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Model approach


Mathias Schubert, vice president of corporate underwriting services at Gen Re, based in Cologne, Germany, explains what is covered by model wordings developed by German insurers in response to the Environmental Liability Directive

On April 27, the trade association of German insurers, Gesamtverband der Deutschen Versicherungswirtschaft e. V., published a noncommittal model wording for the Umweltschadenversicherung (USV)--Insurance of Environmental Damage.

The USV model wording is a response to the new liability regime for the prevention and remediation of environmental damage under the Environmental Liability Directive (2004/35/CE). In Germany, the ELD--which had to be incorporated into all E.U. member state's national law by April 30--was enacted on March 30.

For light environmental risks, which do not require the very detail-oriented manner in which environmental liability insurance applications and policies are processed in Germany, an environmental damage insurance model/basic coverage (USV--basic model wording) has also been made available.

The Umweltschadensgesetz, or Environmental Damage Act, is the core element of the implementing legislation, which also brought about a number of amendments to the Water Resources Act (2002) and the Federal Soil Protection Act (1998).

In accordance with a requirement under the German federal constitution, this legislation will come into effect six months subsequent to its official promulgation--the expected time line is November 2007. There is, however, an element of retroactivity because a responsible party who causes environmental damage--by an emission, event or an incident that occurs before the effective date, but on or after April 30--will not be exempted from liability.

Generally speaking, the German legislator has decided to adopt the requirements of the ELD, without broadening or extending the liability regime beyond these requirements.

Interestingly, a provision contained in the previous draft--which would have authorized the issuance of a regulation rendering insurance coverage compulsory--was not retained later in the legislative process.

Another aspect worth mentioning is related to the damage to protected species and natural habitats, which the ELD defines as any damage that has "significant" adverse effects on reaching or maintaining the favorable conservation status of such habitats or species.

Here, insurers had hoped that the legislator would develop a more concrete description of the criterion of "significance," in respect of which the ELD refers to the somewhat general criteria set out in Annex I of the directive. Very late in the process, this wish was at least partially fulfilled. An amendment of the Federal Nature Preservation Act (1998) states three types of scenarios in which adverse effects are generally not considered significant:

  • Adverse effects of a lesser extent than natural fluctuation that is considered normal for the habitat or species concerned.
  • Adverse effects arising from natural causes or current or past land use considered normal in the area
  • Adverse effects on species or habitats that will regenerate themselves in short time without intervention.

Some people familiar with the German insurance market may have been surprised that the GDV developed a stand-alone insurance product to cater for the new liability regime.

Consider the fact that the GDV's predecessor had developed a modern, dedicated environmental liability insurance product (the UHV model wording) in response to the Environmental Liability Act 1991, which became the fully accepted basis of a product broadly available throughout the German market.

And further consider the fact that commercial and industrial insureds, which have faced an absolute pollution exclusion in respect of their premises and operations under general liability policies since the early 1990s, generally view this cover as a necessity.

Against this background, would it not have been the intuitive solution to rely on the existing product, under which liability for third party injury and damage arising from a pollution event is covered, as a basis, and to create "add-ons" extending the cover so as to respond to the new liabilities under the EDA?

Indeed, the GDV working party considered such an approach at the beginning of its project. During the ensuing discussions, however, the group identified not only similarities between the issues, but also differences between environmental liability for third-party injury and damage on the one hand, and liability for environmental damage on the other.

While a single wording would have been possible in spite of these differences, it was felt that such a wording would have turned out to be overly complex and difficult to understand, particularly from the point of view of the insurance purchaser.

Obviously, it is still too early to predict the potential popularity of the new coverage. Available policy limits which are, of course, up to individual insurers, have not yet been formally announced by insurance companies, but it is expected that they will be in the near future. At this point in time, it appears as though USV policy limits will generally be lower than UHV policy limits.

Although the subject matter is quite complex, insurance practitioners will be able to benefit from their experience with the now familiar UHV product.

Of course, potential differences of opinion regarding important or not so important details can be expected, but a balanced assessment of the main coverage features in my opinion lead to the conclusion that the GDV and the members of the working party deserve praise for having developed a model wording that features a meaningful scope of coverage, while demonstrating caution in proceeding on partially unknown terrain involving significant risk potential.

Mathias Schubert can be contacted at schuberm@genre.comp