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• Compulsory Insurance
• An Alternative Possibility
• A Compensation Fund

8. Blood from a stone
and bouncing cheques?

105 EVEN IF A PLAINTIFF SUCCEEDS in obtaining judgment against a defendant, or the state fines a liable defendant, the remedy is ineffective if the defendant does not have sufficient funds. Possible responses to this problem include:

• insurance;

• bonds; and

• a compensation fund.

Compulsory insurance

106 It has been suggested that private insurance cover should be required as a condition for securing ERMA consent for either experimentation or release of GMOs.[100] Without insurance, the person responsible may be unable to compensate those whom they have damaged and, thus, the liability regime would prove hollow. As noted by Balkin and Davis in Law of Torts:

If the principal aim of tort law is to provide compensation for many of the losses suffered through our modern life, that compensation will scarcely ever be effective unless the defendant is insured against his liability.[101]

107 In general, insurance removes the financial risks associated with the occurrence of events that are unpredictable for the individual but are predictable across the population as a whole. In a large pool of insured parties, the risk faced by each party can be reduced if the risks posed by each party are independent and uncorrelated.[102]

108 Genetically modified organism liability poses two fundamental problems for the insurance industry. First, not enough is known about the likelihood or possible magnitude of the damage posed by GMOs for insurers to be able to assess the level of risk. Thus, insurers cannot set efficient premiums, nor can they spread the risk by reinsurance.

109 Secondly, the risks posed by GMOs are unlikely to be independent and identically distributed. Rather there will likely be a cluster of associated claims. In such a situation the various risks will not be offsetting and the efficiency of insurance will be called into question.[103] This situation is especially difficult given the limited capacity of the New Zealand insurance market.

110 From helpful informal discussions with Mr Chris Ryan, Chief Executive of the Insurance Council of New Zealand, it appears that insurers would be unlikely to provide cover because of the inability to quantify the risk and the difficulty in assessing the magnitude of the liability.[104] Even without specific exclusion clauses, current insurance policies would be unlikely to cover damage caused by GMOs unless the risks of such projects had been explicitly disclosed to the insurer.

111 In submissions to the Royal Commission, the Commissioner for the Environment stated that genetic engineering is not normally listed as an insurance exclusion in the current New Zealand insurance market.[105] An industry spokesperson cited in the submissions suggested that in the future, when more is known, all liability cover for GMOs may become a specific exclusion, similar to nuclear risks. The Commissioner for the Environment submitted that, at present, it would be unlikely that insurers would intentionally take on the GMO liability risk without fully understanding the issues – “[t]here is a general feeling amongst the industry that the risks involved with GMOs in the environment are just too great for insurance companies to accept”.[106]

112 These statements echo those from insurers in other jurisdictions:

• The largest insurance company for the UK farming community, NFU Mutual, has been reported as stating that it will not insure against genetic contamination or damage.[107] A spokesperson for NFU is reported as saying that “these are a new and unknown quantity and until there is more scientific evidence and legal information it is impossible for any insurance company to provide cover”.[108]

• In its report on the insurance issue Swiss Re (a reinsurance company) drew attention to the unknown and unknowable risks of GE and commented:

The risk profile of genetic engineering is extremely diversified and very difficult to anticipate. There is no clear conception of the risks accepted, so how can genetic engineering risks be insured? ... It is currently not possible to give an answer to this question.[109]

• In 1999, the Insurance Council of Australia submitted to the Standing Committee on Primary Industries and Regional Services in Australia that:

[There] is a perception amongst insurers that genetic engineering is dangerous characterised by an extremely diversified risk profile of a new technology. General insurers are reluctant to accept incalculable risks where it is difficult to predict what loss scenarios will arise.[110]

113 In the United States there is little evidence of specific insurance for GMO-related liabilities because, principally, insurance is not required of agricultural operations growing genetically modified crops.[111]

114 However, there is evidence that in the United Kingdom insurance may be available for some, but not all, genetic modification projects. The Agriculture and Environment Biotechnology Commission (UK) discussed the availability of insurance with Mr Tim Humphreys, Association of British Insurers.[112] Mr Humphreys stated that a niche market was gradually developing that covered environmental damage, including that caused by GMOs. However, Mr Humphreys stated that the insurance position would be very different if the United Kingdom moved from research to commercial growing of GMOs, because this would no longer be a niche insurance market but potentially a substantial one, and such insurance would require a reinsurance market larger than the one that exits currently.

115 In summary, it seems unlikely that insurance would be available for all GMO development and use. Instead, it may be that some projects will be able to obtain cover (such as contained laboratory experiments) whilst others will not (such as general release of a GMO).[113] Thus, requiring compulsory insurance is likely to block the approval of some projects that might otherwise have received ERMA consent.

116 Some commentators argue that if the insurance industry is not prepared to insure a project, this may be a good indication that the project is too risky and should not be approved. Thus, requiring compulsory insurance would provide a “market” check on ERMA’s classification procedures.[114] The argument continues with the observation that rejecting compulsory insurance without explicitly proposing who will bear the risk will lead to socialisation of the risk by default (that is, individuals will suffer uncompensated damage).[115] Thus, the argument concludes, uninsurable risks should not be authorised unless government agrees specifically to provide the balance of any liability cover over and above what the GMO developer can secure in the market.

