Insuring the Future 2024 - Environmental Liability for Insurers

Following on from a session on Environmental liability cover during our Insuring the Future 2024 webinar series, we summarise below, from an English law perspective, key insurance issues arising from environmental liability risks.

Background

It is by now trite to say that environmental issues are a major and ever increasing concern for citizens, businesses and governments globally. Environmental risks which are a key focus at present include: the use and effects of per and polyfluoroalkyl substances (PFAs), or "forever chemicals"; the effects of fossil fuels, and the transition to renewables; and a focus on air and water pollution. In the UK, water pollution, in particular, has received huge publicity of late.

Activist groups are using litigation to raise both awareness of environmental issues, and to put pressure on governments or polluting businesses. This has led to increasing numbers of environmental and climate-related class actions in multiple jurisdictions around the world. Our ESG Disputes Radar tracks and collates contentious ESG (environmental, social, governance) developments which may affect businesses.

The widespread use of PFAs (and associated health risks as they accumulate in the food chain) has given rise to claims and class actions in multiple jurisdictions, and to liability and coverage concerns for insurers. A Rotterdam District Court ruling that the US chemical company Chemours is liable for environmental damage in the Netherlands caused by PFAs chemicals led to consideration by prosecutors of potential criminal liability for company executives, and we have seen PFAs-related class actions in a number of US and EU States. For example, a class action was recently filed in the Minnesota Federal Court against 3M, Corteva and Chemours relating to the alleged used of PFAS in carpets. This follows settlements last year relating to the contamination of water with PFAS; 3M are reported to have paid $10.3bn, with Dupoint, Corteva and Chemours paying $1.19bn.

Environmental claims in the English courts are being brought by a range of activist groups and affected consumers, based on allegations of greenwashing, or that a business's activities are responsible for environmental damage. Attempts to pursue environmental claims in the UK have met with mixed results. ClientEarth's attempt to bring a derivative action as a shareholder against the directors of Shell on the basis of their alleged failure to adopt a reasonable net zero strategy was struck out, but claims have been brought in the English courts on behalf of local communities impacted by alleged pollution at the hands of oil companies (as in Okpabi & Others v Royal Dutch Shell) and against Vale and BHP following the Fundao Dam failure in 2015.

ESG standards are also a key legislative focus across Europe and the UK, and businesses should be aware of the regulatory and compliance risks that they face, or may face, as a result. A "polluter pays" principle underpins the majority of environmental liability regimes.  Increasingly, businesses also face criminal sanctions in multiple jurisdictions for causing or allowing environmental harm.  In the UK, the Environment Agency has the power to impose civil or criminal sanctions for environmental breaches. In Stone & Anor v Environment Agencythe court made clear that the offence of "knowingly permitting" environmental harm does not require a positive act; it is enough to know that the harmful activity (here, waste disposal) was taking place and doing nothing to prevent it.

The rise in these contentious risks creates a need for enhanced protection, as businesses seek to mitigate the potential liabilities which may arise from regulatory, criminal and civil action, including in relation to their supply chains.​

A word on nuisance

The tort of nuisance has formed the basis of a number of environment-related claims in the English courts. A claim in "private" nuisance allows the owner of land to seek a remedy against another person whose action (or failure to act) on land over which they have possession or control has unduly interfered with the owner's reasonable enjoyment of their land.   A defendant does not have to have acted negligently, or deliberately, to be liable for a nuisance claim, although some degree of personal responsibility is needed.  

In Jalla v Shell International Trading and Shipping Co Ltd the Supreme Court considered limitation in relation to group claims in nuisance after an offshore oil spill affected land on the Nigerian coast. The Court held that this was a one-off event giving rise to a single cause of action in private nuisance, and that any oil which had not been cleaned up and remained on the shore years later did not give rise to a continuing nuisance which kept the limitation period open. This highlights the fact that, for nuisance cases, it is necessary to differentiate between continuing nuisances (where a new time limit will start to run at each escape) versus ongoing damage from a one-off escape.

In The Manchester Ship Canal Company Ltd v United Utilities Water Ltd No 2 the English Supreme Court held that pollution of a watercourse can constitute an actionable cause of action in trespass or nuisance, and a tortious claim by the canal owner was not inconsistent with, and therefore was not barred by, the statutory scheme for regulating sewerage established by the Water Industry Act 1991. This is likely to mean an increase in exposure for water companies and their insurers, leaving open, as it does, the prospect that owners of (or those with rights to) watercourses which are affected by pollution discharges can now take direct legal action against those responsible for polluting them.

The Court further went on, though, to differentiate between a failure to create a drainage system or outlet for sewage, which is a resource question, versus the consequences of creating a system where contaminated water is discharged onto the neighbouring land. The relevant legislation sets out a complex mechanism through which water company resources are allocated.  A decision not to exercise a power to build a sewerage system is not actionable as a nuisance. In contrast, where the sewage has been discharged from a system that was designed to take that sewage away from its source, the sewerage company could be liable. In practice, this distinction may not always be obvious.

Potentially impacted insurance policies

As is clear, environmental risks may impact businesses through:

• first party losses, with damage (and potentially associated business interruption) arising to the business's own assets or property. Damage to own assets may arise from a number of environmental issues (in particular, extreme weather events or pollution incidents);

• third party claims - for example civil claims in nuisance or negligence by third parties who have suffered loss or damage (or bodily injury) as a result of pollution arising from a businesses' activities; and/or

• statutory and regulatory risk, and losses arising from criminal, public or administrative law responsibilities. This might include liability for clean-up costs, investigation costs and potentially fines and penalties. Clean up and associated costs can of course be very significant (estimated liability for the Deepwater Horizon clean-up was around $15bn). Likewise, however, attritional exposure can build up, for both businesses who are held responsible for multiple small pollution events, and of course for insurers in aggregate across their portfolios.

