London dam ruling heaps pressure on BHP’s risk and insurance strategy

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The Insurance landscape is evolving, with recent reports indicating notable changes. By Matthew Sellers
Scott Lester may only have been in the risk hot seat at BHP for just  over two years, but he is already having to deal with one of the mining giant’s highest profile disasters. 
BHP’s carefully constructed risk and insurance architecture is facing its sternest test after a London judge found the mining group liable for Brazil’s worst environmental disaster, opening the door to a AU$72.5 (£36) billion compensation claim and sharpening questions about how catastrophic mining risks are financed. 
High Court Justice Finola O’Farrell ruled that BHP is liable under Brazilian law for the failure of the Fundão tailings dam in Minas Gerais in November 2015. According to reports that the dam, operated by Samarco – a joint venture owned equally by BHP and Brazil’s Vale – collapsed after its height was increased, unleashing mine waste that swept away the village of Bento Rodrigues, killed 19 people and polluted hundreds of kilometres of the Doce River. 
The class action in London, brought on behalf of some 600,000 Brazilians and dozens of communities and entities, focuses on BHP’s role as a parent and joint-venture shareholder rather than as the direct operator.

Sources indicate that justice O’Farrell found that the continued raising of the dam wall when it was unsafe was the “direct and immediate cause” of the collapse and concluded that the risk of failure was foreseeable. 
Under Brazilian environmental law, businesses that directly or indirectly control or profit from polluting activities can be treated as polluters and held strictly liable. The judge accepted that framework and rejected arguments that responsibility should rest solely with Samarco as the operating company. 
The ruling comes on top of a substantial settlement already agreed with Brazilian authorities. Samarco has undertaken to pay 132 billion reais over 20 years to address human, environmental and infrastructure damage.

The English court has nonetheless allowed the UK proceedings to continue, holding that victims who received money in Brazil may still bring claims in London, subject to any limitations arising from waivers they signed. 
Claimants’ lawyers hailed the judgment as a landmark. Alicia Alinia, chief executive of Pogust Goodhead, described it as “the first time that any of the companies behind the dam collapse have been held to account” and said it delivered “long-overdue justice to the thousands whose lives were torn apart”. In her view, the ruling sends a message to multinationals that “you cannot disregard your duty of care and walk away from the devastation you caused” and that “BHP is now compelled to answer for its actions and pay what is owed”. 
BHP has signalled it will challenge the decision, but has also emphasised the reparations already made. The company said that “the Fundao dam failure at Samarco was a tragedy that should never have happened” and that since 2015 “BHP Brasil, Vale and Samarco have provided $13.4 billion for reparation and compensation to affected people and to public authorities in Brazil”.

It said compensation and financial aid had been paid to more than 610,000 Brazilians. 
For intermediaries and carriers in the Asia-Pacific market, the case is less about unexpected facts and more about the scale of the potential bill and the legal route by which it has arrived on BHP’s doorstep. According to reports that the group has long relied on a sophisticated risk structure, blending group-wide commercial programmes with captive and internal insurers that sit at the heart of its risk management framework. 
Those operations are now overseen by BHP’s chief risk and audit officer, who has global responsibility for risk, insurance and internal audit, and for the group’s captive insurance operations. That role is charged with presenting the corporate view of risk to the board and key committees, managing mandated operating procedures and driving the group’s risk improvement agenda through a three-lines-of-defence model. 
Yet the Fundão ruling illustrates how even the most developed risk frameworks struggle when courts are prepared to reach through corporate structures and tag parent entities with liability for complex environmental harms, particularly when local law imposes strict obligations on those who finance or benefit from hazardous activities. 
From an international insurance perspective, the likely picture is one of layered but limited support. Property damage and business interruption covers respond to physical loss at insured assets, but tailings failures are often subject to tight sub-limits and large retentions.

According to reports that general liability and environmental impairment policies, where purchased, face the familiar hurdles of pollution exclusions, “gradual deterioration” provisions and arguments over whether failures were sudden and accidental or the result of long-term design and governance issues. 
Any captive involved will bear the brunt of retained losses, with reinsurance potentially stepping in above defined attachment points. Sources indicate that but when the headline claim figure runs into tens of billions of pounds – on top of multi-billion-dollar settlement obligations in Brazil – the gap between insured and economic loss is likely to be material. 
That gap has already shaped market behaviour. Since Fundão and later disasters in Brazil, insurers and reinsurers have scaled back capacity for high-hazard tailings dams, demanded more granular data on dam design and monitoring, and in some cases walked away from the risk altogether.

Data shows that tailings governance has become a central underwriting question, and board-level oversight of waste facilities is now scrutinised in D&O placements as well as in property and liability programmes. 
The London judgment adds a further twist by underlining that parent companies can be pursued in jurisdictions far from the mine gate, even where regulators and courts in the host country have already acted. For broking houses and risk managers advising resource groups, that creates a more complex matrix of potential forums, applicable laws and aggregation scenarios when designing towers and drafting wordings. 
For BHP, the court’s next step will be to determine damages, while its appeal runs in parallel.  
For the wider industry, the case will be read alongside the emergence of global tailings standards and intensifying climate-related disclosures as evidence that historic approaches to mining risk transfer are under pressure. 
The Fundão collapse has long been a human and environmental tragedy. The High Court’s ruling now turns it into a defining test of how far insurance, captives and corporate balance sheets can be stretched when a tailings dam fails – and of how much risk ultimately sits with the mining houses that choose to build higher on uncertain ground. 

As the situation continues to develop, industry participants in Insurance will likely monitor outcomes closely.

— Based on reporting from insurancebusinessmag.com

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