Study on the influence of Plant Lifetime Extension … · Study on the influence of Plant Lifetime...

Study on the influence of Plant Lifetime Extension (PLEX) on nuclear liability/010

Prof. Dr. Michael G. Faure LL.M.∗ and Dr. Tom Vanden Borreγ

For

GreenPeace Nordic

11 December 2013

∗ Maastricht University and Erasmus University Rotterdam.

γ Institute for Energy and Environmental Law, Catholic University of Leuven.

Study Greenpeace Nordic Version 11 December 2013

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TABLE OF CONTENT

1. Introduction ....................................................................................................................5

2. The international nuclear liability conventions .............................................................. 11

2.1 Origins of the international nuclear liability conventions ....................................... 11

2.1.1 The Preliminary Report ................................................................................... 12

2.1.2 The Harvard Report ......................................................................................... 13

2.2 Overview of the international conventions on nuclear liability .............................. 14

2.3 Scope of the international nuclear liability conventions ......................................... 17

2.3.1 Scope “ratione materiae” ................................................................................. 17

2.3.2 Territorial scope .............................................................................................. 20

2.4 Principles underlying the international liability conventions of the first generation 21

2.4.1 Strict liability .................................................................................................. 21

2.4.2 Legal channelling of liability to the nuclear operator ....................................... 23

2.4.2.1 The principle of legal channelling............................................................. 23

2.4.2.2 Exceptions to the legal channelling ........................................................... 25

2.4.2.2.1 Right of recourse for compensation paid to third parties ....................... 26

2.4.2.2.2 Right of recourse for on-site property damage ...................................... 28

2.4.3 Limitation of liability ...................................................................................... 32

2.4.4 Compulsory insurance ..................................................................................... 34

2.4.5 Exclusive jurisdiction – obligation of having one single forum ........................ 35

2.4.6 Public funding ................................................................................................. 38

2.5 Changes after Chernobyl ....................................................................................... 40

2.6 Specific provisions with regard to ageing of a nuclear power plant ........................ 48

2.6.1 The applicability of the conventions to ageing ................................................. 48

2.6.2 Legal channelling and ageing .......................................................................... 49

2.7 Global system? ...................................................................................................... 52

2.7.1 Limited adherence to nuclear liability Conventions ......................................... 52

2.7.2 EU Member States that are not party to any of the nuclear liability Conventions

53

2.7.3 Consequences .................................................................................................. 55


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3. Comparison of current limits and amounts available ..................................................... 57

3.1 Overview of amounts available in EU Member States ........................................... 57

3.2 US nuclear liability system .................................................................................... 59

3.2.1 The Price-Anderson Act and its evolutions over the years ............................... 59

3.2.1.1 The 1957 regime ...................................................................................... 59

3.2.1.2 1975: a shift from public to private funding regime .................................. 61

3.2.1.3 2005 and beyond: further increase ............................................................ 63

3.2.2 The NRC property rule .................................................................................... 64

3.2.3 2006: Ratification of the Convention on Supplementary Compensation ........... 64

3.2.4 Conclusions ..................................................................................................... 66

3.3 Amounts of damage caused by a nuclear accident ................................................. 67

3.4 Economic consequences ........................................................................................ 69

3.4.1 Distortions created by the subsidy ................................................................... 69

3.4.2 Artificial competitiveness ................................................................................ 70

3.4.3 Prevention of nuclear accidents ....................................................................... 74

3.4.4 Reduced victim compensation ......................................................................... 76

4. Insurance of the nuclear risk ......................................................................................... 78

4.1 The nuclear European insurance pools .................................................................. 79

4.2 Third party liability insurance in the US ................................................................ 81

4.3 The nuclear mutual insurance systems ................................................................... 83

4.4 Limits of the pools ................................................................................................ 86

4.5 Alternatives: pooling by operators ......................................................................... 88

4.6 Cost of insurance................................................................................................... 90

4.7 Financial security .................................................................................................. 92

