F) Environmental Insurance
Although not so common place in Malaysia as a result of the fact that a majority of projects are built on greenfield sites together with the fact that highly polluting industries were not historically located within the country to any great degree we have included a brief overview of Environment Insurance. This type of insurance relates to coverage of risks which may become apparent if the project site if found to be contaminated and the Employers subsequent liability as the owner of contaminated land. We anticipate the Malaysia will adopt more stringent environmental legislation regarding the land owner’s liabilities to clean up polluted sites which in the future will lead to more developers seeking such protection especially in respect to purchasing prime sites for redevelopment.
Environmental insurance can be defined as protection against exposure to the legal liabilities arising from the ownership and/or re-development of existing property or land and any consequential loss and damages. In simple terms this means:
(1) Exposure to third-party claims for property damage, bodily injury or even loss of business; and
(2) Exposure to regulatory action by an Authorities that requires the Employer to investigation, clean-up of contaminated ground/water or the restoration of environmental damage.
(3) Legal and other costs associated with defending an alleged claim by a third-party or a requirement to take action by a regulator.
A range of possible exposures, for owners of contaminated sites and land, to environmental risk and liability, is listed below.
1) Pre-existing gradual pollution
A) Third party on-site property damage and loss of use of property
B) Third party on-site bodily injury
C) Regulatory/legal liability for off-site clean-up costs
D) Legal defence and expenses
E) Change of law
F) Migration from off-site third-party property leading to on-site third-party damage and/or regulatory or other legal action
G) Contractual liabilities, e.g. warranty or indemnity exposure
H) Cost certainty, cost cap on planned remediation – cost overruns in remediation and clean-up can result, for example, from finding more contamination than the investigations suggested or higher concentrations and either may change the nature of the treatment or the cost of disposal
I) Construction risk of the Contractor creating new contamination on site or exacerbating an existing situation. This could arise, for example, if the Contractor inadvertently provides a new pathway for pre-existing contamination to migrate and cause a loss or damage
2) New gradual pollution
A) Third party off-site property damage and loss of use of property
B) Third party off-site bodily injury
C) Regulatory/legal action off-site clean-up costs
D) Environmental and biodiversity damage and losses
E) Legal defence and expenses
In addition, all these exposures can create significant and consequential business interruption.
When assessing the liabilities and risk of exposure, it is important to distinguish between known issues which have been clearly identified, qualified and quantified and unknown issues, which can range from the suspected but unproven to the totally unexpected. Known issues are those which insurance is unlikely to be able to cover because they are (i) known to the insured and (ii) will have to be addressed, even if not immediately. There is no fortuity to any loss, just a question of when and how much.
The nature of environmental insurance is that there will always be some intrinsic level of residual uncertainty by the very nature of the problem it is trying to address.
There exists a range of insurance policies to cover the environmental exposures of developers, property owners and Contractors as described above. Whilst separate policies can be purchased to cover pre-existing pollution conditions (historical contamination) and new pollution conditions (future contamination) it is possible to purchase both policies to provide seamless cover for a site.
Environmental insurance can prove to be a valuable tool for the transfer of the risk of environmental legal liability.
When considering the types of risk that are insurable, it is important that any claims, losses or damages are both unexpected and fortuitous. Where this is not the case then the insurer is underwriting the cost of known conditions and expected or anticipated works. Where the risk is unexpected and fortuitous, known pollution conditions or contamination can be covered as long as:
A) The known conditions are defined and understood by the underwriters (this requires information);
B) The site remains in a suitable for use condition even with these known conditions; and
C) The known conditions are not causing harm or have a significant probability of causing harm to the environment, public health or controlled water.
Pollution legal liability insurance can be purchased to cover environmental liabilities associated with the ownership or transfer of ownership of contaminated land. These policies are often called ‘contaminated sites/property transfer policies for pre-existing pollution conditions’. They cover on-site and off-site bodily injury, property damage and clean-up costs, future legislation and legal and professional fees as a result of pre-existing conditions. Business interruption for loss of rental income can also be covered. Policies are normally purchased for a set period for example 10 years or 20 years.
Contractors’ pollution liability Insurance provides cover for exacerbation of pollution conditions during development including on-site and off-site bodily injury, property damage and clean-up costs, future legislation, legal and professional fees. Generally cover is for the period of the development and the limits will match those on the pre-existing conditions cover. Alternatively contingent cover can be provided for the benefit of the Employer.
Often Employers acknowledge that their Public Liability Insurance provides sufficient cover for ‘sudden and accidental’ events and understand and take the risk that it excludes any cover for gradual pollution. However, it is not that simple and this is illustrated in the case of Bartoline v Royal Sun Alliance the High Court held that costs for action by the regulators, where this is no property damage and no claim, was not be covered under the Public Liability Insurance policy.
The range of products available for operating new conditions is similar to those for historical pollution providing similar coverage, but limited to new conditions.
Combined solutions can be constructed to cover both pre-existing and new conditions.
Contracting risks, particularly for Contractors actually causing gradual pollution or exacerbating an existing problem, can be covered using Contractors Pollution Liability Insurance (CPL), which may also be adopted within an Employers Project Insurance programme.