In the aftermath of the disaster: liability and compensation mechanisms as tools to reduce disaster risks.

Author:Faure, Michael G.
 
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HIGHLIGHT:

A variety of instruments can be used to compensate victims in the aftermath of a disaster. This article argues that it is important to structure ex post compensation mechanisms in such a way that they also provide incentives for disaster risk reduction. To that end, the article analyzes the ability of a variety of instruments to provide incentives for disaster risk reduction. Further, it argues that where an operator who contributed to the disaster risk can be identified, liability rules can be employed to provide incentives to reduce the risk of disaster. In the case of natural disasters, first-party insurance may be an appropriate tool to provide potential victims with incentives to reduce disaster risk.

In addition to analyzing the theoretical potential of various instruments to contribute to disaster risk reduction, this article provides many examples that show which instruments are used in practice. It also provides a critical analysis of international environmental agreements, arguing that the liability rules used in those agreements show particular features that may reduce their ability to contribute to disaster risk reduction. It therefore argues that there is substantial scope for policy change, more particularly in international environmental agreements. By making a smarter use of liability rules and having risk-dependent contributions to compensation mechanisms, the liability and compensation schemes in international environmental agreements could better contribute to disaster risk reduction than is currently the case.

Introduction

There is a strong demand for compensation in the aftermath of a disaster. The pressure on politicians to provide some form of compensation is especially strong. International environmental law and domestic law both include a variety of liability and compensation mechanisms for victims.

Liability rules are frequently used in the case of manmade or technological disasters. In those cases, a tortfeasor can usually be identified and, to the extent that tortfeasor is solvent, held liable to compensate the victims. Because liability rules will usually not be available in cases of natural disasters, other compensation mechanisms--such as insurance and compensation funds--are used in those instances. Moreover, many international conventions employ hybrid forms of compensation. (n1)

This Article focuses on the extent to which these various liability and compensation schemes can reduce disaster risks. Economic analysis and environmental law conventions show that an ex post compensation mechanism may have positive or negative effects on the ex ante incentives to reduce disaster risks. Depending upon their specific design, liability rules may provide incentives to tortfeasors to invest in risk reduction mechanisms. However, those positive incentive effects are less likely in the case of government financed funds or compensation schemes.

This Article will therefore primarily explore the interrelationship between liability and compensation mechanisms, on the one hand, and their ability to reduce disaster risks on the other. A variety of available liability and compensation mechanisms will be reviewed--specifically liability rules, ex post government compensation, compensation funds, and insurance. Each of these mechanisms' ability to generate incentives for disaster reduction will be critically discussed. Moreover, examples of how these particular mechanisms are applied in international environmental law or in domestic law will be provided. The Article will argue that many of the international environmental agreements dealing with liability and compensation do not sufficiently contribute to disaster risk reduction. What is worse, some of those international conventions even create substantial perverse effects. As the Article will show, domestic law often provides better incentives for disaster risk reduction and better protection to victims. (n2) Hence, it will also be shown that there is considerable scope for improving international conventions by learning from some examples of domestic law and from the economic approach to liability and compensation.

Following this introduction, Part II will sketch the starting points for the analysis. First, the Article will illustrate how liability and compensation mechanisms can reduce disaster risks in theory; next, it will discuss how incentives for risk mitigation can be provided. In addition, Part II will also outline which instruments of international environmental law will be further analyzed. In particular, this section will explain that the most prominent instruments regarding liability and compensation can be found in the nuclear accidents and marine oil pollution international conventions; these will therefore constitute the core of the [*99] analysis. Having outlined the starting points in Part II, Part III will focus on liability rules and solvency guarantees. The potential, conditions, and limits of liability rules, as well as their prevalence in international environmental law, will be outlined and followed by a critical analysis. Part IV will focus on additional compensation mechanisms that take place either in a rather informal way (generosity as a form of charity) or through more formal payments, via compensation funds or governments stepping in and providing additional layers of compensation. Different forms of the latter can be found in international environmental agreements. Part V will focus on an instrument which is not explicitly present in international environmental law, but which plays an important role in domestic law by mitigating risks particularly related to natural disasters: First-party insurance for victims. This Part of the Article will explore the extent to which experience with models of first-party insurance compensation can provide interesting lessons for liability and compensation regimes in future instruments of international environmental law. Part VI will compare the different instruments that have been observed and discussed and consider how liability and compensation instruments in international environmental law have been increasingly improved. This Part will also argue that there is significant potential to improve the contents of the international conventions so as to more effectively contribute to disaster risk reduction. Part VII concludes the analysis.

  1. Starting Points and Background

    A wide variety of legal rules, both in domestic as well as international law, focus on regulating the different phases of a disaster. (n3) Legal rules can focus on three different phases of a disaster: Prevention and precaution, relief efforts and recovery efforts. (n4) Mileti refers to these three different phases of disaster efforts as "preparedness, response and recovery." This Article focuses exclusively on the efforts made in the aftermath of the disaster and, more specifically, on the instruments that are available to provide compensation to victims. The three phases of disaster efforts mutually influence each other. This is especially the case for compensation mechanisms, which may have a positive or negative influence on the incentives to invest ex ante in preventive efforts. (n5) The crucial question in this Article is therefore how instruments applied in the aftermath of the disaster, in particular liability and other compensation mechanisms, can be constructed in such a way as to provide optimal incentives ex ante for disaster mitigation. The question of which instrument may be optimal under which circumstances depends to some extent on the nature of the disaster, but also on the ability of the instrument to expose those who create the risk of disasters (e.g., operators of hazardous facilities) to the damage in case disaster strikes. International environmental law offers relatively few compensation mechanisms. Those that it does offer focus on nuclear [*100] accidents and marine pollution. Most instruments in international environmental law, however, focus on technological risks rather than on natural catastrophes. This Article will follow a law and economics approach to determine optimal instruments of compensation in the view of their effects on disaster risk reduction, since law and economics has paid a lot of attention to the question of how different instruments can provide incentives for prevention.

    1. Technological Versus Natural Disasters

      The question of which instruments can be adequately applied to provide ex post compensation to victims as well as ex ante incentives for disaster mitigation depends to some extent on the cause of the disaster. A distinction is usually made between technological disasters, also referred to as man-made disasters, and natural catastrophes. (n6) Examples of technological disasters are oil spills and nuclear accidents, as well as explosions in particular plants or fires in public buildings. By contrast, natural catastrophes include heavy rainfall, flooding, earthquakes, volcano eruptions, and tsunamis. Data show that while the insured losses resulting from man-made disasters seemed to remain constant in the period betwee (n1) 970-2007, during that same period there was a substantial increase in the insured losses due to natural catastrophes. (n7) A third type of catastrophe usually dealt with separately is the catastrophe caused by terrorism. Such catastrophes are treated separately because on the one hand they are obviously man-made, but on the other hand they share a similarity with natural catastrophes: The injurer (the terrorist) typically can either not be found or is insolvent. As a result, liability rules cannot apply.

      In some cases it may be difficult to adequately distinguish between man-made disasters and natural catastrophes. For example, heavy rainfall could sometimes lead to flooding because infrastructural works have changed rivers and, as a result, the natural carrying capacity of waters has decreased and governments may have...

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