Index-Based Insurance: A Market Mechanism for Improved Industry Compliance and Agency Enforcement for Quantitative Pollution Standards

• Author: Anastasia Telesetsky
• Profession: Associate Professor of Law, University of Idaho College of Law
• Pages: 237-257

237

Chapter 8:

Index-Based Insurance:

A Market Mechanism

for Improved Industry

Compliance and Agency

Enforcement for Quantitative

Pollution Standards

Anastasia Telesetsky*

I. Introduction

Insurance is a reliable market mechanism for coping with external risk s by

spreading the risk over a la rge pool of activity. In the Middle Ages, master

goldsmiths would pay into guild coers membership fees that would include

a form of mutual property and life insurance. If any craftsperson lost their

business through re or if a craf tsperson died unexpectedly, the guild would

rebuild the business or provide a lump sum payment for family support.

When global trade became possible with the connections with A sia, Africa,

and Americas, merchants and shippers began to meet in places like Edward

Lloyd’s coeehouse in London seeking investors to personally under write

the value of loads of c argo. Since these rst days of insurance, catastrophe,

accident, and life insurance have become ubiquitous. But insu rance is not

restricted to t hese categories; a s some insurers have demonstrated, nearly

anything can be insured, including unique risks such as the possibility for

divorce1 and damage to a supermodel’s legs.2

In the past four decades, a market for environmental insurance has emerged

in response to government regulations. Insurers in these markets have begun

1 Belinda Luscbome, Divorce Insurance: Get Unhitched and Get a Payout, T, Sept. 19, 2010, http://

www.time.com/time/magazine/article/0,9171,2015772,00.html.

2 Rachel Mulligan, Heidi’s Legs, V, Sept. 20, 2011, http://www.vogue.co.uk/news/2011/09/20/

heidi-klum---legs-insured-not-worth-the-same-amount (Heidi Klum’s legs were insured by Braun

Razors for 1.1 million Euros through London’s Phillips De Pury and Company).

* Associate Professor of Law, University of Idaho College of Law.

238 Next Generation Environmental Compliance and Enforcement

to assume quasi-regulatory roles. Concerned with protecting against losses

under their various policies, some insurers have begun to demand higher

level of care from their insured parties in response to avoidable environmen-

tal risks. To reduce the risk of an event that may require a payment, some

insurers have also begun to oer insured pa rties technical support to further

pollution reduction as well as mandating reviews of long-term project data

for compliance.

One of the primary challenges with traditional environmental insurance

products is that the market for these products is greatly limited, in par t

because there is no requirement to insure most environmental risks.3 is

results in adverse selection on the part of entities that seek insurance. A sec-

ond challenge with traditional environmental insurance is the fact that there

are high transactional costs associated with investigating individual claims,

which makes the product unattractive to insurance providers. ese limita-

tions on traditional environmental insurance prevent insura nce from being

widely adopted as a market mechanism to improve compliance with existing

environmental regulations.

Even if there was a wider uptake of existing environmental insurance

products, there remain chronic problems of under-enforcement for a variety

of reasons, including both too few enforcement ocers and too little politi-

cal wi ll. For exa mple, in West Virginia, when a group of citizens sued nine

coal companies for release of ha zardous materials into the drinking water,

the citizens soon discovered that the coal companies had accurately reported

that they were out of compliance with water quality standards but that the

states had not pursued a ne or penalty.4 Between 2004 and 2009 there were

half a million violations of water pollution laws by 23,000 chemical factories,

manufacturing plants, and other industrial workplaces who self-reported.5

e situation was alarming enough for the U.S. Environmental Protection

Agency (EPA) administrator to comment in 2009 that EPA is “falling short

of this administration’s expectations for the eectiveness of our clean water

enforcement programs. Data available to EPA. shows that, in many parts of

the country, the level of signica nt noncompliance with permitting require-

ments is unacceptably high and the level of enforcement activity is unaccept-

ably low.”6

3 One exception would be Underground Storage Tanks, for which owners are expected to provide

nancial assurances.

4 Charles Duhigg, Clean Water Laws Are Neglected, at a Cost in Suering, N Y T, Sept. 12,

2009.

5 Id.

6 Id.