New proposed German standard insurance terms

The German Association of Insurers (Gesamtverband der Deutschen Versicherungswirtschaft e.V. - GDV) has issued new contractual clauses to its non-binding model conditions clauses. The aim is to better recognise, calculate, and limit the risk of per- and polyfluorinated alkyl substances – known as PFAS – to a commercially reasonable level. While this clause can be added to business and product liability insurance as well as environmental risk insurance if needed and is not a mandatory requirement, there is a likelihood the exclusion will become a standard clause in the German insurance market.

To this day, many PFAS compounds are considered indispensable. They are found in countless products, from coated frying pans to functional clothing, from foam used by fire brigades to medical implants; PFAS are also used in the production of batteries and photovoltaic panels. However, during manufacturing and use, the chemicals can be released and enter the environment (similar to asbestos, one substance and cause of many insurance claims and litigation PFAs are often compared to).

One other issue of PFAS is that they accumulate in plants, soil, water, animals, and humans. They are difficult to break down in any environment. Various PFAS compounds are considered potentially carcinogenic and harmful to fertility and the immune system in humans.

The intention is that insurers can initially exclude all damages caused by these so called “forever chemicals”. As a next step, the GDV envisages that insurers should – and the suggested clause provides this option - specifically agree with customers under what conditions and to what extent damages caused by certain PFAS compounds can be insured.

PFAS repel water, dirt, grease, and oil and withstand high heat as well as cold. However, since many PFAS compounds are also considered potentially harmful to health, the handling of the more than 10,000 compounds has been controversial for years. The industry is resisting a blanket ban proposed by the EU. Instead, manufacturers are demanding that the various PFAS groups be considered separately: The question is which compounds are proven to be dangerous to humans and the environment? And in which applications? And when and where can certain PFAS be used at a tolerable risk level? Moreover, it is questionable whether there is any realistic basis for considering different PFAS compounds separately in view of the fact that their defining common characteristic – a fluorinated carbon chain that is resistant to degradation – is the very thing that is thought to be harmful to humans and the environment.

The insurance industry is one important stakeholder interested in the answers to these questions. To prepare for corresponding risk dialogues, the GDV is developing a non-binding guide alongside the proposed PFAS clause, which is intended to facilitate the scientific and legal classification of risks.

While the aim is to allow for continued insurance for risks arising from PFAS, the initial consequence of the new clause is the exclusion of all cover. One concern for the insureds may be whether courts and the insurance providers will apply the legal consequences of the clause even in cases where it has not (yet) been included in the insurance documentation and therefore the insurance contract.

However, after careful consideration, the approach by the GDV should have advantages for both sides: For manufacturers and users of PFAS, the dangers, which have often been perceived only abstractly, come into focus and become visible. In the exchange with insurers, users and manufacturers will have to engage more intensively with their risks and consider ways to mitigate the dangers resulting from PFAS. The GDV hopes the PFAS clause could facilitate real alternatives to any dangerous forms of forever chemicals more quickly, by providing a reason for research and development and by providing certainty to the users and producers that there may be a lack of (or only higher priced) insurance concerning the associated risks.

The launch of the clause has already sparked criticism by brokers and other industry organisations. However, as with other examples of standard clauses suggested by the GDV, it is envisaged the PFAS exclusion will become market standard practise in German insurance contracts.

What do insureds including producers and users of PFAS need to do? We advise to check your renewal terms of your insurance contract. It is likely that German insurers will introduce the standard exclusion. If so, you should negotiate the risk to be included specifically. This may require negotiation as well as it may have premium implications.

It will be interesting to see, in due course, how widely the standard exclusion is construed. Since there is recognition across the insurance industry of the substantial risk of PFAS exposure, and a standard exclusion is to be adopted in recognition of this, it may be that a relatively wide interpretation of the exclusion will be adopted, in favour of insurers.