This article is published further to the Prospect Group seminar held at the Centre, Birchwood Park, Warrington, on Tuesday 30th April 2019.
Please click here to see the event flyer.
The seminar addressed gaps in the world of nuclear contracts, with a focus on insurance and the gaps to look out for in nuclear contracts and insurance arrangements, as well as the options available to minimise or remove these gaps. This is one of three sequentially linked papers that summarise the seminar’s content.
The Traditional Role of Insurance
The purchase of insurance is a key risk mitigant and generally occurs at the final stage of the risk management process. After risks have been identified and analysed, an insurance policy is bought with an expectation that it will respond to the scope of risk outside of the policyholder’s financial resources or risk appetite.
However, disappointment (or worse) can result when the policy does not cover what was expected of it. The more specialist the sector being insured, the greater the likelihood that, through misunderstanding, gaps in cover can appear. Over the past sixty or so years the commercial nuclear industry, and its associated international liability framework, have seen the parallel development of a specialised insurance market. Indeed, some of principles behind the liability arrangements were introduced at the behest of insurers. This cocktail of complexity leaves plenty of scope for coverage gaps.
The Nuclear Insurance Market
However, before considering actual insurance coverage gaps, it is necessary to appreciate the relationship between the civil nuclear industry and its insurance arrangements. At its most basic, insurance is a promise to pay an insured’s claim, contingent upon a specified event occurring and after the payment of a premium. Insurers, using the law of large numbers, analyse millions of policies to calculate that premium.
Nuclear is different because the sector does not have millions of policies to analyse (there are only a little over 400 power reactors globally). Moreover, the risk itself offers a low frequency of claims, yet the prospect of a very severe loss should a claim occur.
Therefore, volatility is inherent in nuclear insurance. In today’s regulatory environment, this can disadvantage insurers of nuclear risks in a competitive capital environment, so reducing the size and restricting the structure of the available market. For those insurers that have committed to nuclear, certainty of exposure is critical to help manage the volatility; adequate certainty is achieved by the application of the nuclear liability channelling principle, which sees all liability for nuclear damage focused on the nuclear site operator.
The Radioactive Contamination Exclusion Clause (RCE)
The insurance mechanism that directs liability to the operator is the radioactive contamination exclusion clause (RCE). At the insistence of insurers, this clause has been applied to most non-life insurance policies since the start of the civil nuclear programme.
With cover for nuclear contamination removed from all normal insurances by the RCE, the nuclear operator is made strictly liable for nuclear damage, as specified in the nuclear liability conventions and associated national nuclear laws; each operator must then purchase nuclear liability insurance or provide other financial security, for an amount specified in the Conventions, to cover nuclear damage to third parties. It is this nuclear insurance policy that should account for the insurers’ total exposure to nuclear damage liability for an accident emanating from that specific site.
Unfortunately, the application of the RCE clause, the complexities of the nuclear liability regimes and most of all the interface between nuclear and non-nuclear insurances can leave insurance coverage gaps for nuclear operators, contractors and transporters. Some of these gaps are described in the next paper.
About the Author
Mark Tetley has wide experience gained from senior positions across the London insurance market as both an underwriter and a broker , in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.
Prospect Group is an award winning Multi-Disciplinary Practice combining the legal services of Prospect Law with the consultancy services of Prospect Advisory. Our lawyers and technical experts provide a single point of reference for clients involved in energy, infrastructure and other development projects.
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