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

Author:Faure, Michael G.
Position::III. Additional Compensation Mechanisms A. Potential and Models 2. Models through Conclusion, with footnotes, p. 136-178
  1. Models

    Compensation mechanisms can take different shapes and forms. In the case of technological disasters, it usually consists of providing an extra layer of compensation in addition to the liability scheme (combined with liability insurance). In the case of natural catastrophes, the compensation mechanism usually consists of government intervention that can either be structured as an ad hoc charity or as a more structured compensation fund.

    a. Extra Layer Compensation

    An additional compensation mechanism, which is often put in place in case of technological disasters, (218) is an extra layer of compensation. This extra layer is in addition to the principal liability of an operator who has created the catastrophic risk. Such an additional layer can typically be found in combination with a financial cap on the liability of the operator. Since the operators' liability is limited, the damage could in principle exceed the operators' liability. The extra layer of compensation is then meant to compensate for the amount of damage that goes beyond the amount of the operators' liability. In that sense the compensation mechanism is indeed "additional" and only intervenes when the amount of the operator's limited liability would be insufficient to cover the damage. This additional layer is usually limited and the financing can either be via the government (219) or through operators. (220)

    As the description of the liability regimes in the international liability conventions made clear, (221) the nuclear and marine pollution conventions commonly provide for an additional layer of compensation. (222) However, the Draft Principles on the Allocation of Loss in the Case of Transboundary Harm Arising out of Hazardous Activities, drafted by the International Law Commission, also referred to the need for creating a prompt and adequate compensation mechanism.

    b. Nuclear Liability Conventions

    The aim of the 1963 Brussels Supplementary Convention is to supplement the compensation system provided in the Paris Convention "with a view to increasing the amount of compensation for damage which might result from the use of nuclear energy for peaceful purposes." (223)

    According to Article 3 of the Brussels Supplementary Convention, the Contracting Parties undertake that compensation in respect of damage caused by a nuclear accident shall be provided up to the amount of 300 million SDRs per incident (EUR 341.85 million or USD 432.474 million). Such compensation shall be provided:

    Up to an amount of at least 5 million SDRs (EUR 5.70 million or USD 7.64 million), out of funds provided by insurance or other financial security, such amount to be established by the legislation of the Contracting Party in whose territory the nuclear installation of the operator liable is situated;

    A second tier consisting of the difference between SDR 175 million and the amount required under the first tier (thus maximum 170 million SDRs or EUR 193.72 million or USD 259.70 million), out of public funds to be made available by the Contracting Party in whose territory the nuclear installation of the operator liable is situated;

    A third tier of 125 million SDRs (EUR 142.44 million or USD 190.96 million), out of public funds to be made available by the Contracting Parties according to a formula for contributions which is based on the GNP and the thermal capacity of the reactors.

    The 1963 Brussels Supplementary Convention thus introduces two additional tiers of compensation for covering nuclear damage on top of the first tier of private funds (liability) provided for by the Paris Convention. Indeed, the first tier of the Brussels Supplementary Convention is the insurance coverage of the nuclear operator as established under the Paris Convention. On top of that amount, the Brussels Supplementary Convention provides for two additional tiers of public funds: One "national" public fund to be made available by the Installation State and one international solidarity fund to be made available by all Contracting Parties.

    However, the Installation State can escape from its obligation to make national public funds available. Under the Brussels Supplementary Convention, each Contracting Party has certain freedoms. It can establish the maximum liability of the operator, pursuant to the Paris Convention, at 300 million SDRs, and provide that such liability shall be covered by the insurance of the nuclear operator (in that case the Installation State has met its obligation under the Convention and must not provide for national public funding in the second layer). However, the Contracting Party can also set the maximum liability of the operator at an amount at least equal to the insurance of the nuclear operator and provide that, in excess of such amount and up to 300 million SDRs, public funds shall be made available by some means other than as cover for the liability of the operator. (224)

