Association Internationale de Droit des Assurances International Association for Insurance Law Associazione Internazionale di Diritto delle Assicurazioni Asociación Internacional de Derecho de Seguros Internationale Vereinigung fur Versicherungsrecht INSURING ENVIRONMENTAL RISKS Edited by Ken Davidson and Werner Pfennigstorf Essays in Honor of Ambrose B. Kelly Presented on the Occasion of His Retirement from AIDA in May 1986 by the Members of the Working Party on Pollution and Insurance InsuranceWITHERBY Witherby Insurance and Legal A Division of Witherby Publishing Group Ltd 4 Dunlop Square, Livingston, Edinburgh, EH54 8SB, Scotland, UK Tel No: +44(0)1506 463 227 - Fax No: +44(0)1506 468 999 Email: info@emailws.com - Web: www.witherbyseamanship.com Issued by the Risk Management Institute First Edition 1986 Reprinted 2009 Reprinted 2010 ISBN 0 948691 13 1 © Association Internationale de Droit des Assurances (A.I.D.A.) British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. Notice of Terms of Use All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher and copyright owner. While the principles discussed and the details given in this book are the product of careful study, the author and publisher cannot in any way guarantee the suitability of recommendations made in this book for individual problems, and they shall not be under any legal liability of any kind in respect of or arising out of the form or contents of this book or any error therein, or the reliance of any person thereon. Published by Witherby Publishing Group Ltd 4 Dunlop Square, Livingston Edinburgh, EH54 8SB Scotland, UK Tel No: +44(0)1506 463 227 Fax No: +44(0)1506 468 999 Email:info@emailws.com www.witherbys.com W ITHERBY P U BLISHING GRO U PSince-1740 v PREFACE Ambrose B. Kelly, who has been Chairman of the AID A Working Party on Pollution and Insurance since it was established in 1978, has announced his retirement from all AIDA offices effective at the conclusion of the VIIth World Congress on Insurance Law in Budapest, in May 1986. He will be sorely missed by all who have had the benefit of his vast knowledge and experience, his wisdom, and his charming personality. He will be missed in particular by the members of the Working Party on Pollution and Insurance, for whom he has been a respected and inspiring leader. This collection of essays is a modest expression of the respect and affection that we feel for our parting Chairman. We take comfort from knowing that he retires in the full possession of his physical and mental powers. Approaching the age of 80 years, he comes to his final AIDA meeting at the end of a five-months tour around the world. Thus, while we regret that we will no longer be able to rely on his counsel and the pleasure of his company, we admire his continuing enterprising spirit, and we wish that he may long be able to enjoy life as vigorously as he has. We are very grateful to Messrs Witherby & Company Limited for their kind help in publishing this volume. vii FOREWORD It was a pleasure for me to hear that there would be a publication to honor Ambrose Kelly and I was specially pleased, because of my old friendship with him, to have the opportunity of writing a short Foreword. First, let me explain the acronym A.I.D.A. which appears frequently in this volume, and usually without an explanatory note. As not every reader can be expected to be familiar with the full name of this organization, let alone with its goals and activities, it seems appropriate to note that A.I.D.A. stands for the Association Internationale de Droit des Assurances, or in English, the International Association for Insurance Law. The Association was founded in 1960 and now has 53 national sections world-wide. The aim of the Association is to promote scientific study and collaboration in the field of insurance law, in particular in its international aspects. Amongst its activities, A.I.D.A holds a world congress every four years, regional meetings and colloquia, and organizes working parties on many subjects of which Pollution and Insurance is one. The A.I.D.A. Working Party on Pollution and Insurance held its first meeting in London during 1979 with 21 participants from 12 countries, and has since held annual meetings, prepared studies on various Pollution Insurance related subjects and issued its own Bulletin. Under the Chairmanship of Ambrose Kelly and the Secretaryship of Werner Pfennigstorf of the American Bar Foundation, the Working Party has thrived and now has 22 participating countries. We, lawyers from little countries, are often impressed when participating in international meetings, by the outstanding qualities of some Americans. We think “a country may be proud of these men and lucky to be so large as to have the possibility to have them”; indeed, the larger the country, the more selection can play its role, and how much better some exceptional personalities will be. Ambrose Kelly is one of these impressive men. His first characteristic is his kindness: The “Kelly charm” has become proverbial within A.I.D.A., but the more we know him, the more we are impressed by the viii thoroughness of his analysis of problems, by his clarity of expression and by his universal knowledge of the subject that is in discussion. His interventions are always models. Most important for A.I.D.A., he has put his exceptional qualities to the service of our Association, as a Member of the Presidential Council, later as an Honorary President, and before all as the Chairman of the Working Party on Pollution and Insurance. He created and