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Proposed pollution cover criticized

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BONN, Germany--Germany's commercial insurance buyers association says there are shortcomings in a new model wording to cover exposures under the European Union's Environmental Liability Directive--and it is up to insurers to address the gaps.

The Bonn, Germany-based Deutscher Versicherungs-Schutzverband e.V., or DVS, gave a presentation at a May 9 committee meeting on the nonbinding insurance model developed by the Berlin-based Gesamtverband der Deutschen Versicherungswirtschaft e.V., Germany's insurance association.

The model--officially unveiled at the end of April--is designed to be a basis for German insurers to create products to cover the new exposures under the E.U.'s Environmental Liability Directive.

While the DVS commended the GDV on developing the model wording, it said that the model falls short in some areas.

"Not surprisingly, the approach taken in the model is rather cautious, and a number of points will need further discussion, especially the limitation of the cover to sudden and accidental incidents," said Günter Schlicht, managing director of the DVS, last week.

The GDV model, he noted, excludes environmental damage resulting from the normal operation of a plant for which companies are liable under the new liability system.

"At this point the cover offered is not sufficient," Mr. Schlicht continued.

"It is now up to the market, to the individual insurers, to develop concepts which fully meet the clients' needs," he said.

Another area of concern expressed by at least one German risk manager--and echoed by Mr. Schlicht--is the model's apparent exclusion of product-development risk.

The directive, which E.U. member states were supposed to transpose into national law by April 30, provides a common framework for the prevention and remediation of environmental damage to natural habitats and resources. The directive imposes tough new requirements on cleanup, such as restoration of biodiversity, which up to now have not been covered by insurance, experts have noted. However, in light of the directive, some specialty environmental insurers say they have adopted wordings to handle the new liabilities.

Germany transposed the directive in a new environmental liability law passed at the end of March, but the law will not go into force until later this year.

The GDV's model goes beyond what is currently available in the German market, experts said, but brokers and specialty insurers have previously pointed out that any policy using the model wording would not fully cover the liabilities under the directive.

Under the model, the GDV is suggesting the insurance industry create a specialty stand-alone policy that covers first-party environmental damage.

The product would be bought in conjunction with the current environmental liability policies that many German businesses use to insure against damage to private property and third-party risks

The new coverage is meant to cover a sudden and accidental, unexpected and unintended incident. The policy trigger is the verifiable first discovery of the environmental damage.

The model concentrates on compensating for the costs of environmental remediation, but also insures so-called complimentary and compensatory remediation--two forms of remediation outlined in the directive, according to the GDV.

Compensatory remediation refers to recompense a polluter must make for the fact that a natural habitat is offline for a certain period. Complimentary remediation refers to restoring a habitat or wildlife at another location if a damaged site cannot be fully restored.

As noted by the DVS, the model offers no coverage for environmental impairment due to normal operations, the GDV confirmed. Also, the model does not cover past pollution, but the directive does not create historical liabilities, experts have said.

Nils Hellberg, head of the GDV's liability and credit insurance department, said the reaction to the model by the insurance industry has been "totally positive."

Mr. Hellberg believed the first environmental liability products for the new directive could be on the German market by the end of the year.

Some German risk managers who attended Mr. Hellberg's presentation to the DVS reacted positively to the GDV's efforts in developing a model wording.

"The fact that the GDV has made an effort to offer coverage for this sort of exposure is a positive sign in itself," said Harry Daugird, a risk manager and president of Komposit Risk Consultants & Insurance Brokers Ltd. in Ladenburg, Germany--a unit of Zurich, Switzerland-based engineering company, ABB Ltd.

Ralf Oelssner, chairman of the DVS and director of corporate insurance at Cologne-based airline Lufthansa A.G., said that the model should be viewed as a framework that can be improved upon in negotiations between companies and insurers.

"Every enterprise potentially afflicted by the law has to...take up conversations with their respective lead insurers on the liability side to see if any enhancements of that framework can be achieved," he said.

"If you try to encompass every potential exposure and any potential importance of a part of a cover, I think you will make the model so cumbersome as to make it basically not applicable," he said.