environmental risks: liability, exposure and insurance solutions

Environmental Risks:

Liability, exposure and Insurance Solutions

Environment vs Oil and Gas

How to turn and conflict into mutual cooperation?

Bucharest 24th November 2010

Presented by:

Simon Johnson, Ph.D. Practice Leader EMEA

Aon Global Environmental Services Group

Aon Risk Solutions | Aon Environmental Group and Aon Global Risk Consulting: Proprietary & Confidential

1

Agenda

� Environmental Risks and Liability

– Current Operations

– Historical

– New technologies

� EU Environmental Liability Directive

� Exposure to uninsured loss and damage

� Environmental Insurance Solutions

� Summary


2

Oil and Gas - operations

� Environmental incidents since 1997 in Europe:

– 32 major accidents in commercial and transport activities

– 24 major incidents in oil refineries

� Causes:

– Leaks from valves/joints/pump failure

– Overspill

– Corrosion and defects

– Bulk storage tank collapse and failure

– Pipeline burst

– Fire and explosion

Pollution and environmental damage from oil and elated products and also

fire water and foaming agents


3

Explosion – Tank Farm – Buncefield 2005

All images courtesy of Hertfordshire Constabulary

Petrol leakage from storage tank – vapour cloud ignited.

Explosion registered 2.4 on Richter scale

and was heard 125miles away.

Fines so far total >£10M

Environmental issues remain as a result of product and

contaminated firewater entering the ground and groundwater


4

Donges - France – 2008

Accidental leak - pipeline breakage

400 tons released

Environmental damage to river Loire

Damage to protected reed beds

Photograph Cedre


5

Star Terminal—Suburban Washington DC

A petroleum leak from the Pickett

Road Tank Farm on a nearby site

contaminated the 1,500-home

community


6

Puerto Rico – San Juan Harbour - 2009

An explosion of 11 fuel tanks at a fuel storage complex which shook the ground of

Bayamon, a municipality near San Juan, with the force of a 2.8 magnitude earthquake

caused the evacuation of about 1,500 residents, school closings and class actions

suits. Environmental damage.


7

Plaine de Crau – France - 2009

� France

– Coussouls de Crau

nature reserve

– Oil pipeline failure 4M litres

– Clean-up costs exceed €25M

– Protected species damaged include:

– Crau grasshopper and ocellated lizard

– Environment also important for several

rare birds

– Treated as ELD type claim

– Currently in litigation


8

Oil and gas - Historical Activities – Legacy Liabilities

Redevelopment – decontamination – residual liabilities


9

Carbon Capture and Storage

RISKS: Real vs. Perceived

OR

Issues include: Cost; scalability; short-terms risks;

long-term security and who pays ……


10

Carbon Capture Risks

� In general, geological carbon sequestration projects can be

summarized into five risk categories:

1. Movement out of the storage reservoir - escape

2. Release of CO2 at high concentrations - catastrophic

3. Risks to ecosystems - biodiversity

4. Geo-mechanical and geophysical risks – settlement/heave

5. Risks to underground sources of drinking water - carbonic acid; co-contaminants -

Hydrogen sulfide and nitrous oxides present in the CO2 stream; and salinisation

The above risks can be both short and long-term

Uncertainties can be addressed using environmental insurance


11

Carbon Capture – New techniques - Aon US Project

Solution – environmental insurance program to provide coverage for:

• Pollution of adjoining drinking water system

• Catastrophic release, including control of well risk

• Geo-mechanical failure


12

Environmental Laws and Regulations

European Union

Environmental Liability Directive (EU ELD)

Environmental Damage and Remediation Regulations (England and Wales, similar for Scotland and NI)


13

The EU Environmental Liability Directive

� Implemented across EU

� Liability for environmental damage not just pollution

– To protected species and habitats—Biodiversity

� Creates Strict Liability for many types of

industrial operation

� Financial security may be required – e.g. Portugal

with others to follow

� Financial impact of damages are uncertain

� Croatia implementation through EU law approximation

� Setting a global precedence


14

Financial impact of damages are uncertain

� French Government Report April 2010

– Spill of hypochlorite 1996 – costs (imposed by Regulator) €42,000 today with ELD

€140 - €400k – depending on approach (in-situ/ex-situ)

– Pesticides in warehouse fire 1997 – costs (imposed by Regulator) €10,000 with ELD

€4M

Result of Damage Event

Time

Value of

Environment?

