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AIG Explain Environmental Risks in Infrastructure Projects

11.05.2021

Environmental Risks

As governments around the world look to steer their economies towards recovery from the worst recession in living memory, infrastructure investment is high on the agenda for many.

The number of significant construction projects including rail, roads, bridges and other land developments is expected to skyrocket in the coming years. While it is hoped that this will create the stimulus needed to drive economic growth, there is a risk with projects of this type of unintended environmental damage. Construction is one of the industries seeing the highest levels of environmental claims and those associated with large infrastructure projects have become increasingly complex and expensive to resolve. Given that in addition regulation around environmental damage and its enforcement have become increasingly rigorous, contractors need to tread carefully.

Know the Risks

Risks can be presented by the disturbance of pollutants or contaminants that are already present at a site, or through the introduction of new ones due to leaks, accidents or other mistakes, or through a combination of both. Losses arising from the transportation and disposal of construction waste have also been seen. To help manage potential risk, an important first step is to conduct a thorough environmental assessment report before the project begins to understand the state of the area where construction will take place. These reports are usually mandatory for larger infrastructure projects, which tend to be quite heavily regulated. They will identify if a site is already contaminated and any chemicals or pollutants that need to be contained in the area or safely disposed of elsewhere.

However, depending on the type and size of the project, the risks can be varied and difficult to assess. For example, a railway line will cover a significant distance and may pass over different types of terrain. This presents a range of different types of risks. Flora and fauna may change with the landscape, as can the presence of endangered species and animal populations that need to be protected.

It’s worth emphasising that a risk assessment report won’t identify future contaminants.  In one example, an airport development required the excavation of a significant quantity of contaminated soil. This presented two problems – where to move it to and how to fill the hole that was left behind. Once the first had been resolved, the second was addressed by purchasing a large quantity of imported soil, from a country with relatively lax environmental controls, to replace what had been removed. Unfortunately, the new soil itself was found to be contaminated, creating a further problem to be resolved and a significant additional cost.

Protocols should also be in place to mitigate against fire, another huge risk within the construction industry. Any fire can lead to an environmental claim and we have seen losses where the water run-off from the handling of the fire has picked up contaminated substances which have been spread across construction sites and onto neighbouring land. This has resulted in third party losses and also statutory notices of clean-up from the regulator, which would not be covered under traditional insurance policies.

 

The Importance of Local Knowledge

Regulatory issues for infrastructure projects need to be taken into consideration as these can differ quite significantly depending on the location. For example, in Europe, there are quite strict rules in place governing the response to environmental damage, mandating not only the clean-up of any pollution but the recovery of the area in which the event took place, a process which can be lengthy and expensive.

But in Asia-Pacific, a region that comprises 17 countries, the picture is more nuanced. Countries such as Australia and New Zealand have developed quite sophisticated regulatory frameworks but elsewhere the requirements of contractors to mitigate against potential environmental exposures, as well as the consequences of them failing to do so, are much less clear. A thorough understanding of local regulations is vital.

The importance of local knowledge extends to the purchase of insurance. Increasingly, large international construction companies are involved in infrastructure projects overseas in emerging markets. It is highly advisable that they take out a local insurance policy to sit within a multinational programme. Being able to use underwriters with the necessary experience, knowledge and insights of the local market is crucial in ensuring a complete understanding of the risk environment as well as in determining what the appropriate terms and conditions and limits might be. Equally, if a claim needs to be made, being able to handle it in the local language will make its resolution run much more smoothly.

 

A Shifting Landscape

Environmental consciousness is building fast. As public awareness of environmental issues grows, insurance buyers are putting greater focus on environmental protection and are looking for a better understanding of the details of their policies.

This is a positive development as the shifting regulatory landscape, as well as the rising cost of clean-up and restoration, has given rise to a trend of more and increasingly complex claims for contractors’ activities in recent years. Demand for insurance has risen with lenders and other investors financing a project more likely to request that a policy is in place.  In a trend that has emerged in the last three to four years, larger contractors have had to take on losses caused by the activities of their sub-contractors; so many have moved to protect their own insurance placements, premium increases and coverage. This means that they are now requiring smaller sub-contractors to have an appropriate insurance policy in place. Project owners will look closely at any claim and look at how it is possible to pass it down the chain.

Buyers now have a better knowledge of the coverage they are looking for but there is still progress to be made in educating brokers and clients of the full extent of environmental exposures. In addition, they are not always aware of the range of insurance products that have been developed which are much more sophisticated than those available five to 10 years ago. For example, as government bodies continue to take environmental issues more seriously and put pressure on construction companies to act, insureds can have peace of mind that their insurance policies respond to changes in law, ensuring continuity of coverage.

There is an onus on construction companies and their contractors to take environmental risks seriously. They need to ensure they have the proper protocols and standards in place and that they communicate better with their insurers and regulators about what they are doing. Getting it wrong and falling foul of the legislation can have serious consequences. Regulators are increasingly becoming more active and when they require a polluter to remediate, it is to a high standard, which is increasing the severity of claims costs. Accountability for protecting against environmental damage is only going to intensify.