animated it, and it is no wonder that the results of its work have been specially interesting and useful for all lawyers, academics and insurers who are confronted with pollution problems. Even with Ambrose Kelly now retiring from active life, let us hope that, as an Honorary President of A.I.D.A., he will be amongst us for a long time and that he will continue to help us with his precious advice. Professor Simon Fredericq, President, International Association for Insurance Law (A.I.D.A.) Gent, May, 1986 ix CONTENTS Page Preface v Foreword vii by Professor Simon Fredericq, President of AIDA Ambrose B. Kelly xi About “Dear Ambrose” 1 Jacques Deprimoz Insuring Environmental Risks 3 Harald Ullman Liability Insurance for Industrial Pollution 9 Jean Collart The Pollution Liability Insurance Association (PLIA) 17 James C. Morrow Pollution Liability in the United Kingdom 23 Ken Davidson Can the Legislature Save the Liability Insurers from the 31 Courts? Werner Pfennigstorf Claims for the Benefit of the Environment in the United 43 States: A Foreign Perspective Zdzislaw Brodecki The New Environmental Impairment Liability Insurance 59 in Holland John H. Wansink Industrial Waste and Insurance Law 71 Gerrit Winter The Current Status of Judicial Interpretation regarding 81 Pollution Coverage under the CGL Policy Edward J. Zulkey x Prevention and Insurance 89 Károly Bárd Some Thoughts about Civil Liability and Compulsory 97 Insurance Giovanna Volpe Putzolu Reauthorization of CERCLA: The Struggles of the Insurance 101 Industry to Reform U.S. Pollution Liability Robert S. Faron About the Authors 111 66 INSURING ENVIRONMENTAL RISKS property damage, or loss of economic use of tangible property not physically damaged or lost, arisen during the term of the cancelled insurance contract. AN EXTENDED CONCEPT OF DAMAGE When mentioning the concept of “loss of economic use of tangible property not physically damaged or lost,” the extended concept of damage in section C comes forward. Apart from bodily injury (injury, death), the old AVB policy also covers property damage, but only if it concerns physical injury to, destruction, or loss of tangible property belonging to third parties. This concept of property damage is too restricted for the specific environmental impairment liability cover. In a number of cases there would be no cover at all for damage that is very well imaginable, especially in the event of environmental pollution. Think of damage suffered by a hotel keeper because excessive stench makes it impossible for him to run his—not physically injured— hotel. The cost of examination and clean-up in the event of pollution of open surface water also would not be covered, as this water is not included in the concept “third party property”. This gap is filled by the new coverage of (“pure”) economic loss. This includes also the pollution or contamination of any surface water as well as the loss of economic use of tangible property not physically injured etc., including any consequent damage. In addition, the pollution or contamination of tangible property is explicitly mentioned in the definition of property damage. INSURED SITE The fact that, in particular, the non-accidental industrial emission is a new relatively unknown risk for insurers, also explains that section C emphasizes the insurance of risks connected with activities noxious to the environment, on which the insurer has some grip by means of risk surveys and, dependent on the outcome thereof, the requirement that certain preventive measures be taken. This is expressed in the fact that the insured’s liability, in section C anyway, is only covered in so far as the damage is the result of an emission directly from the site specified in the schedule. This limitation enables the insurers to make a justified rating. Indeed, it is therefore of major importance as regards the environmental risk, where exactly the 67 ENVIRONMENTAL IMPAIRMENT LIABILITY INSURANCE IN HOLLAND insured carries on its activities (sand, clay or peat, water extraction areas, agriculture, nurseries, dwelling areas).11 THE SO-CALLED RUN-IN RISK AND ENVIRONMENTAL DAMAGE FROM THE PAST The above-mentioned considerations of risk management also lead to a situation—certainly in the initial stage—that the so-called “run-in” risk is not included in the cover. As said before, the chain fault—claim may proceed over a very long period of time (Lekkerkerk!). This implies that, during the term of the insurance, the insurer could be faced with environmental claims which, as to unlawful acts and omissions with regard to management of the environment, may be traced back to a time when society was dealing with the environment under the rule “everyone for himself, and the environment for all of us”. The insurance of this risk, the extent of which can still hardly be estimated, has a time bomb effect which might jeopardize the continuity of the new cover. For this reason section C contains a standard clause excluding damage resulting from an environmental impairment which is caused by the insured’s acts or omissions prior to the inception of the insurance. As a different matter, a risk survey on the site and the nature of the environmental risk may sometimes allow a limited cover of this run-in risk. ACID DEPOSITION A form of pollution which is becoming increasingly visible is the so- called acid deposition. One of its features is that acid deposition on a certain part of the soil cannot generally be blamed on a specific source of emission. Motor traffic, domestic and foreign industry as well as