5. The need for a new compensation model ....................................................................... 94

5.1 The basic principles of a new compensation model ............................................... 95

5.2 Alternative financial schemes .............................................................................. 100

5.2.1 Advantages of risk sharing ............................................................................ 100

5.2.2 Risk-pooling for marine oil pollution ............................................................. 103

5.2.3 Toward an EU nuclear risk pooling scheme? ................................................. 106


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5.2.4 An EU Price-Anderson Act: retrospective pooling? ....................................... 107

5.2.5 Munich Re proposal ...................................................................................... 110

5.2.5.1 Compensation for oil spills ..................................................................... 110

5.2.5.2 Proposal for nuclear liability................................................................... 112

5.3 Pooling as a solution to generate higher amounts of cover? ................................. 113

6. Conclusions ................................................................................................................ 114

List of Literature ................................................................................................................. 118


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1. Introduction

1. Nuclear power largely developed after the Second World War. It was especially in the

1950s that possibilities of the commercial development of nuclear energy were explored. It is

important to have in mind that the development of nuclear power has been facilitated by the

creation of various international nuclear liability conventions which were largely created on

the request of the suppliers of nuclear material. Indeed, since nuclear technology at that time

was to an important extent an American monopoly, American suppliers feared liability if they

would deliver material, known-how and services to European operators and an accident would

follow. Nuclear liability conventions were hence created that exclusively channelled liability

to the operator of the power plant (thus excluding the liability of the supplier) and

substantially limited the liability of the licensee of the power plant (both in amount and in

time). Many of the principles of these conventions paved the way for a strong development of

nuclear power, especially in Europe, but also in other continents.

2. Although there may be technical differences between the types of reactors and

installations, many of the nuclear installations that were constructed in the 1960s and 70s1

now are in their forties or fifties and some of those hence reach the time limit that was

originally foreseen for their exploitation. Some countries like Finland, the UK and France

have chosen not to continue the operation of these older power plants and have decided to

build new nuclear power plants.

3. Other countries opt more for the extension of the lifetime of several nuclear power

plants. Several nuclear power reactors have already been granted lifetime extension. This

means that after the nominal design lifetime, varying between 25 to 40 years, licenses of these

plants have been renewed for, typically, a 10 or 20 years period. Consequently, the lifetime of

such a “renewed” reactor can be up to 60 years. The decision as to whether or not grant

lifetime extension lies in the first place with the nuclear safety authorities of the country

where the nuclear power plant is located. In the United States, over 70 nuclear power plants

have been granted license renewal; also Russia is granting lifetime extensions.

1 Worldwide, the most commonly used type of reactor is the Pressurised Water Reactor (PWR); these are indeed US design.


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4. Generally speaking a lifetime extension application will require investments in the

safety of the power plant: replacing worn parts, upgrading of various systems etc. In Belgium,

where a political decision has been taken with regard to granting lifetime extension to

Tihange 1, the Belgian nuclear safety authority (FANC-AFCN) has indicated that in assessing

the lifetime extension, particular attention will be on the ageing and the design.2 With regard

to ageing, the Agency refers to a program for managing older installations in line with

international standards. In this respect, special focus will lie on those parts of the reactor that

cannot be replaced like the reactor vessel. A monitoring of these parts will be required in

order to be able to detect possible failures in an early stage. With regard to design, the Agency

refers to a program for modernizing or upgrading of the installation based on a safety

assessment of the oldest units. The mere fact that several nuclear power plant operators ask

for lifetime extension indicates that there are sufficient economic reasons to choose lifetime

extension rather than building a new power plant. Part of this will most likely also relate to

difficulties in terms of public acceptance for constructing new nuclear plants.

5. It is precisely this nuclear Plant Lifetime Extension (abbreviated as PLEX) that causes

major worries to stakeholders such as Greenpeace. As a result, Greenpeace has launched a

request for research into the consequences of this nuclear Plant Lifetime Extension.

Obviously, an important part of the research investigates the risks involved with nuclear

aging, as well as the economics of nuclear ageing and the extent to which public participation

should be made possible when decisions are made on nuclear aging. Those aspects are

crucially important and will be addressed in other parts of the project that has been

commissioned by Greenpeace.

