Reducing CO2 emissions in the coming decades, without suffocating economic growth, is a priority of the industrialized world in general and power generators in particular. Each year, measurements show an increase in global atmospheric CO2 concentrations thought to cause an increase in overall global temperatures. Much has been written about these observations, and experts continue to debate their possible linkage and, more importantly, their consequences.

Regardless of which side of the debate you are on, there is general agreement that the new U.S. administration will likely propose some sort of carbon limits. Those limits are usually discussed in terms of either a carbon tax or quantitative caps that will ratchet down in future years (presumably, with some type of allowance-trading mechanism). Either approach will have significant impact on the ability of the insurance industry to offer economic insurance options to the power industry. Details will follow shortly.

Carbon Connection

Many ideas are emerging for reducing atmospheric CO2, and they generally fall into the following categories:

  • Use energy more efficiently and, failing that, just use less energy.
  • Use less hydrocarbon-based energy (coal, oil, natural gas), shifting to renewables (wind, solar, geothermal, etc.) and/or nuclear.
  • Continue the use of hydrocarbon-based energy but shift CO2 emissions from the atmosphere to somewhere else.

It should be noted that all of these options will be very costly to implement, either directly or indirectly. No one option can be regarded as a “silver bullet,” so an optimal response to CO2 will most likely blend elements of each. Also, due to the significant costs and uncertainties of carbon capture and sequestration (CCS) technologies, expect the pace of this technology’s introduction to be set by government investment or incentives (the carrot) and by the new carbon rules mentioned above (the stick).

CO2 Hide and Go Seek

Roughly half of the electric power generated in the U.S. today is fueled by coal, the most significant hydrocarbon CO2 source, and coal and natural gas together fuel about 70% of U.S. power generation. Accordingly, it seems likely that even in a carbon-constrained future, coal and natural gas will continue to be used in significant quantities for many decades.

If the resulting CO2 cannot be emitted into the atmosphere, it may need to be captured at the plant and then injected somewhere into the earth. The leading candidates for “somewhere else” are the rock formations that underlie the earth’s surface—that’s the sequestration portion of the technology package. Current geologies that are candidates for the underground storage of CO2 vary, depending on the region, and include saline aquifers, depleted hydrocarbon reservoirs, and unmineable coal seams.

Enhanced oil/gas recovery (EOR/EGR) could be expanded by using CO2 in the production of difficult-to-tap hydrocarbon wells. EOR/EGR provides the most concrete example of how CCS can become a profitable industry, as the CO2 off-takers could use the greenhouse gas to produce oil and natural gas in arduous production environments.

CO2 has remained in the earth for millions of years in various deposits, as has oil and natural gas. Experiments with the injection of CO2 into selected rock formations have generally been very successful, although these projects are of “pilot plant scale” when compared to the volumes of CO2 emitted by a mid-size coal-fired power plant. The best-known operating projects are the Weyburn Project, which captures CO2 at a gasification plant in North Dakota and then pipes it to Weyburn, in southeast Saskatchewan, for EOR; Sleipner, injecting CO2 under the seabed in the North Sea; and the Otway Project, which transports, compresses, and stores 200,000 tons of CO2 each year in Victoria Province, Australia.

Underwriting the Risk

In a CCS-embracing future, power generators and other point-source generators of large CO2 volumes (cement plants, fertilizer plants, and the like) will be faced with a number of new and challenging risks when dealing with CO2. These include regulatory and credit risks, directors and officers liability, and more.

For instance, many CCS projects will use government bonds (such as clean renewable energy bonds, or CREBs) to finance their projects. These bonds typically allow a tax write-off as long as the debtor complies with the carbon-reduction requirements. If a significant release of sequestered carbon were to occur, there would be a risk that the CCS injector would be exposed to incompliance of regulation and bond requirements, thus disallowing the tax write-off because the injector company did not reduce its carbon emissions.

Additionally, there will be the opportunity for the insurance of carbon credits and tax-indemnity insurance surrounding the various government regulations to be set in place.

Types of Insurance Required

Future CCS project operators likely will seek property, liability, and other insurance to respond to these risks, and it is reasonable to expect that the initial response of insurers will be caution, because much uncertainty surrounds new activities. The design and operation of early sequestration projects will receive close underwriting scrutiny, and operators will find that insurance is easier to procure if they adhere to “best practice” guidelines.

Currently, the scope of insurance products applicable to a CCS practitioner includes general liability, property damage (first party), business interruption, builders risk, physical damage, environmental/pollution liability, professional liability, control of well, tax, and regulatory insurance. Property insurance for CCS projects from commercial insurers is reasonably available, and liability insurance for carbon capture and transportation will not be difficult to obtain. However, liability insurance during CO2 injection could be more difficult, even if it is purchased from year to year; long-term (10 years and longer), open-ended liability coverage post-closure does not appear to be available at this time.

The core of the liability insurance will be indemnification for financial harm as a result of an insured peril. In relation to CCS, insured perils would be property damage and bodily injury as a result of CCS operations—for example, if a pipe ruptured and CO2 escaped, causing someone to suffer CO2 poisoning.

Each insurer’s insurance product differs in its scope of coverage and contains its own exclusions and conditions. Many of these exclusions and conditions need to be discussed and resolved in order to provide coverage for a CCS project. Most excess liability policies either restrict or exclude pollution coverage altogether. That being said, even though CO2 is not specifically defined as a “pollutant” in policies, insurers would likely deny a claim for CCS under a standard excess liability policy because the policy wording was written with no intent to cover such an activity. Part of this is due to the fact that insurers have not underwritten these projects before and CCS was never contemplated during creation of the current suite of insurance products.

