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The combination of legislation that will force polluters to clean up contaminated land and the development of former industrial sites is resulting in a growing environmental liability insurance market in the United Kingdom.
Although many insurers still refuse to offer pollution liability coverage except on a very limited basis, several insurers that offer specialized environmental liability policies claim that demand for their products is increasing.
"We are starting to see a marked increase in interest (in EIL insurance) from companies," said Tony Lennon, operations manager of ECS Underwriting in London, a subsidiary of U.S. underwriting manager ECS Inc.
ECS, which underwrites on behalf of Reliance National Insurance Co. (Europe) Ltd., has been at the forefront of EIL underwriting in the London market during the past decade.
Mr. Lennon and other underwriters note a distinct upturn in demand for EIL coverage, particularly new coverage options for contaminated land.
EIL coverage generally covers liability and sometimes cleanup costs associated with pollution. In the United States, EIL insurers are starting to market products that, for a premium, will assume the liability and costs associated with cleaning up an existing pollution site (BI, May 25).
Providing liability insurance for the development of contaminated land "has become a significant source of income" for ECS as government policy and limited land resources in the United Kingdom have resulted in the increased development of so-called brownfield sites, or former industrial locations, said Mr. Lennon.
"Concern about the liability regime for people who hold and own contaminated land has tended to make developers more conscious of what they're doing," he said, noting that "insurance has become a valid tool in allaying fears."
As a result, ECS and other specialist EIL insurers are increasingly being approached for coverage by developers and their lawyers and financiers, as well as industrial companies.
In many cases, the sale and development of brownfield sites is possible only if an insurance policy can be arranged, noted Mr. Lennon.
"Awareness is increasing, and every day we are getting more and more inquiries," agreed Richard Davies, environmental underwriter for AIG Europe (UK) Ltd. in London, a subsidiary of American International Group Inc. that underwrites EIL coverage.
"Government initiatives to develop brownfield sites and the high real estate value of former industrial land in prime (city) locations" is resulting in a demand for insurance policies to cover contaminated land liabilities, observed Mr. Davies.
Even though anticipated U.K. environmental legislation has yet to take effect, "people are aware of its intent and are looking to protect themselves for the future," said Mr. Davies.
The legislation, the Contaminated Land Legislation, was published in the Environment Act 1995 but still is being reviewed by the Department of the Environment. The legislation will make local government authorities responsible for identifying contaminated sites in their areas. Identified sites then must be cleaned up by the polluter to a standard suitable for its future use or, if the original polluter cannot be identified, cleanup falls on any developer, purchaser, present owner or occupier of the land.
"Over the last 18 months, people have become more aware of EIL and understanding of how risks can be covered by insurance," noted Mr. Davies.
One relatively new EIL insurer that is specializing in coverage of contaminated land insurance solutions is Certa (UK) Ltd., an underwriting agent set up by London-based Thomas Miller & Co. Ltd. to write pollution insurance on behalf of Allianz Cornhill International P.L.C.
Stephen Sykes, company secretary and legal director of Certa, agreed that much of the growth in demand in recent months has come from land development projects.
"Big utilities are slowly but surely beginning to realize the value of their land as well as the legal framework surrounding land contamination," said Mr. Sykes.
For example, a recent deal arranged by Certa involved a large U.K. company selling a oe5 million ($8.2 million) site to a U.S. pension fund for development.
"The U.S. company asked for a 12-year indemnity of oe7.5 million for environmental risk, which put the U.K. company on the spot even though they felt it was a low-risk site. A claim on the indemnity could have put the wealth of the U.K. subsidiary at stake," noted Mr. Sykes.
An environmental indemnity insurance policy allowed the seller to shift the risk. The seller bought the policy.
Another deal by Certa involves a more-than-100-acre housing and commercial development on known contaminated land. The development would be cost-effective only if cleanup costs are minimized. As a result, the developers decided to keep the pollution on site by building a containment cell, which in law is defined as a landfill site. A developer can obtain a landfill license only if it can prove it has enough money to maintain the landfill site in the future. Rather than tie up a pot of money in the form of a bank bond for possible future cleanup costs, Certa is designing a risk-funding solution that includes an element of insurance as an alternative safeguard.
Mr. Sykes pointed out that EIL insurers are learning to give clients what they need, such as "long-term comfort."
Certa offers up to oe20 million ($32.7 million) in coverage per site for up to 25 years, with more capacity available through reinsurance, said Mr. Sykes.
"The key to unlocking the market is to be flexible and offer tailored solutions," he said.
Before the Certa's launch last year, "we were aware of the skepticism (toward EIL products), because existing products fell short of clients' needs."
However, insurers "are getting closer to their clients' needs. They are less paranoid because of the experience in the U.S. and are going in with their eyes open," he said.
"As a result, insurers are getting more comfortable with the risks and are beginning to realize the opportunities" offered by pollution risk, said Mr. Sykes.
Certa has developed a system of contamination assessment and land certification -- which it calls its CALC(TM) system -- which is a computer-based environmental audit system devised by a panel of leading U.K. scientists involved in contaminated land issues. Completion of an audit allows the owner of the site a 12-month guaranteed option to buy insurance coverage. This option can be transferred to a new owner, thus providing greater comfort for developers and their investors, said Mr. Sykes.
Zurich International (UK) Ltd., which has been working closely with its U.S. operation to devise products for the U.K. market, is likely to offer products for U.K. financial institutions first, noted Nigel Tocknell, assistant underwriter for global specialities with Zurich in London.
"Lawyers, banks and building societies are concerned about the new guidelines" to take effect perhaps later this year on contaminated land, he noted.
As a result, the insurer is developing EIL insurance for financial institutions for any land they own that is found to be contaminated and where the mortgagee defaults.
However, the company currently has no plans to offer other environmental liability insurance products, because the level of "awareness and knowledge of environmental risk of brokers and policyholders" is not sufficient yet to sustain an EIL market in the United Kingdom, according to Mr. Tocknell.
"We are just looking at financial lender liability, because that's the area where there's most interest," he said.
ECS's Mr. Lennon also observed that while industrial companies are becoming more aware of the liabilities attached to historic contamination, many remain complacent about the liabilities of future contamination.
"Today's general manufacturing activities could be the cause of tomorrow's contaminated land," said Mr. Lennon.
"Companies are causing damage to the environment every day, which could give rise to substantial claims in the future. But a lot of companies assume that because they are complying with regulations, they can't be causing damage to the environment. That is not true," he warned.
Meanwhile, "a lot of companies do not realize that their general liability insurance policy does not pay for first-party cleanup even if the cause of the pollution is sudden and accidental," he said.
As a result, while ECS and other specialist insurers are beginning to sell more and more policies, the numbers are "insignificant compared to the potential" of companies currently uninsured for future clean up liabilities, he noted.