Does your company's insurance policy cover you for pollution incidents?
By David Miller and Katarzyna Danysz
In brief - Companies should review their public liability cover under new environmental laws
Last year saw a toughening of environmental laws. New reporting obligations were introduced, the range of penalties was widened and the maximum amount of penalties was increased. Significantly, the number of corporate defences is limited.
These factors should spur a review of the public liability cover held by at-risk businesses. It is important that the insurance policy provides adequate cover for pollution incidents. Each policy may be different.
Some policies may exclude pollution incidents from the scope of indemnifiable events or may provide coverage only for sudden and accidental events, but exclude gradual pollution events. Coverage may specifically exclude clean-up costs.
What is the definition of a pollution incident?
Under NSW Environment Protection Authority (EPA) guidelines, a pollution incident means:
...an incident or set of circumstances during or as a consequence of which there is or is likely to be a leak, spill or other escape or deposit of a substance, as a result of which pollution has occurred, is occurring or is likely to occur. It includes an incident or set of circumstances in which a substance has been placed or disposed of on premises, but it does not include an incident or set of circumstances involving only the emission of any noise.
Pollution incidents are not confined to heavy industrial sites, but can also be caused by small companies or individuals such as contractors or subcontractors - for example, due to a failure to install proper sediment controls while undertaking earthworks.
Companies must mitigate environmental risks and have adequate insurance
Companies need to comply with environmental rules and regulations not only to fulfil their legal obligations, but also because of the likelihood of public scrutiny and the increased importance attached to environmental considerations by shareholders, potential investors and lenders.
Companies should also ensure that they have adequate insurance cover in the event that a pollution incident occurs.
Who is responsible for paying for clean-up costs?
Following changes to the Protection of the Environment Operations Act 1997, under section 148, an entity or person must notify each relevant authority, including the EPA, of a pollution incident as soon as practicable after the pollution incident has occurred.
The EPA or other appropriate regulatory authority may then issue a notice for the necessary clean-up actions to the entity or person being the occupier of premises from which a pollution incident has occurred or the person who is reasonably suspected of causing or having caused that incident.
A clean-up action is defined in the Act as including:
- action to prevent, minimise, remove, disperse, destroy or mitigate any pollution resulting or likely to result from the incident
- ascertaining the nature and extent of the pollution incident and of the actual or likely resulting pollution
- preparing and carrying out a remedial plan of action
If an entity or person who paid for the clean-up has not in fact caused the pollution, it can seek to recover the costs of complying with the notice as a debt in a court of competent jurisdiction from the person who caused the pollution (section 91 and section 105 of the Act).
Insurance should cover both sudden and gradual pollution events
Usually insurance policies will only cover accidental and sudden pollution, not gradual pollution events, such as leaking pipeline below ground or underground storage tanks causing groundwater contamination.
Cover for this type of pollution can be obtained under an Environment Impairment Insurance Policy or Pollution Liability Policy. Such policies can cover both sudden and gradual pollution events. If contractors are on site undertaking relevant work, it may be prudent to require such insurance.
Adequate and comprehensive pollution liability insurance should include indemnities for:
- Costs of site remediation assessment
- Costs of monitoring, removing, detoxifying, neutralising or cleaning up any pollution, whether sudden or gradual
- Costs relating to business interruption and associated expenses as a result of an environmental impairment claim
- Damages for bodily injury and property damage to third parties, including the costs of clean-up of a third party site
- Reimbursement of a loss in the value of property or commercial value loss as a result of a pollution incident
- Costs of investigating and defending any action brought by a third party or government authority alleging environmental contamination
Suitable pollution liability insurance forms part of the overall environmental risk management program of any entity involved in activities which may cause a pollution event, no matter how remote that possibility may be.