farming are collectively responsible. Insurers do not want to cover this collective responsibility, even if the law of liability based on individual responsibility offered any prospect of recovery of damages. Coverage is limited to damage resulting from acid deposition caused only by the insured and from one site.12 UNLAWFUL/WARRANTED EMISSION INITIATED BY THE MANAGEMENT OF A COMPANY One of the major problems in fighting pollution is that, in an expense point of view, it is often cheaper for companies to discharge noxious 68 INSURING ENVIRONMENTAL RISKS substances illegally instead of neutralizing them or disposing of them in a lawful way. Granting cover for such actions would not be justifiable towards the collectivity of bona fide insureds. Moreover, this would reward this socially unacceptable behaviour, whereas all efforts are aimed at suppressing it. Therefore, the insurers have opted for a solution which should induce prevention. The cover excludes liability for damage resulting from an act or omission in violation of any governmental rule with regard to the environment, if it takes place by order or consent of any member of the board or the management of a company, or any other employee of the company who has been charged with a special responsibility for the observation of such regulations. It must be emphasized that this clause concerns an emission, the prohibited nature of which has been authorized by the policy-making management, and that it is up to the insurer to make this plausible. The possibility also exists that a company discharges gradually and, in doing so, inflicts damage upon third parties. It will escape from a judicial injunction if the judge is of the opinion that this activity should be tolerated for the common good or—under section 6.3.1.5 of the New Dutch Civil Code—on account of major social interest and the polluter assumes responsibility for the damage for his own account. The crux of the matter for the insurers is the fact that an insured, faced with an action for an injunction, is left the following choice: either stop the activities or clean-up, or request permission to continue the activities. If the latter is the case, the insured will consciously accept any future third party claim on his own account, and he will include the cost of these claims in the cost price of his activities. Insurers consider the obligation to pay such future claims a risk that should remain for the account of the polluter (business risk). SALVAGE COSTS/CLEAN-UP COSTS If we talk about prevention, the compensation of salvage costs within the meaning of section 283 of the Dutch Commercial Code is an important issue. They include costs connected with measures taken by or on behalf of the insured, which are reasonly required to avert the imminent danger of third parties suffering damage for which—on the happening thereof— the insured would be responsible and for which the insurance provides cover, or—if the damage has materialised—to limit such damage as much as possible. 69 ENVIRONMENTAL IMPAIRMENT LIABILITY INSURANCE IN HOLLAND In this respect we should point out that this creates a limited cover for the clean-up costs at an insured site, namely if and in so far as these are salvage costs at the same time. If such circumstances occur, a compensation for the clean-up costs is in line with the cover of section C, which is primarily aimed at the protection of third parties exposed to the risk of pollution in the vicinity of the insured company. Therefore, there is explicitly no coverage for clean up costs at an insured site in other circumstances as mentioned above. EVALUATION This completes a broad outline of the new cover in the section policy. If the primary object is complete protection of the victim, one will not be completely satisfied. The amount of indemnity is limited and there are exclusions for a number of risks. Nor does the new cover solve the problem of environmental damage built up in the past. One may wonder whether such damage should not be paid out of public funds. Based on the current limited financial capacity, the cover is primarily aimed at the future. Dependent on the extent to which the new cover is effected, the financial means will increase, and there will then probably be more financial room to extend covers. In the light of these facts I think we should watch this development for some years and only then give a final opinion about this new environmental impairment liability insurance. NOTES 1. Refer also the AAV-report “Environmental Impairment Liability Insurance”, November 1981. 2. For the point of time of uncertaintly, refer a.o. to section 7.17.1.1. Draft New Civil Code and HR 22 February 1924, NJ 1924/488. 3. See HR 30 May 1975, NJ 1976, 572. It is generally assumed that the concept of intended damage includes damage which the insured has foreseen and accepted in advance as the certain result of his act or omission. 4. For a survey, see the report “Environmental pollution and its meaning for and in private insurance”, Verzekeringsinstituut, Erasmus University 1977. 5. See General Report II, AID A working group Pollution and Insurance, by Jacques Deprimoz, Verzekerings-Archief 1982 p. 359. 6. See General Report I, AIDA working group Pollution and Insurance, by J. H. Wansink, Verzekerings-Archief 1982, p. 352. 7. The new wording runs as follows: The cover excludes liability for damage in connection with environmental impairment, unless such impairment is a sudden and unexpected occurrence, and this occurrence is not the direct effect of a gradual process.