In terms of insurance cover for environmental liability, perhaps obviously environmental liability policies are likely to provide the most extensive cover in relation to both third party and first party claims. Nuisance, for example, is a tort, and would in principle constitute a wrongful act under an environmental liability policy, subject to policy wordings - negligence may be required, or cover may be limited to particular types of damage.

These policies are likely to include cover for investigation and cleanup costs, and for business interruption losses. Cover may also arise under:

• Public liability insurance, which may provide more general - and thus less extensive - cover

• D&O policies - these may provide some indemnification for directors and officers for certain breaches relating to environmental issues and in claims that can be brought against directors. In the civil law context, outside of company or shareholder actions, these will be very limited. In addition, the policy is unlikely to provide cover for corporate liabilities; and

• PI insurance may provide some limited "pollution" cover - usually only for sudden and accidental events - but it may also depend upon the insured's conduct being negligent, which may preclude certain claims in nuisance where liability may arise even if the defendant had not been negligent.  

Insurance issues

When looking at the extent of any cover for damage from environmental risks, particular considerations include:

• Exclusions - a policy might typically exclude:

  • Pre-existing (known) losses - pollution events that started prior to the policy period may either not be covered or may be expressly excluded. For "losses occurring" cover, whether the loss falls into the policy period may depend on whether it is an ongoing pollution event or a one-off single event;

  • Pollution - both first and third party liability covers may exclude losses arising from "pollution" in the context of damage caused by environmental risks;

  • Intentional acts - although intentional acts will probably not be covered as a matter of general insurance law in any event, many liability policies expressly exclude liability from (for example) "deliberate acts, wilful neglect or default". Although some authorities have held that "wilful" might include recklessness, in Grant v International Insurance Company of Hanover Ltd, the Supreme Court rejected arguments that "deliberate acts" includes recklessness (in the context of an assault by a security guard at an insured's hospitality venue). That said, "intentional act" is likely to encompass what is known as "blind-eye knowledge", i.e. an insured who deliberately refrains from finding out.

  • Damage or contamination arising from particular substances, such as lead and asbestos, may be expressly excluded from cover.​ The LMA published two new PFAs exclusions in late 2023 -  LMA5595A and LMA5596A .

• Business interruption cover -The English court has been asked to construe a number of business interruption wordings since the Covid-19 pandemic. Many of these claims are still making their way through the courts (but see, for example, our round up of 2023's BI developments in that context here). In particular, for first party environmental claims where BI cover is damage-based, the intersection of the definition of "damage" in the policy and the nature of the losses caused will of course be key.

• Insurability of Fines - insurance policies often state that they provide cover for a fine to the extent that the fine is legally insurable. The received wisdom, however, is that fines cannot be insured on the basis of the illegality principle (ex turpi causa) and the public policy argument that a person should not be able to insure against a fine for criminal or quasi-criminal conduct, since that would defeat the deterrent and/or punitive effect of the fine. Safeway v Twigger remains the leading English law decision regarding the insurability of fines, although it has been subject to criticism. In Safeway, it was held that the illegality principle barred Safeway's claim to an indemnity in respect of a fine imposed by the Office of Fair Trading (OFT) for anti-competitive pricing of dairy products.

• Co-insurance - environmental risks do give rise to the potential for co-insurance. Although many public and general liability policies (and other policies) contain a pollution exclusion, without that exclusion there may be co-insurance, and the potential for contribution between the environmental liability tower on the one hand, and the public or general liability tower on the other.

• Causation - subject to policy wording, an insurer is only liable for losses which have been "proximately caused" by perils which are covered by the relevant policy.  In environmental claims, there may be multiple factors acting in combination, alongside one another or in sequence, which lead to a loss. The key is to find the real, or "efficient" cause of the loss. As confirmed in the FCA Test Case, where multiple causes act together and are of equal efficacy, they can be considered concurrent proximate causes of a loss.  Where, however, one of the concurrent proximate causes is excluded from cover, the general rule is that the exclusion will prevail. In our article here, we considered the Court of Appeal decision in Brian Leighton (Garages) Ltd v Allianz Insurance Plc, in which a pollution exclusion in a Motor Trade policy was held not to exclude losses incurred after a leak from a fuel pipe at a garage.  The policy excluded "Damage caused by pollution or contamination". It was accepted (on the assumed facts) that the proximate cause of the loss was a sharp object rupturing the pipe, which was not itself pollution or contamination, albeit that that a process of contamination or pollution was then part of the causative chain. Insurers should be mindful of the implications of their wordings; if the parties intend for an exclusion (or indeed insuring) clause to apply beyond the proximate cause, this should be stated clearly in the policy. Insurers should make clear, for example, where a clause applies to direct or indirect damage.

Environmental risk is a dynamic and fascinating area, and we are watching developments closely, always with an eye on the implications for insurers. Ultimately, whether or not a policyholder is covered for first or third party losses arising from an environmental risk will, of course, turn on the wording of the particular policy, and the circumstances of the loss; every insurance policy will be construed based on the language used in the context of the policy overall and the permissible factual matrix.