Environmental liability refers to possible fines, penalties, and possible jail terms for non-compliance with environmental laws and regulations.

History of Environmental Liability Insurance

America passed several federal and state laws in the 1960s and 1970s focusing on liability for environmental cleanups.

In 1973, insurers excluded pollution from the general liability policies if it was part of the production processes of the insured party and only covered sudden and accidental pollution. Court decisions interpreted sudden to mean unanticipated, thereby exposing the insurance industry to losses it never planned to cover.

In 1986, insurers changed their policy wording to exclude pollution losses. Insurance companies such as AIG started developing Environmental Liability Insurance products for pollution. Today, more than 100 different environmental insurance policy forms are available.

The Need for Environmental Liability Insurance

Most companies handling potentially hazardous materials purchase a separate environmental liability policy to cover their environmental liability exposures. Such a policy fills gaps in insurance coverage caused by the exclusion of pollution in liability and property insurance policies. Environmental insurance policies can cover almost any legal business activity against a pollution loss event.

Primary Environmental Liability Insurance Policy Forms

There are several primary environmental liability insurance policy forms, including:

  • Environmental Impairment Liability
    • Property owners purchase this insurance for listed properties to limit their exposure to unknown future liabilities. This coverage is essential for commercial buildings such as hotels. It includes coverage for first-party cleanup costs, loss of rents, and business interruption.
  • Contractors Environmental Liability
    • This insurance provides cover for pollution arising from the operations of the insured as described in the insurance application document.
  • Professional Liability

Types of Environmental Liability Obligations

Environmental liability obligations fall into the following categories:

  • Compliance Obligations
    • New and existing laws and regulations can increase the compliance cost of companies involved in the manufacture, use, or release of regulated substances.
  • Remediation obligations
    • The distinction between compliance obligations and remediation obligations is not always clear. A compliance obligation is for the routine closure of facilities at the end of their productive lives, while the remedial obligation is to clean up pollution that could adversely affect the environment.
    • A company may face remediation obligations from contamination of the following:
      • Inactive sites that are unregulated.
      • Property previously owned.
      • Property never owned or used, but used for waste disposal.
      • Property acquired but not contaminated.
  • Fines and penalties
    • Non-compliance could lead to civil or criminal fines or penalties or additional expenses for projects undertaken to address the non-compliance.
  • Compensation obligations
    • Common law, state or federal statutes could make companies obligated to compensate individuals, properties, or businesses for damages suffered due to the use or release of toxic substances or pollutants.
    • Different categories of compensation liabilities exist:
      • Personal injury, caused by bodily harm and medical monitoring.
      • Property damage, such as loss of crops or diminished value of real estate
      • Economic loss, including a loss of profits and costs associated with renting substitute equipment or premises.
  • Punitive Damages
    • The law allows punitive damages to supplement compensatory payments to those harmed by the actions of others with the purpose of deterring actions that disregard others.
  • Natural resource damages
    • Natural resource damages refer to the destruction or loss of the use of natural resources (flora, fauna, air, water and land resources) belonging to or controlled by federal, state, local, foreign, or tribal governments.

Coverage Mistakes in Environmental Liability Insurance

The most common coverage mistakes include:

  • Selling a policy form that does not fit the purpose for which it is intended. For example, selling a policy designed for a factory to a shipping company will not meet the coverage needs of the shipping company.
  • Selling policies with flawed coverage for bacteria.
  • Not addressing preexisting pollution conditions in the environmental insurance policies for farms.
  • Neglecting additional insured endorsements and certificates of insurance.
  • Underestimating the consequences of pollution exclusions in standard policy forms.
  • Leaving ignorant customers uninsured for contamination-related losses because of the belief that pollution exclusions apply to hazardous waste only.

How To Fix Common Coverage Mistakes

Insurers should inform commercial insurance buyers of the consequences of pollution exclusions and offer alternative insurance coverage solutions.

Enlisting the help of environmental risk management and insurance specialists could improve environmental insurance placements.

Training on subjects relating to environmental risk management, pollution, and environmental insurance is scarce. The Society of Environmental Insurance Professionals (SEIP) aims to improve the understanding of environmental risks and insurance.

If you need help with your company's environmental liability insurance, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.