6. However, one particular question is the relationship between plant lifetime extension

and nuclear liability. Nuclear liability will be the particular focus of this study. In this study,

we hence do not examine the question whether the extension as such increases the probability

or the potential damage in case of a nuclear accident. Those aspects are dealt with in other

parts of this project. However, one of the questions that obviously arise, also with regard to

nuclear plant lifetime extension, is whether the nuclear operators will be liable for the costs of

an accident in case of such a lifetime extension. To an important extent, so we will argue in

this report, this question cannot be answered by merely focusing on plant lifetime extension,

2 “FANC en BEL V publiceren technische nota verlenging levensduur kerncentrale”, website FANC, www.fanc.fgov.be


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but has to be addressed by critically examining the entire legal liability framework for nuclear

accidents.

7. Indeed, the international regime dealing with nuclear liability has to an important

extent been seriously criticized in legal and economic literature, precisely for the already

above mentioned characteristics, i.e. the exclusive channelling of liability to the licensee of

the nuclear power plant (thus excluding liability of all others who could equally influence the

accident risk) and for providing very low limits on the liability of the licensee of the power

plant. We will hence argue that these features already today constitute an important problem

as far as providing effective compensation to victims is concerned, but potentially also as far

as providing incentives for the prevention of nuclear accidents is concerned. These problems

are hence not typical for PLEX; however, to the extent that PLEX leads to a potential increase

in the probability of a nuclear accident or of the potential damage, the mentioned negative

features of the international nuclear liability regime would only be exacerbated. Given that the

other studies in this project do indeed provide reasons to argue that nuclear ageing could lead

to increased risks, PLEX would hence be all the more an important reason to be very cautious

in deciding which liability rules should apply in case of a nuclear accident in a power plant

which has been awarded a lifetime extension. Which rules and principles should govern the

liability of the nuclear operator and of those who have participated in the extension (e.g.

suppliers of certain parts or companies having made safety calculations etc.)?

8. Hence, our study will to an important extent focus on the current international legal

framework and its (in)adequacy in providing adequate compensation and prevention, arguing

that those problems might potentially only become worse in case of PLEX and thus call for a

reform of the regime. We will therefore not only critically review the current regime based on

the existing literature, but we will equally look at proposals to reform nuclear liability and

critically evaluate those.

9. It is in that respect interesting to mention that the criticism on the nuclear liability

regimes is definitely not new. Faure and Van den Bergh already argued in 1990 that the

international legal framework for nuclear accidents in fact only provided protection for the

nuclear industry and could hence only be explained as the result of effective interest group


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politics.3 In 1997, Trebilcock and Winter provided an economic analysis of nuclear accident

law and were equally critical on the channelling and limitation of liability.4 Also American

studies had already pointed at the fact that the nuclear liability regime (even the one in the US

which is in our view has some interesting features and provides for higher compensation to

victims than the international regime) in fact constitutes an implicit subsidy to the nuclear

industry. This point was especially made by Dubin and Rothwell in 1990.5 Faure and Skogh

also criticized (in 1992) the current international legal framework and argued in favour of an

international pooling regime which would be able to generate substantially higher amounts.6

Also Vanden Borre provided in his dissertation (of 2001) a critical analysis of the

international nuclear liability regime, calling for an urgent need for reform.7

10. It is in fact striking that although those critical voices with respect to the international

nuclear liability framework were already formulated since the early 1990’s, these voices did

not lead to a fundamental rethinking of this framework. As we will argue below, a revision of

the international conventions did indeed take place after the Chernobyl accident, but first

these have, in fact, not entered into force yet. Moreover, notwithstanding suggestions for a

fundamental reform,8 the amounts were increased but are still largely insufficient to cover the

costs of an average, let alone a serious, nuclear accident.

