Environmental Impairment Liability helps companies meet ESG challenges

Standard property and general liability policies typically only cover pollution caused by a sudden and accidental incident. Environmental damage caused over a long- and gradual-time frame is not part of this. In this instance, third party costs are covered if someone makes a claim against a company, but this does not include the actual costs of the damage, such as clean-up, remediation, or recovery.

Environmental impairment liability (EIL) insurance covers pollution no matter how long ago it was caused or how gradual its effect. It also covers first and third-party costs, filling the gaps that other policies do not cover.

What is an environmental risk?

There are three elements to an environmental risk:

1. A source of contamination – e.g., a leaking oil drum
2. A way for the contamination to move through – e.g., through the soil into groundwater
3. A receptor for the contamination to cause harm – e.g., fish in a river or people breathing in contaminated air

Overview environmental risks

How does EIL help companies meet ESG challenges?

Environmental, social and governance risks are being discussed more and more in client boardrooms. New legislation in the EU will require all large companies to have an ESG strategy in place from 2024 onwards. Increasingly, not having an ESG strategy in place puts businesses at risk of fines and reputational damage.

EIL can play a critical part in ESG strategies as it gives immediate protection against current exposures, and covers for the long term gradual impact of processes and people that were not yet known. In short it can:

• Help companies highlight they are in control of their ESG exposure
• Demonstrate they understand the risks they pose to the environment
• Show they have a plan in place to deal with those risks adequately

Having a rapid crisis response in place and the funds to clean-up immediately after an incident can reduce the extent of environmental and reputational damage. Besides, it can also reduce potential regulatory fines and penalties.

EIL can help manage emerging exposure, such as industries that breach greenhouse gas emission thresholds that can face third party claims for damages as climate concerns continue to rise. Unlike other liability policies, EIL does not exclude climate-related environmental damage caused by long-term gradual emissions.

Why should clients consider taking out EIL?

There is a growing list of reasons why more and more businesses are considering taking out environmental policies. Here we name but just a few:

1. Reputational damage: more and more businesses are concerned about adverse publicity and reputational damage as environmental issues are getting higher up the corporate agenda, including personal liability of board members.
2. Contractual obligations: banks and investors who are financing land deals, mergers and acquisitions of construction projects increasingly require environmental cover.
3. Saving costs and admin on complex projects: an owner-controlled insurance program (OCIP) that includes the project owner, funders, and different tiers of contractors can save a lot of admin time, effort, and money.
4. Legal costs: environmental damage claims can be complex, lengthy, and lead to high legal expenses.
5. Emergency response: policies offer access to 24/7 technical expertise when an incident occurs.
6. Balance sheet protection: the costs of an environmental incident can be very high and leave a large hole in a company’s finances.

What does Environmental Impairment Liability cover?

The following costs and claims are covered by EIL:

First and third-party costs

• Liability to third parties for environmental damage and bodily harm.
• Damage from both sudden and accidental and gradual pollution.
• First party clean-up costs, not just on the client’s site but in the surrounding area as well.
• Statutory clean-up costs if an environmental agency carries out work on a client’s behalf and sends them the invoice.
• Legal defense costs if a client is prosecuted.
• D&O liability for environmental breaches.

Prevention and recovery costs

• Pre-incident loss mitigation: the policy will respond if there is an immediate risk of environmental damage caused by pollution. For example, if a fire at a chemical site leads to a risk of firewater runoff then the policy will pay to pump the water out safely before any damage is caused.
• Crisis management response: one of the main concerns for most clients is reputational damage related to a pollution incident. Clients can access a team of trained PR consultants to manage the messages to media and stakeholders as soon as an incident occurs.
• Site investigation: policies can also pay for investigations to assess the nature and extent of the pollution, how far it goes and how to remediate it.
• Biodiversity restoration: covers the cost of restoring biodiversity lost through pollution.
• Alternatively, EIL can pay to carry out environmental restoration works somewhere else to make up for the damage caused.
• Long-term ground water monitoring: for up to 10-15 years after the incident.
• Business interruption: loss of profits if a client’s business has to close as a result of an incident.

Overview of EIL cover

WTW helps organizations around the world to understand their environmental risks. As companies need to be prepared for 2024 and mitigate potential liability risks, we are happy to provide you with relevant data and insights to cover these challenges. Contact a WTW expert today to discuss your Environmental Impairment Liability insurance options.