Environmental Risk: Defined

Environmental Risk can be defined as the “actual or potential threat of adverse effects on living organisms and the environment by effluents, emissions, wastes, resource depletion, etc., arising out of an organization’s activities.” Environmental exposures, whether physical, chemical, or biological, can induce a harmful response and may affect soil, water, air, natural resources or entire ecosystems, as well as the plants and animals - including humans - and the surroundings where they live. With growing oversight, this type of risk is not typically covered under conventional liability protection, but gaps in coverage can be filled by innovative specialty programs made available by insurers. Given the increase in environmental exposures, the global risk and insurance community would be wise to evaluate its awareness, vulnerability, preparedness and response in managing emerging and unforeseen pollution risks.

Legislative Landscape

These environmental issues transcend borders. Whether directly or indirectly caused, environmental liability has become an international matter for companies with the potential to negatively impact the environment while they conduct business in other countries. Many companies are not even aware of their risks or accountability for incidents occurring while they conduct business across a border or thousands of miles away on another continent. Further complicating this issue, legal and regulatory directives can be as varied as the languages spoken, often involving highly complex legal frameworks.

In an effort to clean up and protect the environment while managing societal costs, many countries are now improving the regulatory framework on the prevention and remediation of environmental damage. As part of this trend, both the United States and the European Union have taken the lead in establishing directives to moderate the liability resulting from environmental pollution incidents. This legislation impacts every business operating in the U.S. and Europe. The European Liability Directive (ELD) and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (aka “Superfund”) respond directly to releases or threatened releases of hazardous substances that may endanger public health or the environment. These rulings establish a common basis for the financial liability to businesses for the environmental threats or damage they cause. Moreover, experts have determined that the ELD has more far-reaching impact than initially expected and many other countries have followed suit, developing their own legislative framework for compliance and consequences for violators.

Just keeping track of the thousands of environmental laws and the effects of emerging regulations can be a full-time job in itself. Few companies have the in-house expertise to manage this.

Potential business liabilities are numerous and include the following examples:

  • Damage to brand reputation
  • Penalties for violation
  • Damages resulting from faulty or defective construction or materials
  • Losses from first- and third party property and material liability
  • Expenses for clean-up of emissions
  • Business interruption losses during contamination removal
  • Costs associated with premiums, litigation, investigation, and compliance
  • Expenses for remediation measures
  • Historical (pre-existing) coverage for past events or operations
  • Demonstrating financial assurance to satisfy regulation requirements in a contamination event: financial security, complete and complementary mechanisms (i.e. bonds, surety), closure and post-closure care of hazardous waste facilities and landfills, etc.

An event can create a range of environmental exposures ranging from liability for on-site cleanup, potential damage resulting from direct pollution of surrounding natural habitat, and even claims for long-term damage to the environment, such as damage to soil, groundwater, and surface water. All such hazards are typically not protected by traditional insurance and can result in substantial financial losses.

Return to Environmental Risk Services to learn how Crawford GTS can help your business reduce the risk of environmental damage and its resultant liability.

Did You Know?

Damages caused by pollution incidents can be substantial – enough to cause financial ruin for an unprotected business. Few businesses have the fiscal resources to recover from this unnecessary loss. That’s why environmental insurance policies make sense. Why risk your business’ future, when Crawford & Company can help you navigate through the potential threats that your company may face?

In the United States alone during FY 2011, “Environmental Protection Agency (EPA) enforcement actions required companies to commit to treat, minimize, or properly dispose of 3.6 billion pounds of hazardous waste.” Studies show that pollution cases are on the rise.1

1 Source: FY2011 Data Source: Integrated Compliance Information System (ICIS); data source for previous fiscal years: ICIS. Disclaimer: Minor corrections may have been made to previous years’ data.