11. This is all the more striking since in related domains (in the sense that it also concerns

catastrophic accidents) such as e.g. marine oil pollution, evolutions equally took place, but

these led to the generation of substantially higher amounts for damage caused by vessel

induced marine oil pollution. It is, just to provide an illustrative example, striking that today

for a country like France, only a total amount of compensation would be available in a case of

a nuclear accident of 381 million euro of which, moreover, only 91 million would be paid by

the operator and the remainder through a subsidy provided by the installation state (in that

example France) and all contracting states.9 Today the compensation available in case of

marine oil pollution (the type of Prestige or Erika disasters) amounts almost to one billion

euro, which is moreover entirely financed by industry (the shipping industry and the oil

3 Faure and Van den Bergh (1990). 4 Trebilcock and Winter (1997). 5 Dubin and Rothwell (1990). 6 Faure and Skogh (1992). 7 Vanden Borre (2001). 8 See inter alia Faure (1995). 9 See Faure and Fiore (2008a), 231.


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industry), without state intervention.10 The amending protocols of the Paris and Brussels

conventions of 2004, as well as the Protocol to the Vienna Convention and the Convention on

Supplementary Compensation do continue to provide for state intervention in case of a

nuclear accident. Even the highest amount under these Conventions, 1.5 billion euro,11 is

clearly insufficient to deal with the damage resulting from a large nuclear incident.

12. The comparison with marine oil pollution is interesting since in the latter domain,

there has been a strong involvement of the European Commission after the Prestige and Erika

incidents. It was in fact under the threat of the creation of a separate European compensation

fund that the parties at the International Maritime Organisation (IMO) agreed to increase the

amounts available via the International Oil Pollution Compensation Fund. They feared indeed

that the EU may create a separate fund to avoid that the parties within the IMO agreed that the

amounts would be increased to the current levels.12 In the nuclear domain, until recently,

European activism has been largely absent as far as the liability regime is concerned. Europe

to a large extent just required that the Member States joined one of the international

conventions. Over the past three years several EU Member States already have increased the

liability of the nuclear operator to the levels required by the revised Paris and Brussels

Supplementary Convention (€ 700 million or € 1.2 billion) – without these revised

conventions being in force. At the same time the European Commission seems to become

more active with regard to nuclear liability. Even before the Fukushima accident of March

2011, the European Commission had created a working group in order to analyse possible

revisions in the nuclear liability regime and the role that Europe could play in that respect.

Fukushima of course put nuclear liability high on the European agenda. Interesting in that

respect is that now voices are also heard especially from international reinsurers that,

provided the nuclear industry is willing to participate, substantially larger amounts could be

generated for compensating victims of nuclear accidents than the amounts currently provided

for in the nuclear liability conventions.

13. This shows that now, at least at a European level, the nuclear liability framework is in

full evolution. It is therefore the right moment to critically analyse the nuclear liability regime

10 See Wang (2007) and see below 6.2. 11 We will discuss this in detail in section 2. 12 Wang (2007).


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and point at potential shortcomings and reform possibilities. Nuclear ageing and PLEX make

such an analysis only more urgent.

14. In this study, we will analyse the possible impact of nuclear plant lifetime extension

(PLEX) on nuclear liability. We will address the following questions:

• Does the current legal framework on nuclear liability address nuclear ageing?

• Would it be a good idea to have a specific provision addressing nuclear ageing?

• What is the liability of suppliers of upgrades of such a lifetime extension?

15. At the end of this introduction, we should stress that we merely focus on nuclear

liability in land-based nuclear installations. The prevention of nuclear accidents is, however,

only to some extent dependent upon the scope of liability provisions. Safety regulation and

standardization by industry may play a far more important role. Even though there are

important evolutions in those domains as well,13 analysing the regulatory framework aiming at

prevention is beyond the scope of this study and will therefore not further be addressed. Also

nuclear liability issues related to the transport of nuclear substances is left outside the scope of

this study.

16. In the remaining of this study, we will focus on the following issues: first, we sketch

the nuclear liability provisions, in general as they follow from the international legal

framework, addressing specifically the potential consequences of ageing of nuclear

installations (2). Then, we go in more detail on the amounts currently available for

compensation and the economic consequences of the limitation of liability (3). An important

problem also constitutes the fact that the current nuclear insurance regime also has important

shortcomings. It is important to address those since the limited insurability of the nuclear risk

has often been proposed as a justification for the liability limits (4). We then argue that it is

possible to develop a new compensation model which would create higher amounts of

compensation for victims and thus a better risk exposure (providing incentives for prevention)

to operators and other stakeholders (5). We conclude by arguing that the new model we

propose could also better deal with specific questions related to ageing and to PLEX (6).

