Renewed Relevance

For over half a century, governments and non-governmental agencies have worked to remediate the effects of environmental pollution. Environmental protection legislation has been enacted worldwide - a result of heightened awareness of sustainability and a string of notable environmental disasters since the 1970s. Global anti-pollution efforts since have sometimes taken the form of environmental activism, and pollution liability insurance (PLI) has been at center stage.

Emerging in the 1960s as a split from general liability insurance, PLI has been leveraged as an approach to risk financing for the legal consequences of releasing pollutants into the air we breathe and water we drink. Today, interpretations of PLI have broadened, and insurance companies write specific policies to offset the cost of pollution cleanup. General liability and pollution liability insurance now coexist in the property and casualty industry as well as actuarial practice.

What is PLI?

PLI covers cleanup costs and legal fees associated with the release, accidental escape or presence of pollutants that can cause environmental, bodily or property damage. It encompasses non-catastrophic and catastrophic risks, such as legacy pollution, sudden spills, light or noise pollution, and is vital for many small and large businesses.

Events That Led to Today’s PLI

The first truly major pollution event that impacted insurance was the Torrey Canyon oil tanker spill in the United Kingdom in 1967, which led to the formation of comprehensive general liability policies across the global oil and insurance industries. Shortly after the Torrey Canyon incident, in 1970, the Environmental Protection Agency (EPA) was established in the United States to clean up heavily contaminated sites, often in partnership with coverage provided by the insurance industry. Acts that followed prioritized safe environmental practices and the financial responsibility of businesses across the country.

Another large high profile pollution event that influenced PLI and American environmental legislation was the 1978 Love Canal disaster in New York state. It directly led to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, or Superfund), which legislated a form of environmental sustainability, enforced responsibility for disasters and established cleanup funds for heavily polluted sites in the U.S. Two more well-known spills that impacted the development of PLI and for which PLI played a major role were the Exxon Valdez oil spill and the Deepwater Horizon explosion in 1989 and 2010, respectively.

Influence of PLI

It may be argued that PLI’s impact on the environment and polluting behaviors can be both positive and negative. Through our research, we have found that the effect of PLI may be considered preventative in countries like China compared to companies in Western nations. In China, PLI has contributed to a reduction in the use of coal and oil resources, lowered emissions and has led to a prioritization of short and long-term risk mitigation investments (Zhu). On the other hand, PLI has potentially undermined the objective of “the polluter pays,” as it may influence firms to lean heavily on insurance companies to bear economic costs, weakening incentives to develop sustainability practices and more sound environmental decision-making.

Emerging Risks

One modern-day emerging risk are per-and polyfluoroalkyl substances (PFAS), or forever chemicals, which are “widely used, long-lasting chemicals, components of which break down very slowly over time”, as defined by the EPA. Some examples of PFAS in everyday products are fire extinguishing foam, grease-resistant paper, water repellent products and non-stick cookware. The danger of PFAS comes mainly from their harmful health effects and the ease with which PFAS spread. Once released, PFAS can spread easily through food, water, air, soil, crops and the bloodstream. Some known harmful health effects in humans include developmental effects or delays in children, increased risk of cancer and decreased immune response which has led the National Cancer Institute to classify PFAS as a human carcinogen.

PFAS claims and litigation have most certainly impacted PLI. Settlements paid by polluting companies regarding PFAS have reached billions of dollars. Compounding this issue, future research could bring new deleterious health effects to light, further increasing settlements. Since PFAS spread easily and the chemicals are widely used, there is a growing global population that could file PFAS claims. Companies must be prepared for future claim settlements regarding PFAS and set aside reserves for this purpose. Pollution liability or general liability insurance could be the first lines of defense in these settlements.

The Future of PLI

While PLI can be a factor in decreasing environmental disasters and lessening overall pollution and emissions, it must navigate political, economic and social factors as potential limitations on its usefulness. Risks of oil spills, PFAS, and others highlight the need for PLI, today and tomorrow. Moving forward, investment in PLI is essential to strategically cover that wide variety of risks, protect the financial stability of companies, and most of all, contribute to the long-term environmental viability of our planet for its inhabitants.

Zhu, Dandan, et al. “Does Environmental Pollution Liability Insurance Promote Environmental Performance? Firm-Level Evidence from Quasi-Natural Experiment in China - Sciencedirect.” ScienceDirect, Feb. 2023, www.sciencedirect.com/science/article/abs/pii/S0140988322006223.