Capturing the carbon market: commercial insurance carriers gear up to cover the risks of sequestering carbon, but for now stop short of offering the long, long long-tail coverage that such projects require.

summary

* Carbon capture projects will require liability coverage on a scale not seen before.

* Liability policies cover the carbon injection process, and the immediate post-closure of carbon capture sites.

* One carbon capture project alone could command insurance liability limits of $100 million.

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As the U.S. Environmental Protection Agency reviews a legal framework for injecting carbon into the ground, the nation's insurance carriers are beginning to make bets on the best way to approach a potentially huge and lucrative market.

For risk managers starting to turn their attention to the complex technologies around transporting and burying carbon, the insurance companies' strategies offer a glimpse of what they might expect if they choose one carrier's program over another.

AEGIS, which has widespread penetration into the utility industry, the sector most likely to own and operate emissions-producing coal-fired plants, has for now at least, chosen a "bolt-on" model.

The bolt-on model, according to Patrick Maguire, a Houston-based broker in the energy and marine division of McGriff, Seibels & Williams, offers coverage endorsements to AEGIS' portfolio of excess liability insurance policies.

From the perspective of the carrier, the bolt-on option is the easiest and fastest way to tailor an off-the-shelf product to meet an emerging need. Insurance carriers routinely resort to the bolt-on option when they need to offer a product to emerging industries or newly developing risks.

For risk managers nervous about sizing up the risks of such large-scale projects, the bolt-on option retains the structure of the general liability familiarity with which buyers are already familiar. "You want to have certainty, and when you're talking about a new product or mechanism, you need to have as much certainty as possible," said Maguire.

Familiarity is important because when it comes to technology like capturing carbon, particularly from coal-fired plants, and injecting it under the ground in abandoned wells and mines, the capital investment runs into the billions of dollars.

Proponents of carbon capture, which reduces a would-be polluter's carbon footprint by removing the amount of carbon dioxide pumped into the atmosphere, say it is a viable solution to global warming. Because the likelihood of successfully containing carbon dioxide in underground geological reservoirs is so high, the effects on human and animal health are likely to be minimal, according to carbon capture proponents.

The technology of pumping carbon underground isn't all that new as oil-field services companies have pumped chemicals into depleted oil fields for years; it is thus a tested technology.

"Oil companies have been doing this, injecting carbon dioxide into brine aquifers and in some eases you're pushing oil around in the subsurface," said Karl Russek, senior vice president of environmental risk for ACE International. "With carbon, you are scaling it up considerably."

Indeed. The scale of carbon capture projects would dwarf anything that has happened in the past.

Carbon has been captured on a relatively large scale--in the range of one to two million metric tons--from natural gas processing in Norway, Algeria and Canada, according to a report published last year by Hunton & Williams, on behalf of the Carbon Capture and Sequestration Alliance, a group made up of utility and energy companies, and the insurance carrier Zurich.

Other early-stage carbon capture experiments are under way in Germany and the United States.

In what may turn out to be a precedent-setting strategy, Chevron Corp., ExxonMobil Corp. and Royal Dutch Shell Pie in September, according to media reports, agreed to invest in a $37 billion natural gas venture at Barrow Island, off the northwest coast of Australia.

The big off companies acquiesced to the Gorgon project off Barrow Island only after Australia's national and state governments agreed to assume the liability for potential damages hundreds of years from now should carbon dioxide, stored more than a mile underground, cause any problems, according to Bloomberg News.

"Letting taxpayers ultimately take responsibility for any problems with the carbon dioxide sequestration is a calculated risk by the government," said Craig Wallace, a senior associate of Lavan Legal in Perth who has advised companies on Australia's draft climate-change legislation.

"It sets a precedent. It's probably very likely other operations would get on the bandwagon," Wallace also said.

Opponents of carbon sequestration have raised concerns that carbon dioxide could leak out of its reservoir because of earthquakes or "ground heaves," due to injection pressure for example. Carbon plumes could migrate from one storage site to another several miles away, or carbon dioxide might even escape from ruptures or leaks in the 3,600 miles of carbon dioxide pipelines in the United States.

"Liability issues regarding potential failure of CCS projects and escape of injected carbon dioxide need to be addressed to mitigate project risks and boost investor confidence," according to Proctor Goodwin lawyers Christopher P. David, Shailesh R. Sahay, and Jordana F. Sobey, in a note to clients last year.

LONG, LONG, LONG TAIL

The few existing liability policies offered by the insurance industry, whether they are bolt-on or de novo liability coverage contracts, cover the carbon injection process, and the immediate post-closure of carbon capture sites.

These policies are adequate so far as they go, but they don't cover the long-term liability risks, which in the case of carbon capture stretch out hundreds or thousands of years into the future. No insurance carrier will issue such long-tail policies.

Yet it is the extreme long-term risks from carbon capture projects that require the tightest coverage, according to the 61-page CCS Alliance study. With no single legal or regulatory framework to delineate the extent of responsibilities, assigning liability or blame is headed for a morass of court disputes.

"Actually, the most challenging thing is what happens beyond 50 years or when a storage site is sealed," said John Scott, head of risk insights at Zurich Global Corporate, quoted in a July article posted on the web site Cleantechnica.com. "Who then bears the risk?"

Over the long term, U.S.-based carbon capture projects face liabilities related to federal clean air and water laws, hazardous waste disposal laws, and the Pollution Prevention Act of 1990. Carbon capture projects also face liabilities connected to state and local property rights, and negligence and breach of contract issues if something goes wrong.