13 See e.g. the proposal for a council directive of 17 October 2013 amending Directive 2009/71/Euratom establishing a

community framework for the nuclear safety of nuclear installations, COM(2013) 715 final.


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2. The international nuclear liability conventions

17. In this section, we will explain the international nuclear liability regime. In order to

understand the philosophy of that regime, it is important to recall its origins (2.1). Second, we

will give an overview of the existing international nuclear liability conventions (2.2). After

that, the scope and principles of these conventions will be discussed (2.3 and 2.4). We will

highlight the changes after Chernobyl in 2.5. This analysis will allow us to assess any specific

provisions applicable to ageing nuclear power plants, c.q. whether the conventions provide for

specific provisions for claims following damage caused by ageing nuclear power plants (2.6).

Finally we will answer the question whether the international conventions do provide for a

global regime (2.7).

2.1 Origins of the international nuclear liability conventions

18. In the 1950s, many countries decided to use nuclear electricity to become part of their

energy mix. At that time, only two countries were able to supply the necessary know-how and

equipment: the United States and the former Soviet-Union. Western European countries

wanting to have access to the necessary technology and know how, had therefore no choice

than to rely on American knowledge and technology. For the U.S., the Western European

countries clearly were an interesting and promising market for the expansion of their nuclear

industry.

19. However, from the outset, the American nuclear industry feared liability for damage in

Europe resulting from nuclear accidents in installations where they have supplied know-how,

technology and equipment. In order to address this fear the first bilateral agreements between

the U.S. and Europe contained a so-called “hold-harmless” clause; under such a clause, the

(European) nuclear operator held the (American) supplier harmless for all claims resulting

from his activities.14

20. As business expanded, the American companies were unsure whether this “hold-

harmless” clause provided sufficient and adequate protection. The US “Atomic Industrial

Forum” therefore conducted two studies on the possible liability claims of victims of a

nuclear accident against U.S. suppliers. The first study was the “Preliminary Report on

14 See, inter alia, R. Gautron (1967) at, 59, M. Isenbergh, (1967), at 279, A.W. Murphy (1962), at 166 and J.P. Piérard

(1963), at 263.


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Financial Protection against Atomic Hazards” (hereinafter called “the Preliminary Report”)15.

The second study was entitled “International Problems of Financial Protection against Nuclear

Risk” (hereinafter called “the Harvard Report”).16

2.1.1 The Preliminary Report

21. According to the authors of the Preliminary Report, the major problem in assessing the

potential liability in case of a nuclear accident was the lack of knowledge concerning the

nuclear risk. A liability claim after a nuclear accident would be many times the amount

available on the insurance market.17 The insurance industry could not offer sufficient cover

given the insufficient capacity on the insurance market and given the lack of data on the

probability of a nuclear accident; therefore it was difficult to calculate the insurance premium.

Thus, the possibilities for a nuclear operator to spread his risk were limited to the means

available on the insurance market; consequently, for that part of the damage that was not

covered by insurance, he could be held liable with his entire assets.18

22. The Report stipulated that given the “undisputed fact that there is a vital national

interest in the development of atomic power”19 it was logical that also the authorities

(government) had an important role to play. The government indeed needed not only to make

sure that a potential liability claim did not hinder the development of the nuclear industry, but

also needed to protect the safety and the security of the population. Therefore, it was

concluded that a government program had to be created in order to meet two basic

requirements: first, the protection of the industry against unknown liability claims and second,

the need to protect the public against the damage they would suffer.

23. This protection of the industry was nothing else than a limitation of the liability. The

authors of the Report added that a limitation of liability would only be acceptable if there was

an additional compensation available, on top of the liability amount.20 Any damage in excess

of that amount should be covered by the government. The aim of this government intervention

15 Prepared by the experts of Columbia University and published in March 1956. 16 Prepared by Harvard Law School and published in 1959. 17 Preliminary Report, 5. 18 Preliminary Report, 11. 19 Preliminary Report, 16. 20 Preliminary Report, 26.


