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BERLINGermany's insurance association soon will unveil a nonbinding insurance model to help insurers develop environmental liability coverage and deal with new exposures under the European Union's Environmental Liability Directive.
The association plans to present the model wording to its members at the end of this month, with the expectation that products will become available before the end of the year.
But any resultant standard wordings are likely to fall short of buyers' expectations and will leave gaps in coverage, according to brokers and specialist insurers.
The Environmental Liability Directive, which E.U. member states must transpose into national law by the end of this month, provides a common framework for the prevention and remediation of environmental damage to natural habitats, including public spaces such as beaches, lakes and rivers, and natural resources. The directive makes polluters pay for cleanup and requires that an area is restored to its "baseline condition."
It covers damage not only to water and land, but also to protected species and natural habitats. There is no existing liability regime to cover the restoration of biodiversity in an area affected by environmental damage, and as such no insurance coverage in Europe, experts said.
Risk managers, brokers and insurers in Europe are therefore currently working out what potential new exposures they face and how to manage and transfer them.
They are working to deadline because some member states, including Spain, have already stated that they will demand compulsory coverage or financial guarantees within three years.
In addition, the directive says member states must encourage the development of insurance or financial security products for environmental damage and report back to the European Commission by 2010.
The Gesamtverband der Deutschen Versicherungswirtschaft e.V. in Berlin is leading the charge for German companies faced with the new exposures.
The insurance association said last week that it will recommend a specialty stand-alone product that can be bought in addition to the existing environmental liability policies that cover against damage to private property and third-party risks and that are already bought by many German businesses.
"We came to the conclusion that all operators that have environmental liability insurance for their (existing) risks will also need an insurance solution for the new ELD liabilities, especially for the biodiversity damages, which isn't covered so far," said Nils Hellberg, head of the GDV's liability and credit insurance department.
The GDV, in consultation with experts from member companies, has worked for about three years to come up with its insurance model, Mr. Hellberg said. It is targeted at the approximately 150 liability insurers that operate in Germany.
Mr. Hellberg believes the first environmental liability products for the new directive will come to the market as early as the fourth quarter of this year.
But, while the GDV's model will go beyond what is currently available in the German market, experts point out--and the GDV acknowledges--that it won't fully cover the liabilities under the directive.
The model stops short of fully covering the directive in that it would not provide coverage for environmental damage because of "design risks, authorized emissions and for normal operation damages," Mr. Hellberg added.
"We have no experiences in that field," explained Mr. Hellberg. "That's more or less a normal part of an exclusion in liability insurance, especially when you don't know what will happen ... with a new kind of liability," such as with biodiversity damage, he said.
The model also will not cover past pollution, he noted.
Jan Wulfetamge, a lawyer for the federation of German industries, the Berlin-based Bundesverband der Deutschen Industrie e.V., said the GDV's model may not be attractive to companies because it does not cover design-risk liability.
From a broker perspective, the GDV approach "does not provide sufficient coverage for the new risks," said Stefan Scholz, a broker in the liability practice group at Aon Jauch & Hübener Holdings GmbH.
"There are important gaps," he noted, such as that coverage is provided only for sudden and accidental losses.
"Our clients have started to ask for adequate risk transfer solutions quite early," Mr. Scholz said. "At the moment, we consider that the German insurance market still does not offer sufficient coverage to the changed environmental risk exposure of our clients. With this advice, most of our clients remain very reluctant about the decision to take out new cover and prefer to wait how the market develops."
The U.S. environmental insurance products, which have been available in Germany for some time, offer "at least an interesting alternative," he added.
"What they are recommending does have some elements of breadth to it," said Karl Russek, senior vp-environmental risk, for the ACE European Group in London. "But because they are not willing to go past the sudden and accidental threshold, I think it falls short."
Mr. Russek of ACE thinks the GDV has come up with a model that "most of the indigenous German casualty insurers would be more comfortable in providing." However, the model "stops short of what is available elsewhere in the marketplace, and what is available currently in Germany in our wording," he added.
ACE is one of four specialty environmental insurers which say they have already added wordings to fully cover companies under the directive. The other insurers are AIG Europe S.A., part of American International Group Inc., Chubb Insurance Co. and XL Insurance Co.
Meanwhile, the Deutscher Versicherungs-Schutzverband e.V.--the German commercial insurance buyers association--would not comment on the key points of the GDV's recommendation.
It said it would prefer to wait until it has reviewed the complete model.
"We did offer our opinion to the GDV that the insurers should develop wordings which may bring a maximum of coverage for the companies under ELD," said Georg Klinkhammer, the DVS' liability expert.