Environment

A blueprint

For compulsory environmental insurance for industries

Sukanya Pani

A blueprint

-- The use of insurance as a market-based tool for environmental management has gained momentum in the past few years. Insurance is a contract that can either broaden or narrow conditions upon which compensation is given for environmental damage. Existing tort doctrines or statutory provisions very often stipulate the conditions upon which compensation is given. In areas such as perceived environmental risks, however, it may be easier and less costly to all parties to adopt contractual conditions of payment. By monitoring the insured's activities as part of underwriting procedures, insurance companies can provide economic incentives to comply with standards.

Damages awarded by the Supreme Court of India in cases of environmental damage have been mostly exemplary in nature. The issue of compensation by economically unsound industries is still unanswered. Compulsory insurance that accounts for all their operational risks can be a method to make industries pay for damages accruing out of their activities. This must be mandatory for all industries that use scientific and technological know how.

Early attempts to provide environmental insurance in India can be exemplified by the Public Liability Insurance Act (plia), 1991 and the National Environmental Tribunal Act (neta), 1995. plia makes it mandatory upon industries, which handle hazardous substances, to have an insurance policy that would cover their liability to provide immediate relief on a specified scale. neta goes beyond statutory compensation limits and provides for compensation without limit in all cases where death or injury to a person (other than a workman), or damage to property or the environment, is caused by an accident involving a hazardous substance. But both these acts do not account for the concept of compulsory insurance that would take care of cleanup costs of environmental damage.

In order to provide immediate help to the victims of technological disaster, all industrial facilities should be required to have insurance that can provide interim relief to victims (see table: Environment liability insurance options) and final compensation including restoration and cleanup costs.

Sukanya Pani is a fifth year student at the National Academy of Legal Sudies and Research, University of Law, Hyderabad

Environment liability insurance options
TYPE OF COVERAGE KEY FEATURES
Bodily injury and property damages • Compensation for damage due to pollution conditions, such as release of hazardous or toxic materials. Covers onsite and offsite injuries
• Damages for personal injury such as mental anguish, and for costs of treatment
• Property damage including costs to replace or repair property and compensation for the loss of use of the property
Contract damages • Provides compensation where pollution impairs the insured's ability to perform under a contract
• Covers situations where pollution requires the insured to cease operations while the pollution problem is addressed and contracts with customers may be broken
• Covers situations when the insured warranties to a lessee of property owned by the insured that the property is free from pollution, but pollution still exists and causes damages to the tenant (lessee). The coverage pays for compensatory damages for which the insured is liable for such a breach of contract
Environmental clean-up costs • Policy pays for the costs the insured must incur to address its pollution problems and comply with government standards established to protect human health and the environment
• Covered costs including site investigation costs and the removal, treatment or disposal of wastes
Legal defence expense • Coverage pays for the insured's legal costs incurred to defend or settle a liability
• Coverage pays for legal fees to defend against lawsuits brought by federal or state regulators and private third parties
Business interruption • Coverage pays for internal costs that the insured suffers as a result of pollution
• Internal costs include loss of income, continued payment of salaries and other routine business expenses, and expenses for temporary relocation of the business during the period of restoration
Remediation cost • Policy pays for cleanup costs that run substantially over budget, including remediation costs
Overruns • Policies require the insured to accept the risk of the project going over budget by a certain percentage of the estimated cost. The insurer pays only if the project costs exceeds the estimated cost, plus the agreed upon buffer
Source: based on Tetra Tech EM Inc. study of the insurance market and assessment of environmental liability insurance options for cleanup activities