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was to prevent private companies from not investing in nuclear activities for fear of an

enormous liability claim.21

24. The Preliminary Report concluded that the interests of both the industry and the public

could be met by limiting the amount of liability of the nuclear operator to the amount

available on the insurance market and by providing for public funds for damage not covered

for by the operator (or his insurer).

25. As we will discuss, the U.S. nuclear liability law (called the Price-Anderson Act)

adopted in 1957 indeed limited nuclear liability and provided for government invervention on

top of this limited amount.22 The U.S. legislator thus clearly followed the conclusions of the

authors of the Preliminary Report. The Price-Anderson Act, however, only covers liability for

nuclear accidents in the U.S. It does not and cannot cover nuclear liability issues in Europe.

This transboundary issue was analysed in the Harvard Report.

2.1.2 The Harvard Report

26. According to the Harvard report, the American industry could play an important role

in the development of nuclear energy in the whole world; on the other hand, the American

companies that would support the nuclear energy industry were exposed to considerable

risks.23 It was feared that victims of nuclear accidents in Europe would sue American

companies in the U.S. The Report indicated that these companies could indeed be held liable

for defects of the material/products delivered to the operator (product liability). The Harvard

Report identified three reasons why these companies should not be held liable.

27. First, in case of a nuclear incident, the suppliers feared being prosecuted instead of or

jointly with the nuclear operator, even if their role was limited to calculations or supervision

of specific parts of the reactor, because the victim of a nuclear incident could be compelled to

sue as many companies as possible. It would most certainly be lucrative for a West European

victim to sue American suppliers in the US. This could, according to the Harvard Report,

21 R. Lowenstein, “Indemnification against liability for nuclear accidents in licensed atomic energy activities”, in J.L.

Weinstein (ed.), Progress in Nuclear Energy Law and Administration, Pergamonn Press, vol. 3, 1962, 238. 22 Cfr. infra, section 3.2.1. 23 Harvard report, 5.


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result in substantial legal problems,24 and subsequently lead to lengthy trials of which a large

part would be futile.25 Secondly, according to the Harvard report, it would be unfair to hold

the suppliers liable since, after the delivery of goods and services, they generally lose control

thereover.26 Moreover, the authors of the Harvard Report considered the nuclear operator to

be in a better position than the different suppliers to control the risk. Thirdly, the nuclear

operators were more capable of obtaining insurance. By concentrating liability on the

operator, pyramidal insurance costs could be avoided.27 As a result, not every supplier would

have to buy a separate insurance coverage, limiting insurance costs.

28. The authors of the Harvard Report concluded that the best solution was to make all

liability claims against “atomic suppliers” impossible by legislative intervention. To abolish

every legal claim against the supplier would be “the most simple and most effective solution”;

the new social and economic circumstances – inter alia resulting from the peaceful use of

nuclear energy – necessitated such a legislative intervention; these circumstances were more

important than legal dogmatic objections.28 The Report therefore proposed the introdcution of

twelve measures which eventually were largely adopted by the nuclear liability conventions

(channelling of liability, strict liability, limitation of the liability amount, limitation of the

liability in time, the mandatory insurance of liability and the exclusive competence of the

court of the country where the incident occurred, etc.).29 Moreover, the draft text of what later

became the 1960 Paris Convention on Third Party Liability in the Field of Nuclear Energy

was annexed to the Harvard Report. Both the Harvard and the Preliminary Report have thus

strongly influenced the compensation system enacted by the nuclear liability conventions.

2.2 Overview of the international conventions on nuclear liability

29. In the beginning of the development of private nuclear industry, two international

regimes were created that regulate the civil liability for damage caused by nuclear accidents,

i.e. that create compensation mechanisms for nuclear damage.30 The first treaty regime has

been established under the auspices of the OECD Nuclear Energy Agency (NEA) and consists

24 In particular, problems of an international private law nature: competent court, applicable law and enforceability of foreign judgments in the US. At the same time, there existed the risk that a victim would try to avoid the law of the installation State by “forum-shopping”.