    As we already mentioned above, important changes occurred in the international regime after the Chernobyl accident. We mentioned that first tier liability (the liability of the operator of the nuclear power plant) shall increase to EUR 700 million. Moreover, according to the Protocol to the Brussels Supplementary Convention, the Contracting Parties will undertake that compensation in respect of nuclear damage shall be provided up to an amount of EUR 1.5 billion per nuclear incident. This will be divided as follows:

    Up to an amount of at least EUR 700 million: Funds provided by insurance or other financial security or out of public funds provided pursuant to Art. 10(c) of the Paris Convention;

    Between this amount and EUR 1,200 million: Public funds to be made available by the Contracting Party in whose territory the nuclear installation of the operator liable is situated;

    Between EUR 1.2 billion and EUR 1.5 billion, out of public funds to be made available by all the Contracting Parties according to the formula for contributions.

    Finally, the Convention on Supplementary Compensation for Nuclear Damage (CSC), adopted on September 12, 1997, is a new and independent legal instrument, which means that a State does not need to be a party to the Vienna or Paris conventions in order to become a party to the CSC. (225)

    According to Article III.1.A of the CSC, the Installation State shall ensure the availability of at least 300 million SDRs (EUR 341.85 million or USD 458.29 million). This provision provides for an obligation of the Installation State to ensure that 300 million SDRs are available; the Installation State is free to choose how this amount is funded (private insurance, regional agreement, etc.). A State meets its obligation under Art. III.1.A of the CSC when it imposes liability on the operator for the entire amount. So, as such, this Article does not oblige a State to make public funds available. However, according to Art. II.1.B of the CSC, the Contracting Parties shall, beyond the amount available under the first tier, make public funds available. (226)

    If one were to summarize the situation, one could hold that in addition to the individual liability (with financial caps) of the nuclear operator there are two additional types of funding mechanisms: There is an obligation of an Installation State to make certain amounts of money available; it can do so either by providing for public funding, or by making the nuclear operator liable for the total amount-- this is the second tier of the Brussels Supplementary Convention and the first tier under the CSC.

    Finally, there is a system that can be called an international solidarity fund, funded by all Contracting Parties. (227) This public funding can as such not be shifted--this is the case for the third tier of the Brussels Supplementary Convention and for the second tier under the CSC.

    The total amounts available in the nuclear liability regime can be summarized in the following table:

    The table above highlights that the nuclear liability regime of the second generation increases the differences between the Paris and Vienna Convention with regard to the liability amount of the nuclear operator (or, in a system of unlimited liability the amount up to which the operator is required to have financial security) and with regard to the total compensation available. Under the revised Paris and Brussels Supplementary Convention, a total amount of EUR 1.5 billion will be available (of which EUR 700 million is financed by the operator) whereas the total amount of the initial Paris and Brussels Supplementary Convention was EUR 356 million. The total amount available under the Vienna Convention is equal to the amount set by the 1963 Brussels Supplementary Convention.

    Table 3 also demonstrates that under the nuclear compensation scheme of the second generation, public funding is either newly created or kept at the same level as in 1963 in relative terms. (228) In absolute terms, there is considerably more public funding in the second generation conventions. (229) Under the 2004 Brussels Supplementary Convention, the public intervention has more than doubled (230) and under the IAEA regime, no public intervention existed under the conventions of the first generation.

    It is important to underline that out of the four new nuclear liability instruments that resulted from the revision exercise, only two have entered into force so far. The Protocol to the Vienna Convention entered into force on October 4, 2003; the CSC entered into force on April 15, 2015.

    c. Marine Oil Pollution

    As mentioned above, the establishment of a compensation fund was decided upon at the 1969 conference, which led to the conclusion of the CLC 1969. (231) Two years after the adoption of the 1969 CLC, the 1971 Fund Convention was enacted. The 1971 Fund Convention has two aims: To provide compensation when the protections provided under the 1969 CLC are inadequate; and to relieve ship owners from additional financial burdens. (232)

    The 1971 Fund Convention plays two...

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