The environment problem has been an important issue for Chinese government. Surveys and conversations on China’s vibrant social-networking services show increasing public concerns over environmental pollution. Recently, the episodes related to PM 2.5 and Beijing Cough are the obvious instances. Under this backdrop, we discuss the development of environmental pollution liability insurance in China.
In 2007, the State Environmental Protection Administration (the name has been changed to Ministry of Environmental Protection of the People’s Republic of China(“MEP” since 2008),) and the China Insurance Regulatory Commission (“CIRC”) jointly issued a guide on environmental pollution liability insurance, Guidelines on Environmental Pollution Liability Insurance (MEP Issued  No.189, “2007 No.189 Guidelines”). In 2007 No. 189 Guidelines, MEP and CIRC jointly encouraged local government to promote the environmental pollution liability insurance system in their own administrative regions. It said an environmental pollution liability insurance system suitable for the national conditions of China should be preliminarily established during the period of the 11th Five-Year Plan, which is from 2006 to 2010. Pilot and demonstration projects thereof should be carried out in major industries and regions to preliminarily establish the directory of covered enterprises or facilities of key industries based on the degree of environmental risks and the standard of compensation.
However, 2007 No. 189 Guidelines has not been well executed. According to the news from CIRC, there are only 2000 enterprises in China which have applied environmental pollution liability insurance till now and the total premium is only RMB 20 billion Yuan (about USD 3 billion). Actually, China is in a high-incidence season of environmental pollution accidents. You may still remember the algae bloom pollution accident in Tai Lake, Chao Lake and Dianchi Lake in 2007, the extreme water pollution accident in Yancheng City,Jiangsu Province in 2009, the cadmium pollution accident in Liuyang City, Hunan Province in 2009, the oil pipeline explosion in Dalian City, Liaoning Province in 2010, the oil spill accident related to CNOOC and Conoco Phillips, and the most recent air pollution in Beijing and its suburbs. Most of the pollution accidents are not covered by environmental pollution liability insurance. Environmental pollution accidents have occurred frequently in some industrial enterprises of some regions, thus have severely polluted the environment and jeopardized the health of the masses. In addition, many social contradictions have been aroused because some victims suffering from pollution accidents are not indemnified in a timely manner.
Therefore, MEP and CIRC have to issue the Guidelines on Pilot Project of Compulsory Environmental Pollution Liability Insurance (MEP Issued  No.10, “2013No.10Guidelines”). 2013 No. 10 Guidelines has some significant advances compared to 2007 No. 189 Guidelines. For example, it may make the environmental pollution insurance another compulsory insurance in China after compulsory insurance for traffic accident of motor-driven vehicle. However, it is still insufficient for solving all problems of environmental pollution liability insurance in China.
1. 2013 No. 10 Guidelines determines the scope of pilot enterprises that need to apply environmental pollution insurance compulsorily.
During past years, enterprises didn’t have the incentive to purchase environmental pollution liability insurance, so the market attracted much less demand than expectation. Firstly, because most of these polluting enterprises are cost-sensitive enterprises, they don’t want to pay for any extra insurance unless it is compulsory. Even if they decide to purchase, these enterprises would typically go for sudden and accidental pollution coverage with a small sub-limitation within the public liability cover. Secondly, most polluting enterprises are major tax contributors in local regions and local governments usually don’t want to disturb these enterprises to buy environmental pollution liability insurance otherwise it is a compulsory obligation, even if there are environmental pollutions existing. These enterprises didn’t feel the pressure to buy environmental pollution liability insurance. Lastly, Chinese laws and regulations have no punitive damage and class action system for pollution litigations, and pollution producers always are reluctant to pay the premiums as they treat it as a burden for their business.
To solve such problems, 2013 No.10 Guidelines has determined clearly which kinds of enterprises need to purchase environmental pollution liability insurance products:
(1) Enterprises that related to heavy metal, including heavy nonferrous metal mining industry, heavy nonferrous metallurgical industry, lead storage battery manufacture industry, leather and its product industry, chemical material and chemical products manufacture industry, etc.
(2) Enterprises which have been required by local regulations.
(3) Other enterprises that have high environmental pollution risks.
Furthermore, the government encourages enterprises that have high environmental pollution risks to purchase environmental pollution liability insurance, such as petrochemical enterprises, hazardous chemical enterprises, hazardous waste operating enterprises and those enterprises which have dioxin emissions.
2. 2013 No. 10 Guidelines stipulates corresponding stimulation and restriction mechanism to require and encourage enterprises to purchase environmental pollution liability insurance products.
During past years, the legal punishments for environmental pollution are far from enough, so enterprises didn’t have pressure to buy environmental pollution liability insurance products. Firstly, in accordance with Tort Liability Law of PRC, punitive damages can only be applied to product liability. Article 47 of Tort Liability Law of PRC stipulates:” Where a manufacturer or seller knowing any defect of a product continues to manufacture or sell the product and the defect causes a death or any serious damage to the health of another person, the victim shall be entitled to require the corresponding punitive compensation.”So, there is no punitive damage regulation for pollution liability. Secondly, there is no class action system in China. Most people cannot find a better way to sue these polluting enterprises by themselves. Thirdly, although in the new published Civil Procedure Law of PRC (Order No. 59 of President of the PRC, 31st August, 2012), China allows relevant bodies and organizations prescribed by the law may bring a suit to the people’s court against such acts as environmental pollution (Article 55), how the existing environmental pollution liability laws and regulations are to be applied in a third-party claim context is yet to be clarified.
