Environmental insurance: allocating risks between insurers

Out-Law Analysis | 11 Nov 2015 | 5:35 pm | 3 min. read

FOCUS: Commercial insurers should work together to ensure that their corporate customers can respond to claims related to environmental damage quickly while preserving their own rights to apportion liability.

Environmental insurance is no longer a new, niche product and many businesses will now have this cover as part of their standard insurance portfolio. However, this can lead to confusion where both their environmental and their general liability policies potentially respond to the same risk.

If both policies cover the same company for the same interest against the same risk there will be double insurance, giving the company the right to pursue either insurer in the order and for the proportion of the loss that it chooses. At the same time, each insurer will have a general right to claim a contribution from the other to cover that other's share of the loss – while policy provisions can complicate the position still further.

This is no good for the policyholder, who may need immediate access to funds or legal representation as promised by their interlocking policies. The commercial reality will require insurers to maintain 'behind the scenes' dialogue in order to preserve a good relationship with their customers.

A practical example

Take for example the owner of an industrial business park situated beside a river. There are flood defences nearby which the owner has maintained over the years. There is then a flood, which causes damage to the industrial units leased by the commercial tenants which operate from the business park.

In an attempt to recover their losses, the commercial tenants may pursue the park owner by bringing claims in both nuisance and negligence. They may allege that the its failure properly to maintain the flood defences amounts to an actionable nuisance because that failure exposed them to the risk of flooding. They may further allege that the owner has been negligent because it had a duty to maintain the flood defences properly and it failed to do so.

In this scenario the business park owner may have an environmental liability policy covering spillages within the boundaries of its premises. It may also have a general liability policy which covers its liability in negligence to third parties. The environmental liability policy is likely to cover nuisance but not negligence, while the general liability policy is likely to cover negligence but not nuisance. However, both policies could cover the risk of damage by flood and the two causes of action arise from substantially the same set of facts so the claims are very closely interlinked.

Excess, or rateable proportion?

So what happens next? Despite the possibility of double insurance, entitling the insured to choose which of its insurers to claim against, the general position is usually subject to the policy wording.

Both policies will contain one or both of the following clauses:

  • an 'excess' clause: this converts the policy into an excess of loss policy, meaning that it will only respond once the policy limit under the other policy is exhausted;
  • a 'rateable proportion' clause: this limits an insurer's liability to the insured to its share of the loss, which means that the insured will have to pursue both insurers for their proportions of the loss.

Where both policies contain an 'excess' clause, they will cancel each other out - meaning that both insurers remain liable. In addition, if one insurer pays out in full, it retains a right to claim a contribution from the other insurer for its proportion of the loss.

Although the right of contribution governs the position between the insurers, the insured business will not be in a position to delay the defence of its case until its insurers have agreed between them who is liable and for what proportion of the loss. The company is being sued: it needs immediate legal representation and confirmation that its defence costs will be paid by its insurers.

In practice, most insurers are alive to these issues. In this example, one of the insurers will almost certainly agree to meet the insured business's claim in the first instance while continuing dialogue with the other insurer behind the scenes. That way, the company's defence costs will be paid but the insurer's right to contribution will be preserved.

Manoj Vaghela and Rebecca Ransome-Lewis are insurance law experts at Pinsent Masons, the law firm behind Out-Law.com.