You're covered: facing tougher pollution fines, companies in Brazil look to new insurance policies for protection.

Tougher environmental laws can mean lots of extra costs for business. A Brazilian insurance company, though, sees opportunity as well.

Unibanco-AIG Seguros, a joint venture between Unibanco, Brazil's third-largest private bank, and American International Group, (AIG), a U.S. insurer, now offers Brazil's first comprehensive corporate environmental liability insurance. While no policies have been issued, the insurers say they have received a slew of coverage requests from pollution-prone companies.

Guilhermo Leao, a Unibanco-AIG environmental insurance product manager, says the company expects to sell dozens of policies by year's end. It has been selling this type of policy for two decades in the United States. "Signing up companies has been slow because this is such a new product. But we are now negotiating policy terms and prices with some 25 major companies in Brazil to whom we've given price quotes," says Leao. "And I estimate that we will issue 30 to 40 environmental insurance policies by the end of the year."

Many companies--oil, petrochemical, chemical, pulp and paper, textile, metals and mining concerns--are interested in this insurance because, while their overall liability insurance covers them for pollution that can be contained within a 72-hour period, they have no coverage for so-called gradual pollution, which takes place over longer periods.

Coverage protects against losses from leaking underground fuel tanks to industrial-residue containment pools, which might contaminate river or water tables over months and years, says Unibanco-AIG's industrial risk director Luis Nagamine. These kinds of risks are getting more expensive, Nagamine says. A 1998 law increased to US$17 million from $17,000 the maximum penalty for environmental infractions, especially pollution. At the same time, domestic and foreign banks in Brazil have taken the initiative to make their corporate clients take steps to reduce environmental risks. Loan approvals might depend on insurance policies to antipollution safeguards. "These banks are making such demands because of their growing concern about being co-liable for environmental damage that results from investment capital they lent," says Nagamine.

To receive coverage, a company must undergo an external environmental audit to determine potential risks. That risk level determines price and what will and won't be covered. The Unibanco-AIG policy covers up to $35 million, double the $17 million maximum fine that the government can impose on a company for serious environmental offenses, such as oil spills. The policy covers damage inflicted on-site and offsite, including in residential and industrial properties. It also covers damage done to the environment in general, including rivers, beaches, water tables and other areas not controlled by the company.

Brazil is the only country in Latin America where Unibanco-AIG offers such an environmental policy, says Henry Arima, general manager in Brazil of American International Underwriters (A.I.U.), AIG's international arm. "It is so new in Brazil that we don't expect to have competitors in Brazil until the end of 2005," Arima says.

When Brazilian companies run through their general liability insurance and their sudden-and-accidental pollution insurance, their coverage often does not cover accidents involving underground equipment, like fuel or industrial waste tanks, and it usually only includes, as part of its off-site coverage, residential and industrial areas, not the environment in general, says Walter Polido, the technical and juridical director of the Brazilian office of Munich RE, a German insurer.

"Unibanco-AIG's broadly defined first- and third-party coverage is one big plus of its new comprehensive insurance," says Polido. "But the big breakthrough of the Unibanco-AIG's new product is its coverage of gradual pollution."

Trends. That breakthrough has prompted other Brazilian insurers to gear up for offering similar types of insurance. "We expect to be offering companies a policy similar to the Unibanco-AIG one during the first half of 2005," says Alvaro Igrejas, the civil liability manager of Itau Seguros, another large Brazilian insurer. "To offer such insurance, we're going to have to acquire know-how from a foreign insurer who offers it."

Roberto Smeraldi, the director of the Brazilian office of Friends of the Earth, says the new coverage could prompt businesses in Brazil to be more proactive with their environmental practices here. Preparing to the pass the third-party audit will force companies to become more environmentally careful before qualifying for coverage, says Smeraldi. "And to preserve their image and to keep their environmental insurance premiums from skyrocketing," he says, "they will likely have to maintain such environmental consciousness and caution."