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Perspective

Mandating Environmental Pollution Liability Insurance in China

July 19, 2018| Von Frank Wang | General Liability | English

Region: China

Environmental pollution has been an inescapable issue along with rapid economic development in the world. China is no exception. Since the beginning of immense economic development in the 1980s, China has seen a serious increase in soil, water and air pollution, which has caused widespread environmental and health problems. A recognition of these problems has led the Chinese authorities to tackle this issue seriously. In October 2015 the construction of an “ecological civilization” was first written into the National Five Year Plan, and in March 2018 this construction was first written into the Constitution, which shows the Chinese government’s determination to regulate environmental pollution.1

Insurance plays an important role in promoting ecological civilization. China has been piloting environmental pollution liability insurance in some high risk industries since 2008. Significant progress has been made but the insurance penetration is still at a very low level. Therefore, the Chinese government has been considering establishing compulsory environmental pollution liability insurance (CEPLI) for some time, and it will become a reality soon; the Ministry of Ecology and Environment (MEE) passed the Compulsory Environmental Pollution Liability Insurance Regulation on May 7, 2018.

The Regulation requires any business to buy CEPLI if it is involved in hazardous waste, tailing reservoirs, petroleum products, coal mining, metal ores, chemical raw materials, chemical products, and other industries defined by the government as representing a major environmental risk. If a business fails to apply after a certain period, the government will publish the names of these enterprises and penalize them with a fine of up to CNY 30,000. In terms of the scope of coverage, CEPLI will cover third-party bodily injury, third-party property damage, ecological environment damage, emergency handling and cleanup expenses.

It is noteworthy that gradual pollution and ecological environment damage are included in the coverage for the first time because neither the industry nor the government consider the existing coverage (which is triggered by sudden and accidental pollution) as adequate to cover the main environmental pollution risks. However, this creates a great challenge to the insurance industry. How to underwrite gradual pollution and how to assess ecological environment damage are the two main questions local insurers need to answer first.

Environmental Pollution

It is good to know that the MEE established the basic guidelines for these two areas and continues to improve the related supporting systems, such as risk management and information sharing databases. For instance, the Regulation requires that prior to issuing a policy, insurers should conduct an assessment of the environmental risk and base their decisions regarding the limits of liability and premium rates, for each and every insured, on the results of this assessment. Furthermore, insurers are required to conduct an onsite hazard screening at least once a year and advise the insured on the remediation of major environmental impairments.

From a legal perspective, in 2015 China started to support public interest litigation for environmental pollution - a concept similar to class actions in other countries. Government agencies, environment protection organizations, foundations and other non-profit organizations have been recognized in some public interest litigation cases as qualified plaintiffs for a few years. Since March 2018 People’s Procuratorates are legally allowed to participate in public interest litigation for environmental pollution as plaintiffs, which is expected to increase the likelihood of incurring liability for environmental pollution - which in turn would increase demand for pertinent insurance solutions in the future.

The above issues, among many others, were discussed at Gen Re’s China Liability Seminar, which was held in May in Beijing and Shenzhen and themed “Develop Green Insurance, Promote Ecological Civilization”. One common takeaway from the seminar was that environmental pollution risk management is crucial to the healthy development of the related insurance products in the future.

More than 100 attendees from about 50 insurance companies joined the discussion with Gen Re liability experts, and guest speakers included two environmental pollution risk experts and one experienced insurance lawyer. The seminar further enhanced Gen Re’s position as the “Liability Thought Leader” in China.

Gen Re works with our clients on complex liability risks in several jurisdictions around the world. To find out more about CEPLI, or to seek expert advice for your business, don’t hesitate to get in touch with your local account executive.

Endnote
  1. To read more on the background of “ecological civilization”, go to https://thediplomat.com/2015/09/chinas-new-blueprint-for-an-ecological-civilization.

 

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