Environmental damage insurance in theory and practice

Abstract

In this paper, some particularities of environmental insurance are addressed. First, the paper summarizes the general conditions of insurability. Then, it is explained why insuring environmental liability may be difficult. Specifically, the necessity of an adequate risk differentiation may be difficult to obtain in cases of environmental liability. Then, it is explained how, at the theoretical level, a move towards different insurance schemes (notably first party or direct insurance schemes) provides a solution to problems of insurance of environmental liability. Although the move towards first party or direct environmental insurance may seem attractive at a theoretical level, nevertheless a variety of practical questions may arise. The alternative utilized in practice is not first party insurance (whereby victims would take out insurance coverage), but a form of direct insurance, whereby environmental damage is insured directly, that is to say as soon as damage occurs and irrespective of liability. The paper then discusses a recent example of such a direct environmental insurance, as it was applied in the Netherlands. Although this system seems to have considerable benefits, the major disadvantage lies in the fact that apparently all insurers in the Netherlands moved to this new environmental damage insurance. This raises important questions as to the competitiveness of the particular market.

Citation

Faure, M. (2002), "Environmental damage insurance in theory and practice", Swanson, T. (Ed.) An Introduction to the Law and Economics of Environmental Policy: Issues in Institutional Design (Research in Law and Economics, Vol. 20), Emerald Group Publishing Limited, Leeds, pp. 283-328. https://doi.org/10.1016/S0193-5895(02)20015-9