117 Another possibility is that the insurance industry may be prepared to insure GMO projects if the liability of those involved were capped, either with the government accepting liability for any damage suffered over the level of the cap, or such additional loss lying where it falls.[116] Although this arrangement would not help the insurance industry estimate appropriate premium levels, it would ensure they were only exposed to claims of limited size. For example, in the United States the liability of individual nuclear power plants is capped at US$200 million. If an accident occurs at any plant causing damage exceeding this amount, then all reactor operators are each required to contribute US$88 million, creating a fund totalling around US$9.3 billion.[117] However, even under this scheme, the maximum liability of the nuclear power plants is less than 2 per cent of the estimated financial cost of a catastrophic accident.[118]

118 The capping of liability could help encourage the insurance industry in New Zealand to cover GMOs. However, because of the unpredictable nature of GMO damage it would be difficult to assess the level at which liability should be capped. Further, capping liability would reduce the application of the “polluter pays” principle.

119 If insurance can be obtained two further problems emerge. First, compulsory insurance may reduce incentives to install safety precautions because it is the insurer who will have to pay out if damage is caused and not the company. Some incentive will be created if premiums are structured to reflect an assessment of the safety mechanisms in place.[119] However, some commentators argue that insured defendants are unlikely to be greatly deterred by the prospect that, if there is damage caused, they will lose a no-claims bonus or face an increase of premium on renewal of their policies.[120] Regardless, insurance would increase the likelihood of adequate compensation for the plaintiff, and such benefit may well outweigh this incentive problem.[121]

120 Secondly, the Royal Commission noted that, even if insurance could be obtained, the substantial premiums would act as a penalty to GMO producers, deterring them from investing in genetic modification.[122] Others respond that requiring insurance is not a penalty, it simply means that the risks of genetic modification remain with the industry itself.[123]

Conclusion

121 Given the current stage of the genetic modification industry, full insurance is unlikely to be available for all projects that might be approved by ERMA. Insurers are likely to be deterred by the absence of information on which sensible underwriting decisions can be made (lack of claims history, uncertainty of future claims). As the genetic modification industry develops and experience is gained, insurance may become more available, but because of the pace of the biotechnology industry, such delay may often be tantamount to a prohibition.[124] Therefore, requiring compulsory insurance is likely to block some projects that would otherwise have received ERMA consent.

122 Compulsory insurance does not deal with some of the earlier problems identified with GMO liability:

• There may be a considerable period of time between the act or omission on which the claim is based and the claim being made. The insured company may no longer exist or have ceased paying premiums. It would be difficult to create a regime guaranteeing payment under insurance policies years after the event. Few insurance companies would provide ongoing cover for a company that has ceased to operate and that may well have become insolvent. Similarly, the insurance company itself may no longer exist.

• The insurance industry is unlikely to be able to cover the liability if catastrophic damage is suffered.[125] There is also the possibility of irreversible or incompensable loss being suffered.

123 If there is a desire for the genetic modification industry to develop, at least some projects might have to proceed without insurance. However, this would mean that in the event that damage is suffered, a plaintiff may be left without an adequate remedy if the defendant does not have sufficient funds. It is a policy issue as to whether this is acceptable and, if not, who should take responsibility if such loss is suffered.

BONDS

124 Bonds provide another means of ensuring that those involved in the genetic modification industry have access to funds to cover damage claims against them.

125 The simplest form of performance bond requires the potentially liable party to deposit a specified amount of money for the period that the risk is expected to remain real. In the event of damage some or all of the fund would be forfeited. The rationale is that having to provide such a bond would create incentives for the GMO developer to act carefully, provide a check on the financial security of the developer involved,[126] and create a fund from which to meet any damage claims.

126 Currently, resource consents under the RMA may impose conditions requiring that:

• a bond be given in respect of the performance of any one or more conditions of the consent;

• a financial contribution be made; or

• works or services be provided to restore a site.[127]

127 The Ministry for the Environment, in submissions to the Royal Commission, proposed amending the RMA to provide for the bonds to be extended beyond the period of the consent order so as to deal with problems arising later. Similarly, the Ministry for the Environment proposed that bonds should be able to be imposed on any approval for developing or trialling a release of GMOs.[128]

128 Problems with any bond scheme include:

• The bond would have to be retained until it was assessed that the GMO posed no danger. Because of the possible time lapse before damage caused by GMOs is discovered, the bond may act more as a fee than as a bond in the true sense.

• Accurately setting the amount of the bond. This will be difficult given the lack of information about levels of risk and likely outcomes: it is hard to set the level of the bond without knowing the likelihood or scale of potential damages. The setting of the bond at too high an amount would penalise the GMO developer, setting the bond too low would provide insufficient cover.

