First published in Insurance Day.

Anaerobic digestion – literally digestion without oxygen – is the biochemical process by which bacteria convert suitable organic waste material into biogas. This is clearly beneficial for farms, which, first, generate a lot of organic waste and, second, can use the resultant biogas to either generate electricity or heat energy. No surprise, then, that anaerobic digestion is catching on.

Current estimates suggest there are more than 540 active anaerobic digesters (ADs) in the UK and the number is rising. However, this is considerably fewer than in Germany, where the technology originated, which is reported to have approaching 9,000 units.

Germany’s boom in ADs took place in the early 2000s so the technology is well established; here, it is relatively new. British contractors are having to come to terms with installing new technologies and British farmers are having to learn how to improve the quality of the digestate – the semi-solid input material from which biogas is extracted. The UK’s recycling culture still lags behind that of its European neighbours.

When an AD is operated efficiently and is well maintained, it is a highly beneficial piece of technology. However, when an AD fails, it can fail catastrophically, resulting in significant first- and third-party claims, and, often, environmental damage which attracts the attention of the Environment Agency. The technology, therefore, represents a serious potential exposure for insurers.

Coverage issues

There are, however, a number of tricky coverage issues surrounding AD technology. Many of these issues stem from the fact a large number of the policy wordings in use today were drafted before the technology started to catch on in the UK and do not feature specific definitions and exclusions. It may be thought that standard power plant exclusions might apply to AD facilities, and in some cases those exclusions will be highly relevant. In most cases, however, the regulation of ADs is more akin to that seen in the waste management industry.

In the absence of a specific policy exclusion, damage to an AD could, potentially, fall for consideration under a first-party property policy. While damage caused by design- or construction-related issues would tend to be caught by standard first-party exclusions, damage flowing from burst and/or damaged pipes – a fairly common issue with such plants – could fall within the scope of first-party cover.

Insurers specifically intending to provide cover for ADs commonly do so under engineering policies. It might be assumed that cover under such policies would be more straightforward, the wordings being tailored to complex technologies.

However, the definition of “plant” needs to be considered carefully as it is subject to numerous exclusions that could potentially capture an AD, despite an insurers’ intention that it be covered. Consider, for example, exclusions applying to “concrete”, “masonry” and “enclosing structures” in the context of a concrete AD tank, whose purpose is to hold or enclose digestate.

Insurers who intend to cover ADs are often unaware of the exposure associated with their contents. The feedstock and the bacterial culture, which has to be added to trigger the digestion process, are both valuable. The cost of replacing the bacteria can be especially high as they do not simply grow on the waste spontaneously; the culture has to be bought from a specialist supplier, which can be both expensive and a lengthy process. In some instances, new bacterial cultures can take weeks or months to grow and be supplied. Whether or not this bacterial culture is insured is something that needs to be addressed early in the underwriting process.

When it comes to third-party claims, the failure of the tank and pipes are prime sources of concern. As a large tank full of liquid organic waste material, the potential for leakage is always front of mind. If seals or pipes fail, the liquid waste can contaminate land, including that of neighbouring properties, and find its way into water courses. While a gradually occurring leak will fall foul of most pollution conditions, a sudden failure resulting in a leak has the potential to trigger a policy response.

The contamination of a watercourse will, in most circumstances, trigger a response from the Environment Agency. In cases of serious contamination, the Environment Agency can impose significant fines as well as costly, mandatory remediation measures. Aside from the Environment Agency, the UK is also home to particularly litigious angling clubs who will use the law to zealously protect their sport.

The technology also gives rise to tricky issues in terms of custody and control exclusions. Although many ADs are situated on farms, it is not necessarily the case that the farmer will be both the owner and the operator. It is, for example, fairly common for an AD to be owned by an investment company, with the farmer having contractual responsibility for day-to-day operation, in return for a generous fee.

Sometimes, the plant will also undergo remote supervision from the overseas owner of the technology. Insurers need to have a clear understanding of which parties are interested in an AD project and their respective roles and responsibilities before issuing cover. Depending on an insured’s role in the operation of the plant, professional indemnity, as opposed to third-party legal liability cover, may be required.

ADs are here to stay and are set to grow in number – their benefits are too significant to be ignored, both financially and environmentally. The challenge for insurers is to be alive to the issues these facilities create and ensure their wordings are fit for purpose. After all, muck has been an integral part of farm life for hundreds of years and is not likely to disappear any time soon