Environmental Risk: a Comparative Law and Economics Approach to Liability and Insurance

The first part of the paper explores the factors that make up an efficient mechanism for ensuring that industries internalise the costs of environmental damage. In particular, the author considers the insurability of environmental risk and the possibility of using highly individualised insurance policies to cover that risk and at the same time to provide incentives to invest in safe technology and practices. He concludes that the most appropriate way forward would be to use an institutional structure in which strict liability both for damages suffered by private parties, and for restoration of impaired natural resources is imposed. Liability should be non-retroactive, individual and proportionate – assisting the potential tortfeasor to perform a costs-benefits analysis. Regulation should work hand in hand with insurance. Regulators should set minimum safety standards as pre-requisites for the operation of certain types of industrial plant on the basis of the information provided by insurers as to the nature of insurable risks. Any plant authorised to operate should therefore be able to obtain insurance coverage. Such a system would provide for environmental liability which is limited to the extent necessary to make it insurable. The need would therefore remain for a tax based compensation fund to cover uninsured damage. The second and third parts of the paper go on to examine how far national legal systems and EU law respectively measure up against the proposed model. Monti concludes that the suggested model would be in keeping with and useful to the further development of environmental policy in the EU.