A Shift toward Alternative Compensation Mechanisms for Environmental Damage?

In this book, many shifts in the compensation of environmental damage have been discussed, largely dealing with the choice between private and public funding. These contributions dealt especially with the question how, for instance for soil pollution, oil pollution damage or nuclear accidents, compensation can be achieved either through private or through public funding. In particular, many of these contributions dealt with the way in which regulators have either facilitated private funding or have intervened to provide (additional layers of) public funding. This paper has a different focus. Indeed, in addition to trends in regulation from private funding to public funding and vice versa also within the private funding itself, several shifts can be observed. These shifts largely concern financial mechanisms that have been developed in the market to provide compensation for environmental harm. Indeed, private actors confronted with environmental damage can of course seek a variety of financial or other mechanisms to obtain compensation for that damage. A traditional and well-known mechanism is insurance, where traditionally the distinction was made between two types of insurance arrangements. On the one hand, a private actor who fears the risk of being victimized by environmental harm could seek coverage directly from an insurance company. This type of insurance, whereby a victim seeks insurance coverage for his expected losses, is considered so-called first-party insurance. This is distinguished from the type of insurance whereby a private actor seeks insurance coverage for the risk of having to pay compensation to a third party as a result of being held liable. The latter type of insurance is referred to as third-party or liability insurance. It is remarkable that, since the early days of the discovery of environmental damage (usually after the so-called “black points” were discovered in the 1970s), the financial mechanism that was developed to compensate environmental damage was liability insurance. However, for a variety of reasons, which will be discussed below, liability insurance was not able to provide a complete and/or satisfactory cover for environmental harm. As a result, a shift has taken place from liability cover for environmental damage to a variety of other financial mechanisms. For instance, to some extent, corporate actors have decided to simply cover some risks simply themselves, for instance by creating reserves for potential environmental damage.1 other alternatives have also been developed, such as the creation of ex ante guarantees and deposits. In addition, some modest experiments have taken place (mostly in the u.s.) with the use of so-called alternative risk transfer (art) which consists basically of using capital markets to cover environmental risks.2 many other alternatives to liability insurance have been developed as well.3 in this contribution, not all of these possible alternatives to liability insurance can be discussed but we will refer to a more detailed discussion of these alternatives in the literature section. However, it seems interesting to generally focus on, on the one hand, the reasons for moving away from liability insurance and, on the other hand, to focus on two particularly interesting alternatives. The latter alternatives have especially been developed in the netherlands, the dutch apparently being front-runners in the development of new financial and insurance techniques to cover their environmental risk. However, a shift towards these alternatives can certainly also be found in other legal systems.