Increasing public awareness of environmental issues means operator scrutiny is at all-time highs. Catastrophic issues in Brazil, Hungary and Canada have also very publicly pushed the impact of pollution incidents to the top of boardroom agendas.
For mining companies operating across the globe, there are over 16,000 different environmental laws affecting operations. Much of this legislation results in strict liability for clean-up and the potential for damage to third parties and their property. There is also huge potential for change of law exposures occurring during the mine life and post closure remediation periods.
Tailings dams are a problematic area for insurers and one where executives are looking for risk transfer solutions. Compared to water dams, they are more 10 times more likely to suffer a failure.
In most developed countries, they are subject to close controls and monitoring. Australia’s mining industry hasn’t seen a major environmental failure for many years, the most recent being in 1994 at Olympic Dam, then owned and operated by Western Mining.
Insurers have always been concerned about tailings dams – how many there are, where they are, how they’re constructed and what volumes are stored in them. Remarkably, despite the recent incidents of failure, we’re no closer to knowing how many tailings dams exist around the world. Current estimates range anywhere from 3000 to 6000.
Why aren’t there accurate figures? There’s no doubt it’s a sensitive issue for some companies; some of the blue-chip miners happily share the information but others, particularly smaller operations in developing countries, prefer not to make details of these installations public.
Mining operations are always seen as heavy property/loss of gross profit risks, with insurers charging commensurate premiums. Liability exposures are often considered the ‘poor relation’ and regarded as minimal given the remote nature of mining operations and the restricted access to them. Tailings dams are the exception to the rule.
An inability to provide sufficient comfort (and that means information) will see underwriters: i) increase premiums, ii) reduce cover, and iii) impose reduced sub-limits – or a combination of all three. Traditional liability policies are only triggered by “sudden and accidental” events – gradual pollution is excluded, as are pre-existing conditions. And such, pollution must leave the licenced mine area to trigger a third party liability policy.
On site contamination would have to be addressed under a first party policy and, under “polluter pays” legislation, the site owner/occupier is responsible for remediation. But not all property policy wordings will address this, especially if the event is gradual. Companies need to have carried out detailed risk assessments and ensure that their internal processes plus insurance program are fit for purpose. Mining companies here are doing a good job of this.
But many Australian miners have extensive international operations. ASX-listed miners cannot afford to relax their standards overseas and must develop a minimum benchmark that applies to every operation regardless of location.
To ensure premiums levels are controlled and cover enjoys the maximum breadth possible, mining houses need to be prepared to provide their insurers with robust data and information addressing the construction, monitoring and management of their tailings facilities. They also need to demonstrate effective control over any works undertaken to increase their capacity (heightening and widening), for both liability and property underwriters. A failure to provide sufficient data will leave clients exposed to price hikes and cover restrictions.
Available risk transfer solutions
The insurance market (in conjunction with Willis Towers Watson) last year designed some novel and unique risk transfer policies that address some of these issues. Specialist natural resources underwriters are at the forefront of designing bespoke polices in the following areas:
- Contractors’ pollution liability policies
- Pure financial loss policies, to cover third party financial losses following a pollution incident
- Environmental impairment policies, that sit alongside general liability policies and “fill the gaps” left by the common exclusions of gradual defect and pre-existing conditions
- Insurance for contractual warranty and Indemnity provisions.
One of the major limitations to the provision of large scale insurance for the mining industry is capacity. While the market could easily put together $300 million of capacity for a project, the size of the numbers involved in potential environmental impact liability (EIL) claims simply dwarf this sizeable figure.
So, where does the market provide benefit? It’s for all those claims and issues that are currently either uninsured or are being funded out of profit (declining) and loss accounts in the future. For prospecting and contracting companies, EIL Insurance can be an essential part of the risk management process to transfer contractual risk and protect.
For any company with captive and/or balance sheet reserves, the insurance community can, and does, provide meaningful insurance and reinsurance of these complicated (and potentially long tail) liabilities.
Insurance is only part of the risk management toolkit for all companies involved in the mining industry. Advanced engineering, operating at the outer extremes of the globe and increasingly strict regulation dictates that the management of environmental risk is part of daily operations. Integration of specialist insurance products into the conventional risk transfer suite can only add to protect businesses during these uncertain times.
Gavin Wilby is an account director specialising in mining for Willis Towers Watson.
This article also appears in the April edition of Australian Mining.