Environmental Financial Assurance: The Compulsory and the Voluntary in a Stressed Economy

environmental liability insurance, pollution event, site closure, compulsory closure surety bonds, economic downturn, bankruptcy, insolvency

In these times of economic downturn in Europe, governments and environmental authorities are increasingly concerned about operators not being able to foot the bill for site clean ups when a company is declared bankrupt. Take the French Government for example, who were left with a heavily contaminated site to clean up and no one to pay for it after a controversial bankruptcy and subsequent closure of a metalwork plant in 2003. Consequently and after long discussions, the country is expanding mandatory environmental financial guarantees to include more types of businesses next year. The fact of the matter is that standard environmental liability insurance does not serve as this financial assurance in the case of bankruptcy.

One question commonly asked from our clients about their standard risk transfer environmental liability insurance coverage is, “what will the insurer pay for on my behalf if I close one of my industrial facilities and must clean it up as a result?” The answer is generally straightforward: “nothing”. The same answer applies if a clean-up was required after bankruptcy.

This is because a site closure triggers an exclusion that exists in all standard environmental liability insurance contracts on the market: material change in use. Even without this contractual protection, insurers are in a position to push back on the basis that in order to be insurable, a risk must be incidental which is not the case with a site closure.

In fact, the costs of securing a location at the time of closure to protect the environment against potential pollution threats can be anticipated: the removal of waste, decommissioning equipment, disposing of fluids, neutralizing underground storage tanks, remediating identified polluted areas or monitoring underground water are all duties for which expenses can be forecasted. Provisions can be built up into balance sheets and when the time comes, cash is available to face the liabilities.

However, under accounting rules, provisions cannot be built to address the unknown or the unanticipated; this is what insurance provides protection for.

The Role of Voluntary Environmental Insurance Explained

With regards to environmental liabilities, insurance products are designed to cover losses as a result of tort or civil claims for damages arising from unforeseen pollution events, as well as for expenses incurred responding to legal responsibilities such as land clean-up or ecosystem services compensation after environmental damages or first-party business interruption after contamination.

Environmental insurance is a risk transfer mechanism that responds to environmental liabilities stemming from on-going or historic business operations, and provides the financial protection to a business’s balance sheet to ensure that it will be able to continue to run despite an adverse pollution incident or an environmental damage.

Compulsory Closure Surety Bonds

Now, governments and environmental authorities around the world are growing increasingly concerned about the unstable economic climate threatening the provisions built up by businesses for environmental legacies.

They tend to impose mandatory closure bonds to the benefit of local authorities. These sureties are specifically designed to finance the closure care activities and clean-up of sites if the guaranteed company fails to do so (e.g. following a bankruptcy). If triggered, bonds provide the necessary funds to the local authorities in order to substitute the failed operator in its duties, ensuring that taxpayer’s money will not be used.

In the US, these bonds are being enforced by the Environmental Protection Agency for waste landfills, with such provisions also existing and expanding in Europe for landfills (i.e. Austria, Belgium, France and Germany) as well as for mines, quarries, wind turbines and certain classes of industrial facilities. Unlike an insurance contract these bonds are not protecting the insured company against potential liabilities, but the local authorities against some failure of the company.

By introducing these mandatory requirements, regulators’ final intent is certainly not to have to use the guarantees, but rather to ensure that they are there to protect governments’ balance sheets.

The Outlook

One can anticipate that the need of such guarantees will only grow in the coming years. For example, closure bonds could be required by governments to secure elements of the development of fracking for shale gas in Europe. In this case, authorities would assure the proper plugging of wells, decommissioning and remediation of working pads at surface level after exploration and production.

However, when a business must seek solutions to meet a mandatory environmental financial assurance, a voluntary environmental liability insurance program for on-going operations should also be considered to ensure that there are no holes in the pollution financial protection net.

Indeed, what could be worse for a company than to have to file bankruptcy after a non-affordable uninsured pollution accident and see its mandatory surety closure bond being used by the authorities to secure its site and shutting down its business?

About Julien Combeau

Julien is an Executive Director for Willis’ Environmental practice, with responsibility for UK and Europe. Based …
Categories: Environmental Liability, Europe

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