25 Harvard report, 57. 26 Ibid., 52. 27 Ibid., 57; Norbert Pelzer (1994) at 9. Exactly the same reasoning is found in the Exposé des Motifs, Motif 18. 28 Harvard report, 59. 29 Cfr. infra, section 2.4. 30 For a useful overview, see, inter alia, Liability and Compensation for Nuclear Damage: An International Overview

(OECD: 1994).


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of the Convention on Third Party Liability in the Field of Nuclear Energy of 29 July 1960

(hereinafter referred to as “the Paris Convention”) and the Brussels Supplementary

Convention to the Paris Convention on Third Party Liability in the Field of Nuclear Energy of

31 January 1963 (hereinafter referred to as “the Brussels Supplementary Convention”). The

Paris Convention introduces the five major principles of international nuclear liability

conventions. The Brussels Supplementary Convention provides for additional compensation

of damage in case the coverage of the operator under the Paris Convention is inadequate or

insufficient.

30. The second nuclear liability treaty regime has been developed under the aegis of the

International Atomic Energy Agency (IAEA): the Vienna Convention on Civil Liability for

Nuclear Damage of 21 May 1963 (hereinafter referred to as “the Vienna Convention”). The

Vienna Convention introduces, as does the Paris Convention, the five major principles of

international nuclear liability law.

31. The NEA treaty regime is regionally confined (i.e. Western Europe, Slovenia and

Turkey), while the IAEA treaty regime is worldwide in scope.

32. There have been no significant changes to the different nuclear liability treaties until

after the Chernobyl accident. 31 The accident triggered a revision process for both the NEA

and the IAEA regime, resulting in the adoption, on three different dates, of several new

international conventions32. On 21 September 1988 the Joint Protocol Relating to the

Application of the Vienna Convention and the Paris Convention was agreed upon. On 12

September 1997, two new legal instruments were opened for signature in the IAEA regime:

the Protocol to Amend the 1963 Vienna Convention on Civil Liability for Nuclear Damage

(hereinafter called: “the Protocol to the Vienna Convention”) and the Convention on

Supplementary Compensation for Nuclear Damage (hereinafter called: “the Convention on

Supplementary Compensation”, of CSC). Whereas the Protocol to the Vienna Convention –

quite logically – modifies the Vienna Convention, the CSC is an independent “stand-alone”

31 Both the Paris and Brussels Supplementary Conventions have been supplemented by a few additional protocols. The

Protocol to the Paris Convention of 16 November 1982 adjusts some of the definitions and imposes liability on the operator for damage to the means of transport; the Protocol to the Paris Convention of 16 November 1982 changes the unit of account into SDR and increases the liability amounts of the three tiers from the initial 120 million up to 300 million SDRs. Although the basic text is always that of the Paris Convention, when referred to the latter it will include the additional protocols as well. In this respect, see, inter alia, M. Lagorce (1993), at 24.

32 After the Chernobyl accident several conventions concerning nuclear safety issues have been adopted as well. In this paper, we only discuss the international conventions dealing with nuclear liability and compensation.


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convention, since any country can join the Convention without having to be a Party to the

Paris or Vienna Convention.

33. Finally, the revision process of the NEA-regime resulted in the opening for signature

of two new instruments on 12 February 2004: the Protocol to amend the Convention on Third

Party Liability in the Field of Nuclear Energy of 29 July 1960 (hereinafter referred to as “the

Protocol to the Paris Convention”) and the Protocol to amend the Convention of 31 January

1963 supplementary to the Convention of 29 July 1960 on Third Party Liability in the Field of

Nuclear Energy (hereinafter called “the Protocol to the Brussels Supplementary Convention”).

34. In order to be able to make the distinction between the different treaties, it is useful to

distinguish the nuclear international liability regime of the first generation on the one hand

(being the Paris Convention, the Brussels Supplementary Convention and the Vienna

Convention) and the nuclear international liability regime of the second generation on the

other hand (all the other Conventions mentioned above). Whereas the nuclear liability

conventions of the first generation consisted of three conventions, the nuclear liability

conventions of the second generation added five more treaties. Thus, as a result of the revision

process, the international nuclear compensation system consists of no less than eight

international conventions. The table hereunder gives an overview of the different conventions.