New CCS-ready insurance products are malleable and works-in-progress. However, it is important to note that general liability and third-party liability insurance is available for companies in this industry. In order for insurers to provide a response, applicants will need to complete a detailed submission, consisting of available reports, including 2D/3D seismic studies, phase 1 and 2 environmental reports, and other data pertinent to site selection. Further information on monitoring and operations, including knowledge of the contractor, will be necessary to properly price the insurance.

CCS and Insurance Regulation

While the private sector is looking for the federal and state legislatures to determine a liability framework, the government does not have to accept all the risk. Previous paradigms of public and private sector insurance include the Price-Anderson Act and the Terrorism Risk Insurance Act. These models essentially lay out the temporal and financial framework in which insurance companies operate.

In the 1950s, the U.S. recognized a need for nuclear power. However, the main threat to the development of nuclear power was the liability associated with a catastrophic event, whether in the form of a meltdown or a major contamination. The power generation industry was unwilling to accept all of the risk for this potentially devastating liability, and insurance for such a liability was untested and would have been too expensive to make a project economically feasible. Recognizing this roadblock, the U.S. Congress passed the Price-Anderson Act.

The Price-Anderson Act set an aggregate cap on liability (initially $10 billion). Once this cap is broken, in the event of a major nuclear event, the government would serve as a “backstop” to indemnify the claimants. The current model of public/private interaction through the use of mutual insurance companies is a suitable answer to the liability associated with nuclear power.

Another, more recent example of government indemnification for the insurance industry is the Terrorism Risk Insurance Act (TRIA). After the terrorist attacks on September 11, 2001, terrorism insurance policyholders saw their premiums skyrocket. The size and proven uncertainty of a terrorism event caused terrorism insurance capacity to shrink and demand to surge. Thus, the cost of purchasing such capacity rose dramatically.

As lenders, power generation regulators, and other stakeholders demanded terrorism insurance, the federal government stepped in and set up TRIA. Like Price-Anderson, it set an industry-wide cap that the insurance industry must surpass. Once this number is triggered, the government would serve as “re-insurer” to the insurance industry, indemnifying claimants for all losses in excess of the cap. So, for instance, in the first year, 2002, the trigger was $10 billion. If a $20 billion certified (by the secretary of state) terrorist event occurred, the insurance industry would pay the first $10 billion and then seek government funds to pay the remaining $10 billion. Once they knew the worst-case scenario for a policy period, insurers were able to expand capacity and offer terrorism insurance at affordable rates.

Insurance Market Climate

For new CCS projects, insurers are operating on a “see how it goes basis,” performing extensive due diligence via internal task forces. Insurers are looking to provide financial solutions to their clients and also use this as an opportunity to grow their product base in ways their competitors may not.

The largest mutual insurer to the utility industry, AEGIS, a general liability insurance company, has indicated the availability of “bolt-on” solutions via endorsements to its excess liability insurance policies. Though AEGIS and EIM, the industry mutuals serving the utility industry, are unsurpassed in their casualty product offering (including hard-to-find coverage such as failure to supply and unaggregated limits of insurance), they are maintaining a posture of conservatively preserving capital. This is because their primary fiduciary duty is to protect their customer/owner’s surplus.

Commercial insurers can act in more opportunistic modes, as they are encumbered only by the orchestration of underwriting and reinsurance. Their growth can occur by offering new insurance products. This has created an opportunity for insurers—including Zurich, AIG, ACE, and XL—to gain an inlet into this lucrative market.

For instance, if ACE can provide better and/or cheaper CCS liability insurance than a company’s current insurer, ACE has created an advantage and could potentially win the business. As CCS projects develop, those insurers willing to implement an opportunistic strategy and target utilities planning CCS projects can gain footholds into the seemingly impermeable utility casualty insurance market.

More market competition is always beneficial. By having more suppliers of CCS insurance, the insured can look forward to faster broadening of coverage and price reduction. It also creates greater capacity, and if excess markets in Bermuda and London can agree on a similar form, uniform coverage programs could exist for insureds into the $150 million-plus limit range.

Commercial-Scale Project Will Benefit

Further advances in insurance options for CCS projects will inevitably occur as more projects are constructed and reach full-scale operation. Insurers will be paying close attention to permitting procedures and will encourage lobbying efforts for legislation favorable to the industry.

A federal, legal framework will benefit not only insurers but individual states and project developers. This is important because of the expected cross-border, migratory nature of the CO2 while in storage. It would also greatly assist in lowering the price of CCS liability insurance, as the underwriting efforts and legal costs associated with coordinating differing statutory regulation could be avoided.

Insurance companies have some of the most efficient mechanisms to develop solutions to risks. The key for a broker is drawing the boundaries around a risk and allowing the underwriter to formalize the insurance of that risk. In the past 18 months, there has been remarkable acceleration in insurance product development attributed to the efforts of innovative insurers and foresighted project developers willing to spend time to educate others. As a testament to this, and an encouraging word to project developers concerned with their potential liabilities, CCS liability insurance is increasingly available to assist in the large-scale development of a necessary and potentially profitable industry.

—Patrick Maguire ( is an insurance broker for the Energy & Marine Division of McGriff, Seibels & Williams Inc.