EU ELD requires the full environmental value is restored


15

ELD Summary

� The ELD creates a new liability

� Uses a “Polluter Pays” model

� Strict liability for hazardous operations (16) industries

� Biodiversity Damage a New risk for ALL companies

– Not linked to physical damage or pollution condition

� Coverage is available and inexpensive now in Europe

– Freedom of Services policy covers Biodiversity claims

– Local markets

– Underwriting process is easy compared to USA

– Provides Gap coverage, fills the pollution exclusion

– Carriers provide expertise in handling regulators and their claims


16

The Environmental Insurance Gap

General Liability/

Public Liability

Property

D&O

Environmental

Exposure GAP

‘The gap between traditional insurance cover

and the range of environmental liability …has become uncomfortably

wide and will get wider.’

IUA Report on Environmental Risks: insured or not?


17

Cover and Comparisons – GL and Environmental Liability

YES including pollution (Sudden and

Accidental and Gradual) and damage

where not caused by Pollution

No CoverEnvironmental Damage –

biodiversity – non-pollution trigger

YES including Gradual PollutionDepends on wordingTransport

YES including Gradual PollutionSudden and Accidental OnlyBusiness Interruption

YES including Gradual PollutionNo CoverDirectors and Officers

YES including Gradual PollutionSudden and Accidental OnlyLegal Defence

YES including Gradual PollutionNo CoverClean-up –on-site

YES including Gradual PollutionDepends on wording and only

sudden and accidental

Clean-up - off-site

YES including Gradual PollutionSudden and Accidental Only3rd Party Bodily injury and Property

Damage off-site

YES including Gradual PollutionSudden and Accidental Only3rd Party Bodily Injury and Property

Damage on-site

Pollution Legal LiabilityGeneral LiabilityCover and Trigger


18

Operational Risks - Information and process

� Underwriting Information– Property location

– Activity

– Details of facilities—property surveys

– Environmental reports—management, etc.

– ISO 14001/EMAS

� Submission– Application form – required for warranties

– On-line option

� Response– By return – simple cases

– Within 5-working days

Underwriting requirements do not require new or additional environmental testing


19

Example - Claim and Loss – Iberia 2008

� Iberia

– Food processing plant

– Loss of product off-site not realised for

nearly 12 hours – fuel eventually entered

river – September 2008

– Significant product lost causing significant

damage

� Response

– Plant had environmental insurance

– Insurer had local environmental expert

on-site within 24-hours of notification

– Insurer’s representative with Aon and

the insured were able to meet with

regulators and the local authority to

discuss appropriate actions

– Clean-up/restoration complete May 2009


20

Claims—Experience, Trends and Lessons

� Number and severity is increasing

– As regulations take effect and enforcement increases

– Industrialization pushes in pristine habitats

– Growing and vocal environmental action groups

� Complex—cause, damage, coordination and response

� Require immediate response—expertise

� Liaison/communication

– Regulators

– Other local enforcement agencies

– Communities

– NGOs/pressure groups

� No insurance – no help!

� No insurance - no legal defense costs


21

Summary

� New Regulations and implementation of existing regulations

drive risk

� Environmental damage, biodiversity and climate change present

new and emerging risks

� Claims for pollution and environmental damage are increasing

and are increasingly complex

� Current casualty/property programs may be inadequate and

have significant gaps - be aware and beware of the exposure

� Environmental insurance represents a cost effective and

efficient access to contingent risk capital

� Market continues to develop solutions and streamline processes


22

You Can No Longer Ignore Environmental Risks

Plausible deniability

of environmental

risks is no longer a

viable option in

today’s world

Contact:Simon Johnson Ph.D.

Practice Leader EMEA

Aon Global Environmental Services Group

+ 44 207 216 3719/+ 44 7507 882 266

[email protected]

Silvia Pavalascu

Aon Romania Broker de Asigurare Reasigurare

+40 212125816/+40 372 195 337

[email protected]

Andreea Mihai

Aon Romania Broker de Asigurare Reasigurare

+40 212125816/+40 372 195 335

[email protected]

environmental risks: liability, exposure and insurance solutions

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