Environmental risk: Your attention please

The growing commitment to responsible investment in the industry is not being matched with adequate insurance policies, writes Neil Cameron.

Whose investments and returns are unwittingly exposed to unprecedented levels of environmental liability? Whose directors may bear both personal financial and criminal liability for the consequences of environmental damage caused by the corporate entity? The answer is, unfortunately, most private equity firms. But how would you know and would you know the difference? 

Although an increasing number of private equity firms are publicly aligning themselves with the Principles of Responsible Investment (PRI), their support is being undermined by insurance advisers who do not give responsible environment enough attention, an observation demonstrated by the inadequate level of coverage afforded for environmental liability within portfolio insurance programs. 

You might ask, how has this happened, how did it creep up under my radar and how can I address this unsatisfactory situation going forward?

It happened because environmental legislation has changed and for some this has complicated the hitherto straightforward steps taken to evaluate your insurance needs. More complex and pervasive legislation has increased the need to develop an almost intuitive understanding of its impact on business and how your duties, responsibilities and liabilities have changed. Environmental risk is now unique in as far as liability is created through both tort and statutory systems but it’s only the former system that was intended to be addressed (albeit inadequately) under standard General Liability (GL) policies. Whilst environmental due diligence can sometimes fall victim to transaction timescales and commercial pressures, the consequences arising can now be so far reaching that they’re often beyond the scope of cover provided under GL insurance. Failure to recognize in full the limitations of these policies with regard to the nuances of modern environmental risks can exacerbate an already perilous situation.

Failure to recognize in full the limitations of these policies with regard to the nuances of modern environmental risks can exacerbate an already perilous situation

Lack of clarity around this subject partly exists because the responsibility for advising on how the different disciplines of environmental risk are affected can often fall between different professional advisers (insurance, legal, financial, environmental) and so unless your insurance adviser can show joined up thinking, focused on the multi-faceted risk impact on your business, it is easy for the true consequences of tightening legislation to silently creep under the radar.

This is particularly relevant for those promoting the virtues of the PRI where stakeholders' expectations will be heightened. The environmental risk element of the PRI agenda, if misunderstood or uninsured, can impact a balance sheet, business reputation and exit value. After all why should you routinely survey, protect and insure your factory against the risk of fire, theft, flood but not understand and insure your environmental risks which can lead to comparatively more complex and costly claims to the business. Understanding your risk is your protection.

To even the most casual of observers it makes sense to understand the changes that are taking place, what is driving these, the intent and how they can affect your risk spectrum and what you should be doing to stay one step ahead. Start asking your insurance adviser how to embrace environmental risk and how it can work for you. Their advice and experience in his field will vary but environmental risk is an exposure and an opportunity, learn to understand the difference. There are experienced insurance advisers who can pin point exactly where your existing and emerging environmental risks converge, the limitations of GL insurance and the need for specific environmental insurance products to protect against hitherto uninsured and/or misunderstood exposures.

Neil Cameron is the founder of  Insight Environmental Limited, an insurance provider.