Now the situation has changed. In accordance with2013 No.10 Guidelines, for those enterprises which didn’t apply environmental pollution liability insurance accordingly, the environmental protection department can adopt the following punishment measures:
(1) Whether this enterprise has applied the environmental pollution liability insurance will be closely tied to whether this enterprise can get approvals for its project environmental impact assessment reports, project environmental protection acceptance reports, mandatory implementation of cleaner production audit reports, sewage discharge permission and IPO environmental performance test, etc.
(2) Environmental protection department has the authority to temporarily suspend the application from these enterprises that do not apply the compulsory environmental pollution liability insurance for special funds such as environmental protection special fund, heavy metal contamination controlling special fund.
(3) Environmental protection department has the authority to provide the information of those enterprises that do not apply the compulsory environmental pollution liability insurance to banking institutions as an important reference for reducing the rate and credit of these enterprises.
Meanwhile, 2013 No.10 Guidelines also lists the following measures to encourage enterprises to apply environmental pollution liability insurance:
(1) The environmental protection department will give priority to those enterprises that have applied environmental pollution liability insurance when arranges the allocation of environmental protection special funds and heavy metal contamination controlling special funds.
(2) The environmental protection department will provide the information of those enterprises that have applied environmental pollution liability insurance to banking institutions and ask the institutions to provide credit support to these enterprises in the principle of controllable risks and principle of sustainable commercial development.
3. 2013 No.10 Guidelines determines the coverage, premium rate, environmental risk assessment, application procedure, environmental risk precaution and accident claim settlement mechanism of environmental pollution liability insurance.
Basically, some important and practical aspects of 2013 No.10 Guidelines are as following:
(1) Coverage of environmental pollution liability insurance shall include the following:
A. The personal injury/casualty or property losses of the third party due to environmental pollution;
B. The expenses reasonably and necessarily incurred by the applicant/insured for saving the life of the third party or avoiding or reducing the property losses of the third party;
C. The clean-up fees paid reasonably and necessarily by the applicant/insured for controlling the spread of the pollutant, or cleaning up the pollutant in accordance with the environmental protection laws and regulations.
D. Other compensation liabilities as agreed between the applicant and the insurance company.
(2) Limit of liability
The applicant shall determine its own liability limit that can cover the environmental pollution losses in accordance with its own environmental risk level, the possible damage area, etc.
(3) Premium Rate
The insurance company shall determine the basic premium rate based on the environmental risk of the applicant, the historical accident data, and the applicant’s ability to afford the insurance product.
Based on the basic premium rate, the insurance company shall determine the specific premium rate in accordance with the environmental risk assessment of the applicant, synthesizing whether or not this applicant abides by the environmental laws and regulations ( including the legal execution situations of this enterprise about the approval of environmental impact assessment reports, project environmental protection acceptance reports, sewage discharge permission, environmental protective facilities operation, reviews of cleaner production, and emergency system for the pollution accidents), and considering the applicant’s industry features, producing process, production scale and local environmental sensitivity.
(4) Environmental risk assessment
The insurance company can entrust a third party or by itself to take environmental assessment of the applicant before signing insurance contracts.
(5) Damage calculation
For the personal injury/casualty and property losses of the third party, and the emergency expenses paid by the applicant for taking corresponding measures to prevent the pollutants from spreading and reduce losses, the insurance company may make appraisal and evaluation of the accident in accordance with the Recommended Measures to Calculate Environmental Pollution Damages (Annex of MEP  No.60). In the pilot areas of appraisal and evaluation of environmental pollution damage, the insurance company may entrust professional institutions to calculate damages.
However, 2013 No. 10 Guidelines needs to be fully enforced and it still has some shortcomings which cannot solve all environmental pollution liability insurance problems in China.
1. The local governments have less desire to rigorously enforce2013 No. 10 Guidelines. The index of pollution has not been clearly and detailed listed in the local government performance evaluation system. On the contrary, the index of Gross Domestic Product (“GDP”) is always the most important data for the evaluation system. So the local governments usually encourage enterprises to produce more products and will ignore the pollution problems of them. The demand of environmental pollution liability insurance will largely depend on how rigorously the local government enforces 2013 No. 10 Guidelines.
2. There is no insurance derivatives market, such as Catastrophe Risk Exchange (“CATEX”) in China. That means insurance companies cannot use the financial instrument to diversify their own risks and costs. Considering that the pollution accidents in China are usually major accidents, most of insurance companies don’t want to sell such environmental pollution liability insurance products to potentially dangerous enterprises in China. In fact, only a few insurance companies sell such insurance products in China now and that is why it is difficult for enterprises to buy such insurance products. Maybe after the issuance of 2013 No. 10 Guidelines, the insurance derivatives market can be established in China step by step.
3. From the viewpoint of legislation hierarchy, this Guideline is not a law issued by national congress, but just a guideline issued by MEP and CIRC, two ministry-level authorities, and this will hugely influence the its implementation.