Agency Theory and Environmental Damage – an Environmental Insurance as an Instrument of Control

Abstract

Theoretical background: Implementing the Environmental Liability Directive (ELD) based on the “polluter pays” principle has increased the legal liability of entities using the environment for the imminent threat of environmental damage and environmental damage caused by their activities. Conclusions of the ELD evaluation assessment and Special Report prepared by the European Court of Auditors revealed several problems confirming a need for continuous monitoring and control of the implemented environmental law, usually performed by the state. Complying with legal requirements in the field of environmental protection is a principal-agent relationship, where based on the implicit social contract, the state (the principal) gives licences to operate and partly delegates the duty to protect the environment to the operator (the agent) and the agent in case of imminent threat of environmental damage or environmental damage is required to, inter alia, take preventive and remedial action.

Purpose of the article: The paper mainly aims to examine, whether and to what extent standalone environmental insurance, also referred to as environmental impairment liability (EIL) insurance, may be used by authority (the principal) as an instrument of control of environmental damage in terms of the ELD caused by operators (the agent).

Research methods: The research methodology involves deductive reasoning and is based on a qualitative analysis of the literature (mainly on agency theory and environmental insurance), the ELD, national reports for Member States from the CEE countries, including ELD cases, industry reports, and documents on the environmental insurance market in the EU-CEE countries, and a comparative analysis of the features of available insurance solutions for environmental damage.

Main findings: The paper’s findings indicate that standalone environmental insurance, which supports the environmental risk management process and provides a cover for liabilities arising under the ELD, may be used to monitor the agency’s activity. However, despite the broader scope of standalone environmental insurance coverage and better alignment with ELD requirements than that of traditional property and casualty insurance, it is not a widely available and commonly used tool in selected CEE countries. A great deal of effort is therefore needed to develop these EIL insurance markets for cooperation between the government and the insurance market in this area.