Carbon insurance liability
Geoff Manks, New Zealand Tree Grower February 2012.
You may be a forester growing trees for the purpose of trading your carbon credits, or you may provide professional advice to those involved in carbon forestry, or carry out silviculture work on plantations. With the emergence of carbon forestry as a viable significant business, there is the need to stop and examine the exposures and liabilities surrounding these activities.
Let us broadly categorise the risks associated with the above activities as follows −
- The surrender liability attaching to forest owners where NZUs have been claimed
- Contractual obligations on forest owners to supply NZUs to a third party
- Loss of income following a loss of trees
- Financial loss suffered by other people as a result of errors or omissions in advice provided to them
- Legal liability arising from damage to other people’s property.
The first three points are addressable by forest owners getting quality advice on insurance and setting up a programme to cover unforeseen events such as fire, wind, earthquake or landslip. This issue was covered in the November 2010 article in the Tree Grower. However the cumulative value accruing with the surrender liability, along with the loss of potential future earnings, means the true economic values attaching to carbon forests can escalate rapidly.
If we look at the fourth and fifth points above, these are as financially important as the others, yet are probably given the least thought by forest owners when instigating risk management safeguards. So it is worth summarising these so you can be more informed.
Professional indemnity insurance
Professional indemnity provides cover against errors or omissions in the provision of professional advice which results in a financial loss to someone else. We know that carbon foresters − any forester growing trees where they claim and sell credits − can potentially gain substantial financial rewards from their forests. Given that your forest currently represents a different financial proposition than that of just waiting for a harvest return, there are some things you may wish to review −
- Insurance - If you previously did not carry any insurance cover, as there are now some statutory obligations on you, it may be worth reviewing this position
- Legal - The structure of forest rights, legal review of management contracts and agreements for sale purchase
- Accounting - Asset values, liabilities and income management
- Forestry consultancy - Measurement, ETS registration and returns, property and asset valuations, soil and topography reports for suitability of new plantings
- Real estate agents - Disclosure of carbon activity from property and representations of suitable land activities. The point about highlighting the above professions and services is that the failure of who you engage to advise and provide you with suitably qualified answers could result in a financial loss to you if the advice was not of a high standard. Therefore it is relevant for you to question the professional advisor. Do they carry professional indemnity insurance? If so what is the policy limit? Has their professional indemnity carrier been informed they provide advice in the carbon credit space?
So who you use to provide professional services in the carbon credit space does matter. They should be skilled and knowledgeable in the area of carbon forestry. For example, when dealing with a sale and purchase of land with forestry. Not all lawyers will be proficient in understanding the obligations on land owners and the necessary steps to ensure a purchaser is not lumbered with any liability from the vendor’s previous carbon credit trading activity. It will pay to get expert advice when it comes to carbon forestry issues.
Public liability insurance
Unlike professional indemnity, contractors’ public liability provides cover for legal liability arising from someone’s actions resulting in loss or damage to another person’s property. So as a land and forest owner, you have a potential legal liability to others should loss or damage arise from your actions or property. However it is likely that those most exposed to this are the likes of contractors involved in working on or in your forest, carrying out spraying, thinning, pruning, planting, clearing and construction.
An example of a contractor exposure may be where trees are sprayed, but the batch used for spraying contained the wrong chemicals, or unbalanced concentration of chemicals, resulting in many trees being badly affected or trees dying. In this instance, the financial loss and liability will most probably be to the forest owner’s account.
It is therefore important that you preserve your chances of recovering the significant costs and liabilities incurred by ensuring the contractor carries suitable public liability insurance. In addition to the costs of your direct loss, the government is not going to be sympathetic to hear you cannot meet any surrender obligations brought about by the uninsured actions of the contractor employed.
Public liability – Forest & Rural Fires Act
This is taken as an extension under a public liability insurance policy and is a must for all land owners and contractors working on your property. Section 43 of the Forest and Rural Fires Act stipulates in that recovery of all fire fighting and associated costs can be made from the person responsible.
This is where ‘property has wholly or partially been destroyed or damaged by or safeguarded from an outbreak of fire’. Such costs can include ‘control, restriction, suppression or extinction of the fire and may be recovered’. The Act also allows ‘any loss in, or diminution of, value of that property: and any consequential loss or damage not too remote by law, may be recovered from that person namely the owner of the property’.
In order to be liable for all costs, the person need only be responsible for the outbreak or it is established that they caused it. You do not need to be negligent in order to be legally liable. In other words, even with a fire permit, having taken all reasonable precautions and the spread being outside your control, it is most probable that costs would be recovered against you. Given that statistically 98 per cent of land is deemed to fall under the Act, it is almost a certainty that all readers of this article have some exposure and liability.
Examples of costs
A large peat fire in 2009 around Kaimaumau took over a month to put out at considerable expense of over $1 million. Early in 2010, the mount Allen forest fire outside Dunedin was one of the largest ever. This was started by a contractor and burned over 800 hectares, taking several weeks to extinguish. Fire fighting costs were well in excess of $1 million.
In February 2010 the Whitireia Park Fire in Wellington was deliberately started from dry grass on a fence line in a carpark. The fire swept through 75 hectares of gorse and bush. With five helicopters emptying monsoon buckets at a cost of $90,000, along with 80 fire fighters, costs totalled more than $200,000, even though it was extinguished in one day.
In short, if you light a fire to clear scrub or have a picnic, then you will be liable for all costs if the fire escapes, regardless of whether you obtained a permit for the fire or if the fire spread due to factors outside your control. If a fire starts accidentally you will be liable if it can be demonstrated you should have known there was a risk.
Generally a public liability policy will not cover fines or penalties imposed, but should cover all costs recovered against you by the Fire Service, or costs claimed anyone else in order to protect their property from fire.
As highlighted above, it is again important for you to check that anyone coming on to your property has public liability insurance in place, including the extension for forest and rural fires. Do not hesitate to ask if they carry public liability insurance, what the policy limit is and if they have the Forest & Rural Fires Act extension.
None of the issues mentioned should prevent you working with any service provider, or trading your carbon credits. However there are some fundamental precautions that should be taken, as a matter of good practice
- Does the service provider have the right skills and knowledge as the better informed and skilful they are the less likely of a problem occurring?
- Are there any indications the service provider has had a questionable history resulting in property damage or loss? You can reduce the chance by making some general enquiries.
- Does the service provider carry liability insurance, and are the limits sufficient for your activity and their exposure?
- Having no insurance cover is not an option.
Requiring your contractors and service professionals to have general liability and professional indemnity insurance is not an intrusion but good business. You could expect that the majority of contractors or service providers already carry liability insurance, so it may be more of an issue to ensure the limits of cover are satisfactory and they are with a financially sound insurance company.