• The Royal Commission concluded that the substantial premiums involved would make any required bond a penalty to GMO developers.[129] The appropriateness of the term “penalty” has been discussed above in relation to insurance (paragraph 120). This balance, between making GMO developers responsible for the potential costs of genetic modification and making the market attractive to encourage investment and development, is a policy decision that has already been noted.

• If bonds were required they would most likely be underwritten by an insurance company.[130] As discussed above in relation to insurance, it is questionable whether insurers would be prepared to issue bonds involving all risks from genetic modification.

• If insurers are not prepared to underwrite bonds, a GMO producer may be required to put up a substantial amount of money for an indefinite period of time. This may not be feasible, with the result that requiring a bond may block some projects that would otherwise have received ERMA consent.

Conclusion

129 The requirement of performance bonds is another possibility for ensuring that GMO developers have some funds available for compensating damage caused. A real difficulty arises, however, in attempting to set a level that is realistic in this uncertain area. The level of the bond set to ensure compensation for all of those who suffer injury may stifle the development of potentially beneficial scientific processes.

130 In addition:

• because of the likely time lapse before damage caused by GMOs is discovered, the bond may act as a fee; and

• any bond is likely to be insufficient in the face of catastrophic or irreversible damage.

An alternative possibility

131 Rather than requiring compulsory insurance or performance bonds, another method of attempting to ensure that potential defendants are in a position to meet claims would be to require or authorise ERMA, in giving approval to new organisms, to treat as a factor in arriving at its decision the likely ability of the applicant to meet claims. The Environmental Risk Management Authority could have a discretion to require insurance or a bond payment for those cases where the risk is suitably uncertain but still capable of satisfying the purpose of the HSNO Act.[131] This is the position in Australia under the Gene Technology Act 2000.[132] As with earlier options, this would not address the difficulties relating to time lapse and catastrophic or irreversible damage.

A compensation fund

132 To be compensated under the current common law tort regime, the potential plaintiff needs to prove damage caused by an existing defendant with the means to pay for any claim. A common difficulty with the insurance and bond schemes is that, because of the possible time lapse, damage may not be discovered until after the responsible party has ceased to exist.

133 If the real concern is ensuring that damaged parties are compensated it may be more efficient to create a compensation fund into which all companies involved with producing GMOs would be legally bound to contribute.[133] The compensation fund could be structured in a number of ways, that include:

• operating as a private insurance pool. GMO producers would contribute to the fund from which compensation could be paid if a GMO producer were found liable but had insufficient funds; or

• being used to rectify damage caused. The state would then take action against individual defendants to repay the funds used (like the “Superfund” discussed in the next paragraph).

134 The Royal Commission report does not discuss the possibility of a compensation fund in great detail, but does not appear to support it. It refers to the United States “Superfund”, a trust fund administered by the Environmental Protection Agency to provide funds for the cleanup of chemical waste.[134] The Royal Commission appeared unattracted to such a scheme on the basis of claims that, in practice, the Superfund has “result[ed] in lengthy and expensive litigation, delays and inefficiency in clean ups, waste and even fraud ...”.[135] An additional problem is that the Superfund is underfunded. In 1991, the fund contained US$8.5 billion, even though the estimated potential demand ranged from at least US$17–24 billion to as high as US$700 billion.[136]

135 Problems of inefficiency may be generally associated with large pooled compensation funds and thus a genetic modification compensation fund would suffer similar problems. Likewise, even a large fund may be inadequate in the face of catastrophic or widespread damage from GMOs.

136 Another example is the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage (1971), which establishes a fund to compensate victims of oil pollution. The Fund provides compensation (with a maximum limit per incident) where:[137]

• No liability is triggered under the Brussels Convention.[138]

• A shipowner is unable to meet their obligations under the Brussels Convention.

• The damage caused exceeds the liability limit in the Brussels Convention.

This could provide a model for a GMO compensation fund, although there are limits to the analogy. For example, it may not be as easy to identify an individual GMO “incident” as it is to identify an oil pollution “incident”.

137 An additional difficulty with a compensation fund is that without knowing the likely consequences of GMO development and levels of associated risks, it is difficult to assess the amount of the levy that should be paid into such a fund, especially if the contribution of each GMO developer is to be based on the risk that each individual project poses. Unless the financing of funds is proportionate to actual risk, it fails to create efficient incentives for installing preventive measures. But, if proportionate financing is possible (that is, where the risks are known or there is clear causation) there is less need for a joint compensation fund.[139]

138 Companies are likely to be resistant to a compensation fund because it might result in them paying large amounts of money to help rectify damage caused by another company (and perhaps a competitor). This is inequitable and conflicts with the “polluter pays” principle. It would also mean that “clean” companies would pay twice, once when creating effective preventive measures, and again when paying into the fund to compensate for companies with less effective preventive regimes. This would create a disincentive for prevention.[140]

Conclusion

139 A compensation fund would ensure that money was available in the event of damage that could not be compensated under the usual tort regime. There are, however, likely to be problems of inefficiency and difficulty in setting the size of the compensation pool. The requirement of such a levy may act as a disincentive to investment and development in this area.