Jui Lien Chung, AXA XL

Environmental liability: Why are take-up rates for environmental impairment liability insurance low in Asia?

Jui Lien Chung, AXA XL

May 23 2023

Compared to North America and Europe, take-up rates for environmental impairment liability (EIL) insurance in the Asia-Pacific region remain relatively low. I believe there are three reasons for this:

  • The ongoing effects of a paradigm created several decades ago whereby economic development was prioritised over environmental protection in developing countries, including some in Asia.
  • The fact that in recent decades the region hasn’t experienced a massively destructive environmental catastrophe attributable to a corporation.
  • A lack of awareness regarding coverage gaps in general liability and property policies.

In this article, I will elaborate on these ideas and assess the potential implications of “betting against” the possibility of an incident harming the land, air or water.

Differentiated responsibilities
In 1992, the UN Conference on Environment and Development established the notion of “common but differentiated responsibilities” based on “the different contributions to global environmental degradation.” In essence, environmental protection in less developed countries did not need to be as rigorous as in developed countries. That stance helped generate robust economic growth that significantly improved people’s living standards. It also contributed to widespread degradation in many places of the air, land and water. For instance, as South Korea rapidly industrialised, the air quality around Seoul worsened considerably.

These conditions prompted some of the region’s governments to enact more robust environmental protection standards and to step up their enforcement efforts.

Nonetheless, the view that economic development takes precedence over environmental protection hasn’t fully eased in some sectors of the business community. And environmental sustainability doesn’t feature prominently on the management agenda of some companies in Asia.

(However, the exceptions to this broad generalisation are growing as more and more Asian companies adopt and emphasise ESG principles in their operating models.)

This stance is reinforced by the absence of compulsory environmental liability insurance in most jurisdictions. Currently, such coverages are required in South Korea and Vietnam and only for selected industries like oil and gas. Moreover, the insurance markets in many Southeast Asian countries aren’t as well-developed, making it more difficult for companies to secure this type of specialised insurance.

Standalone EIL policies
Another factor contributing to the low take-up rate is that in recent decades there has been only one devasting environmental catastrophe in Asia caused by a private company, the 1984 cyanide gas leak in Bhopal, India. And despite widespread public anger after the Bhopal disaster, environmental protection laws or regulations were not strengthened.

In contrast, there were several highly injurious environmental incidents in Europe and the U.S. in the 1970s. These led governments to enact and more rigorously enforce stronger laws and regulations. That meant that industrial companies and property owners/developers in these lands faced a greater probability of being held liable for an environmental accident and were obliged to take more responsibility for protecting the environment.

These developments, in turn, resulted in the creation of an EIL insurance market for mitigating environmental risk. In fact, one of AXA XL’s predecessor companies was one of the first insurers to provide EIL coverages in the U.S. Today, AXA XL offers standalone EIL policies in all the major markets, including Singapore, China and South Korea, covering businesses against claims for bodily injury, property damage, clean-up costs and business interruption. We also offer global EIL programs with locally compliant policies in 50 countries in all regions of the world.

Significant coverage gaps
When an incident damages the land, air or water, clients could discover that some losses aren’t covered by their General Liability or Property policies. The most significant coverage gaps are:

  • General Liability policies cover “sudden and accidental” events like fires or explosions but typically exclude third-party losses caused by gradual occurrences over time.
  • Property policies usually don’t cover first-party losses (property damage and business interruption) caused by contamination or mould, including the associated clean-up costs.

For example, a chemical plant leaked styrene gas that sadly caused several deaths. It also contaminated the air and land in surrounding areas. The leak was caused by deficiencies in the cooling system, leading to a pressure build-up and, ultimately, uncontrolled release of the styrene gas. If the ongoing investigation finds that the company could have monitored the cooling system more closely and that the incident wasn’t purely ‘’accidental’’ then it is likely that the company is not covered for any compensation it must pay for the pollution under its General Liability policy. EIL policies, on the other hand, are designed to cover such liabilities.

An example of the second gap is a claim from a real estate client that owned a building where excessive condensation in the air conditioning system caused mould build-up affecting 85 residential units. This type of claim isn’t uncommon, especially in countries having four seasons. Under most Property policies, this loss would have been excluded. Fortunately, this client had an EIL policy which covered the remediation costs.

Betting against or insuring against?
Industrial companies, property owners and developers exposed to environmental liability risks essentially have two options: either “bet against” or “insure against” the possibility of an incident damaging the air, land or water. For the reasons outlined above, many companies in Asia have chosen the former. Is this stance appropriate? And sustainable?

As a claims manager, I’m not in a position to judge that; my role is to help clients resolve covered claims promptly, efficiently and fairly. Nonetheless, many nations that haven’t already done so are moving to implement new environmental laws and regulations, typically with “polluter pays” provisions. Many are also stepping up enforcement efforts to protect their air, land and water. And in today’s social media-saturated environment, the reputational risks associated with an environmental incident shouldn’t be overlooked. Although these indirect costs aren’t insurable, they can be substantial and are increasing exponentially.

Also, since prevention is vastly less expensive than mitigation, clients with operations in Europe and the UK could benefit from AXA XL’s new environmental sensitivities tool. Briefly, it produces a detailed and consistent environmental assessment of every location within a client’s portfolio based on the latest data from the most sophisticated sources. Among other benefits, this capability enables clients to prioritise the sites where the environmental exposures are most significant.

A final note: I recognise that readers may have different points of view about some of the issues I have highlighted in this article. Given the complexities associated with this topic, that is certainly understandable. If so, I encourage you to add your perspectives to this article’s link on AXA XL’s LinkedIn page.

Jui Lien Chung is a claims manager for Casualty and EPC. He has 20 years of experience managing claims in the Asia region. He has a degree in Economics from the National University of Singapore and a law degree from the University of London. Jui Lien joined AXA XL in 2014 and is based in Singapore.

This article was written by Jui Lien Chung, Claims Manager, Casualty and EPC, AXA XL, who can be reached at [email protected].

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