The nature of many business operations means that pollution or environmental damage can occur at any time. Increased focus on our ethical responsibilities towards the environment is causing a shift in how businesses are more mindful of the legal and reputational consequences of dealing with a pollution event. Environmental Impairment Liability Insurance covers liability and cleanup expenses associated with pollution. In this article, we will discuss what EIL insurance is, list the industries that should carry it, as well as outline why your Commercial General Liability policy alone may not offer all the protection you need.
The discovery of an unexpected pollution condition on your property can be very costly and time-consuming. Fortunately, there are insurance products available to protect property owners from losses arising from a pollution event. Specifically, EIL insurance protects businesses involved in creating, processing or transporting products deemed to be potential contaminants. Policies typically include coverage for third-party property damage and bodily injury claims (including defence costs) as well as ‘first party’ remediation coverage.
EIL insurance is also referred to as:
- Premise Pollution Liability
- Site Pollution Liability
- Pollution Legal Liability (PLL)
EIL insurance covers accidental pollution that arises from standard operations, such as pollution that may be produced by the business’s products. It also covers any other mishap resulting in environmental damage. Environmental policies protect against pollution exposures at your premises, at adjacent third-party premises or at locations where you conduct business.
Where do environmental exposures come from?
Environmental exposures generally stem from the release of a pollutant at a site, long-term exposure to one, or incidental exposure to activities of neighbouring businesses. Additionally, rural properties see a good deal of exposure. This is likely due to increased illegal dumping and unregistered tanks, main street businesses (like printers,) cleaners, service stations, and residential properties with old heating oil tanks or faulty sewer lines.
What types of businesses should have EIL insurance?
Classes of business that should consider having Environmental Impairment Liability include the following:
- Shopping centres
- Senior care/assisted living facilities
- Apartment complexes
- Recycling centres
- Service stations
- Older residential properties
Companies at a lower risk of polluting (like organic farming companies) may not require this type of coverage.
Why do you need EIL insurance?
An accidental pollution event, such as a contamination leak on your business property, could lead to a third-party claim against your company. Examples of claims could be nuisance, bodily injury or damage to their property. Furthermore, a regulatory authority may then demand the clean-up of your land or require you to restore the biodiversity damaged, whether on- or off-site. And finally, you may be required to pay associated legal defence expenses. Environmental insurance, more formally referred to as EIL insurance, can provide coverage for these types of liabilities.
What does Environmental Liability insurance cover?
Environmental Liability insurance mainly provides coverage for unknown, pre-existing and future environmental liabilities. It provides coverage for the following areas:
- Sudden or gradual pollution
- Cleanup costs
- Bodily injury
- Property or third-party damage
- Legal costs and expenses
Depending on the scope of the coverage, some Environmental Liability insurance policies may also include other optional risks:
- Non-owned waste disposal sites
- Transportation of hazardous materials
- Reputational damage
- Business Interruption
What are examples of environmental liabilities?
If you’re considering purchasing a business that is likely to negatively affect the environment, then environmental liability is crucial. For instance, when you buy a piece of equipment that is likely to cause air pollution, an environmental assessment is done to understand the different kinds of environmental liability related to the equipment you are buying.
The different types of environmental liabilities depend on their source. Insurance Business Canada magazine lists the most common types of liabilities:
- Compliance obligations: Regulations overseeing the building, disposal, and use of harmful substances on the environment.
- Remediation obligations: Businesses are made to limit the impacts of their activities and their pollution on the environment, as well as their effects on human health.
- Fines and penalties: For non-compliance.
- Compensation obligations: What may need to be paid for environmental damages as a result of pollution to property or individuals.
- Punitive damages: Commonly used as a deterrent. This is similar to compensation obligations but more expensive.
What is not included in EIL insurance?
While pollution and asbestos tend to be common exclusions on most other insurance policies, certain exclusions are particular to Environmental Liability insurance policies:
- Non-compliance with environmental laws
- Prior knowledge of pollution conditions
- Abandoned properties
- Deliberate dumping
How much does EIL insurance cost?
The cost of Environmental Liability insurance will depend on the environmental risks and exposures of businesses and their activities. Some companies will have a heightened exposure as a result of their emissions to air or waste management activities, while others are more likely to face oil and chemical spills, or the discharge of contaminated water, from cleaning or cooling operations.
Depending on the size of the company, the materials being handled and the potential effects they have on the surrounding habitat will determine the amount of coverage required. Similar to purchasing other types of insurance, any previous incidents will affect your premium rate, as well as any historical factors of the area.
Sudden and accidental liability vs. EIL insurance: Know the difference
As a business owner, you can purchase an EIL policy to cover first-party cleanup of the pollution condition on your property, as well as any third-party liability to others that may result. If you do not wish to purchase a full EIL policy for your business, limited coverage is available by purchasing the Sudden and Accidental Pollution Liability extension under a CGL policy.
A wide range of pollution exposures could shut down your business, cause damage to third parties and result in expensive, time-consuming cleanup costs. Pollution claims, resultant damage and cleanup costs associated with an environmental incident are typically excluded from general liability policies.
CGL insurance covers accidents and injuries that cause damage to employees, property, and equipment. Typically, CGL policies exclude covering damages resulting from pollution. A property owner can buy sudden and accidental (S&A) pollution liability under a CGL policy. This will provide third-party liability coverage for property damage and bodily injury caused by a polluting incident.
Coverage provided under this extension is quite limited when compared with Environmental Impairment Liability insurance. Why? The policy only provides third-party coverage and is restricted to a specific period of detection and reporting of an incident, hence the name, “Sudden and Accidental”.
The S&A extension usually does not include the owner’s own site remediation, government cleanup orders or waste management activities.
LIMITATIONS UNDER PROPERTY INSURANCE POLICIES
The majority of Commercial General Liability policies in Canada contain some form of exclusion surrounding pollution. Typical property insurance would only respond to pollution when caused by an insured property peril, such as a fire or flood. It would also cover damages related to the business operations, including damages caused by an intense fire, or the fumes emitted by faulty cooling or heating systems.
It would only respond to costs of replacement or compensation of owned physical property i.e. buildings, machinery and plant or stock. Those policies, however, either limit or do not include coverage for pollution damage, making you vulnerable to extremely pricey risks.
Comparatively, EIL insurance provides both first and third-party coverage for unknown pre-existing conditions, as well as new pollution events. Whether they occur suddenly or gradually over time does not matter in this case.
The day-to-day running of some businesses may result in the possibility of environmental damage occurring. To protect companies against these risks, it is important to obtain the correct type of coverage for your business needs. EIL insurance can help mitigate your business’ exposure to costly penalties related to the risks.
Speak to one of our isure representatives for more information about Environmental Impairment insurance.