In the United States, public-private liability frameworks that could cover long-term indemnity include the 1957 Price-Anderson Nuclear Industries Indemnity Act. Price-Anderson, which establishes a no-fault insurance program designed to indemnify the nuclear industry against liability, caps accident liability at $7 billion, with nuclear utilities required to buy primary coverage up to $300 million per plant.

Other federal liability protection frameworks that could apply to carbon capture projects include the National Flood Insurance Act Indemnity/ Risk Pool, the Biomaterials Access Assurance Act, the Amtrak Reform and Accountability Act, and even the Terrorism Risk Insurance Act.

Many of these laws address the risks associated with carbon capture liabilities only after sites are closed. Even as the first carbon pilot projects get under way in the United States, it's clear that the legal framework hasn't caught up, and that makes it hard for insurance carriers to design policies to fit the needs of carbon capture projects. "The real issue is regulation and how it drives insurance requirements," said Russek. "The jury's still out with regard to what the regulatory response is to that." Capacity, terms, and conditions are questions which depend on the regulatory framework.

Where large-scale carbon capture projects have taken off, governments have assumed either some or all of the associated tort liabilities that might arise. In Norway, for example, the government has agreed to provide unlimited liability for carbon capture projects run by Oslo-based StatoilHydro ASA in Norway and Algeria, according to a Bloomberg News report.

In Canada, discussions last year focused on sharing the liability between the government and the private sector, with industry taking on the liability for the first 10 years before then transferring the liability to the government.

In the United States, Texas and Illinois have agreed to take title to the injected carbon dioxide and indemnify members of the FutureGen Industrial Alliance of any liability associated with carbon capture, according to the CCS Alliance report titled "Study of Legal Issues Relating to Risk and Liability in Connection with Carbon Capture and Storage."

In addition, Kansas, Texas, Montana, Washington and Wyoming have all introduced or passed laws clarifying property rights issues surrounding carbon capture.

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The nation's first coal-fired carbon capture pilot began late last month at American Electric Power's Mountaineer Power Plant in Mason County, W.V. AEP is pumping carbon dioxide into two wells, one 8,200 feet underground, and the other 7,800 feet under the surface.

"Several pilot projects have been insured through environmental site-liability programs and underwriters are willing to look at that as well," said Tom Swartz, senior vice president for Marsh in Houston. "Those can be written for a term of 10 years. The environmental site liability policies should be endorsed to make sure carbon is defined as pollution. This clarifies the intent of the underwriters to cover liabilities associated with a loss of carbon, and to define it as a pollutant."

$100 MILLION LIMITS

For the moment, the commercial insurance industry is prepared to accept limits of up to $100 million per project, according to Peter Breitstone, CEO of Aon Environmental. "I think we could put together $100 million in limits in this type of project," he said.

The question, he also said, was whether managers of a carbon capture project were looking to insure a sudden, unexpected pollution release, or whether they would prefer to cover the gradual release of pollution over decades, even centuries.

In addition to the utility industry, which is far along in terms of carbon capture research compared with other sectors, several large manufacturing companies are looking at carbon capture projects, added Breitstone.

Manufacturing companies, like the nation's largest utility companies, tend to operate with very high deductibles and that's where the commercial insurance giants like Zurich, Chartis, ACE and XL Insurance, often have an edge over the utility mutuals carriers like AEGIS and Energy Mutual Insurance, an excess carrier.

Zurich North America, which announced last January the launch of its first carbon capture liability policy along with a separate geologic sequestration financial assurance product, said the announcement has generated interest from several potential clients.

The policy, known as Carbon Capture and Sequestration Liability Insurance, has limits of up to $50 million per risk per year, and is specific to a geologic reservoir, according to Lindene Patton, chief climate officer for Zurich North America.

With coverage restricted to first-party claims, the policy offers pollution event liability, business interruption coverage, well control coverage, transmission liability and even geomechanical liability.

"There are other markets who were interested in offering additional capacity if the need arose," said Patton.

In conjunction with the carbon capture coverage, Zurich also announced a Geologic Sequestration Financial Assurance product to cover specified closure and post-closure activities of a carbon capture site. Coverage for post-closure activity can extend out as far as 30 years to 50 years, said Patton.

As of late August-early September, neither the carbon capture liability nor financial assurance policy announced by Zurich had been issued to any customers, Patton also said, and for the moment governments and taxpayers, not risk managers, have stepped up to assume the risk.

In the end, Maguire said, given the technology and the regulations involved in mounting a carbon capture project, any large-scale CCS initiative will require a custom-designed policy tailored to the particular exposures of the project.

"You want certainty in the product and the contract, and there are ways to potentially endorse a general liability policy to cover the risk," said Maguire. "One product that offers some certainty is a customized risk-specific pollution legal liability policy."

While some carriers, the so-called early adopters, are tiptoeing into the carbon capture market, the bulk of the insurance industry is waiting for more guidance from regulators before delving further into the structure of new policies.

"There's no product that's an out-of-the-box specific product that's ready to go," Maguire said. "This is a new technology and a new wave of climate change mitigation, and it's going to be a developmental process and the products will develop as the industry does."

riskandinsurance.com

* Carbon Capture Alliance liability report.

* Toward a federal policy for carbon capture and sequestration.

CYRIL TUOHY is managing editor of Risk & Insurance[R]. He can be reached at [e-mail].