introducing a ’Bartoline‚ extension, however experts conclude that if Bartoline had purchased a so called Bartoline Extension they would still have had no insurance coverage for the claim.

As a result insureds who only purchase General Liability coverage have very little insurance for environmental losses. This has led to activity to educate insurance professionals; ‘Environmental Risks: insured or not?’, published by the International Underwriting Association (IUA) and Chartered Insurance Institute Continuing Professional Development modules from Chartis on the issues. In December 2011 the IUA called for more work to be done on collecting environmental claims data and have subsequently published a further paper ’Environmental Loss Scenarios‚ showing what has been described as a “black hole” in coverage for many environmental risks.

In their 2012 Report on Pollution Incidents, the Environment Agency; the regulator in England and Wales, make clear that, "A major incident can cost a business millions of pounds in clean-up and prosecution costs" and point out “that in many circumstances business insurance does not cover all the costs involved in pollution incidents, leaving companies liable to pay for clean up”. The Environment Agnecy also makes clear that, “Pollution incidents where we could not identify the source have fallen significantly, indicating that we are getting much better at tracing the source of pollution incidents”, and “We ensure that costs associated with our interventions are recovered from the polluter, under the ’polluter pays’ principle, wherever possible. Recharging our costs where we can has resulted in bills for polluters running into millions of pounds.”

For most businesses uninsured losses of several hundred thousand pounds are a serious issue that threatens their survival. For many businesses this is the high outcome, low probability risk for which insurance provides an effective economic solution. All businesses therefore should seek to purchase insurance for Environmental Impairment.

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