Businesses in the energy and natural resources are particularly exposed to pollution risk. From leaks and spills to poor waste management, there is the potential for serious environmental damage and significant health impacts.
Managing that risk effectively is therefore crucial.
That starts with recognizing that the industry is potentially vulnerable to a wide range of risks. Examples of pollution include:
Energy and natural resources businesses also need to consider how pollution and contaminants could find a pathway to where they’ll cause problems – through soil or groundwater, for example.
They must also identify the “receptor” at risk from the contamination – a local population dependent on clean drinking water, say, or the fish in a river.
All energy and natural resources businesses should have strong systems in place to manage their environmental risks.
Waste management plans, for example, set out how the organization will manage material such as wastewater, effluent, solid waste and air emissions. Environmental management plans provide a blueprint for assessing how the business’s operations in each site could impact the environment – and how these impacts will be mitigated.
It’s also important to conduct an environmental impact assessment ahead of any new development or project; this will identify risks to the surrounding area so that these can be managed. Long-term monitoring may also be required – ongoing testing of groundwater, for example.
In many cases, energy and natural resources businesses will be operating under environmental management permits. Managing these effectively will ensure the organization complies with all regulation; they may also be able to improve their risk profile over time.
Responsible energy and natural resources companies will do everything they possible can to avoid harmful impacts and incidents. However, it is impossible to remove all risks entirely.
Insurance such as general liability and property cover may provide some support if there is a problem. However, these policies typically only cover pollution caused by sudden and accidental damage – as opposed to gradual pollution – and they do not cover first-party costs.
To cover the gaps in their existing insurance, many energy and natural resources businesses are turning to environmental impairment liability insurance (EIL).
EIL can cover both sudden and accidental pollution – an oil spill, say – and gradual pollution that has occurred over time. It can also cover air pollution, including the impact of historic emissions, which is a growing concern in the energy and natural resources sector.
Broadly, first and third-party costs covered by EIL include: clean-up costs, liability to third parties for environmental damage and bodily injury; pre-incident loss mitigation costs, site investigations, soil and groundwater remediation, crisis management response, statutory clean-up costs if an environmental agency carries out work and demands payment; biodiversity restoration, long-term groundwater monitoring, legal defence costs if the policyholder is prosecuted; and director and officer liabilities for environmental breaches.
Where a business has general liability or property insurance in place, it would claim on this cover first. But most of the coverage above is likely to be excluded; EIL therefore covers the excess costs and risks.
In practice, there are two main types of EIL cover. Premises pollution liability (PPL) insurance covers the policyholder’s owned locations and assets, as listed in the policy schedule. Contractors pollution liability (CPL) insurance covers work done by contractors – on infrastructure projects, for example.
EIL policies have now been available for more than 20 years, but there are still some misconceptions about the cover. For example, energy and natural resources businesses often assume the insurance will be very expensive, but increasing competition in the market is having a significant impact.
In other cases, organizations in the sector are underestimating their risk exposures and therefore deciding they don’t need cover. Some businesses point out that EIL is not required under environmental regulation, but it’s important to recognize that the compliance burden is continuing to grow.
EIL insurance is available to businesses operating throughout the energy and natural resources sector. In oil and gas, most onshore and offshore risks can be covered, from refineries and oil storage terminals to exploration companies.
In power, most generation risks are covered, though coal is one notable exception; there is now growing demand for EIL that covers renewable energy projects. In mining, a particularly high-risk activity for pollution, a broad range of EIL is available.
Significantly, EIL can also help energy and natural resources businesses execute on their environmental, social and governance (ESG) strategies. The cover can be an important part of the approach to managing both immediate and long-term environmental impacts.
For example, EIL policies can cover climate risks, such as the impacts of air emissions, which are typically excluded from traditional general liability policies.
EIL also covers biodiversity damage, also routinely excluded from other insurance. More broadly, the cover can help energy and natural resources companies to understand and report on their environmental risks – and to demonstrate that they are managing their ESG exposures effectively.
For smarter ways to managing environmental risks, please get in touch with our specialists.