Table 1: Overview of the international nuclear liability conventions

Overview of the international nuclear liability conventions

First generation Second generation

NEA-regime Paris Convention on Third Party Liability in the Field of Nuclear Energy of 29 July 1960

Protocol to amend the Convention on Third Party Liability in the Field of Nuclear Energy of 29 July 1960 of 12 February 2004

Brussels Supplementary Convention to the Paris Convention on Third Party Liability in the Field of Nuclear Energy of 31 January 1963

Protocol to amend the Convention of 31 January 1963 supplementary to the Convention of 29 July 1960 on Third Party Liability in the Field of Nuclear Energy of 12 February 2004

IAEA-regime Vienna Convention on Civil Liability for Nuclear Damage of 21 May 1963

Protocol to Amend the 1963 Vienna Convention on Civil Liability for Nuclear Damage of 12 September 1997

- Joint Protocol Relating to the Application of the Vienna Convention and the Paris Convention of 21 September 1988

- Convention on Supplementary Compensation for Nuclear Damage of 12 September 1997


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35. Hereunder we will now first briefly explain the scope (2.3) and the principles

underlying both the Paris and Vienna Conventions as they were laid down in the nuclear

liability conventions of the first generation (2.4). After that, we will explain how this regime

has been changed by the conventions of the second generation, thus equally indicating how

the compensation regime is organized today (2.4).

2.3 Scope of the international nuclear liability conventions

36. Before analysing the major principles of the nuclear liability conventions, it is useful

to determine their scope: to what types of accidents do the conventions apply and until where

and when do they apply.

2.3.1 Scope “ratione materiae”

37. According to Article 3.1 of the Paris Convention, the operator of a nuclear installation

shall be liable, in accordance with the Convention, for: damage to or loss of life of any

person; and damage to or loss of any property other than the nuclear installation itself and any

other nuclear installation, including a nuclear installation under construction, on the site

where that installation is located; and any property on that same site which is used or to be

used in connection with any such installation, upon proof that such damage or loss

(hereinafter referred to as "damage") was caused by a nuclear incident in such installation or

involving nuclear substances coming from such installation. We find a similar definition in

Article II.1 of the Vienna Convention: ‘The operator of a nuclear installation shall be liable

for nuclear damage upon proof that such damage has been caused by a nuclear incident in his

nuclear installation (…)”. Two elements are crucial in determining the scope of the

conventions: nuclear installations and nuclear incident.

38. A nuclear incident is being defined as: “means any occurrence or succession of

occurrences having the same origin which causes damage, provided that such occurrence or

succession of occurrences, or any of the damage caused, arises out of or results either from

the radioactive properties, or a combination of radioactive properties with toxic, explosive, or

other hazardous properties of nuclear fuel or radioactive products or waste or with any of

them, or from ionizing radiations emitted by any source of radiation inside a nuclear

installation.” (Article 1.1 of the Paris Convention). According to Article I.l of the Vienna

Convention a nuclear incident means “any occurrence or series of occurrences having the

same origin which causes nuclear damage”. The Paris Convention thus links the occurrence or


18

the damage to radioactive properties of radioactive material used in a nuclear installation. The

Vienna Convention has the same link, via the definition of nuclear damage. 33

39. This definition implies that there is a nuclear incident, according to the Vienna and

Paris Convention, if a damage was caused whereby either the damage itself or the occurrence

arises out of or results from the radioactive properties, or a combination of radioactive

properties with other properties of substances inside a nuclear installation. In principle, one

could say that as soon as either the damage or the occurrence have a radioactive nature or

cause, the definition of “nuclear incident” of the Conventions will apply. Therefore, if both

the occurrence and the damage are due to radioactivity, compensation may be claimed under

the Conventions. However if the occurrence and the damage are conventional, this will fall

outside their scope. Compensation may, however, be claimed under the Conventions either

where an occurrence due to radioactivity causes conventional damage or injury or where an

occurrence of conventional origin causes radiation damage or injury.34

40. Note that the text of the Conventions does not require as such there to be a sudden

occurrence; therefore one can assume that the Conventions apply to accidental and gradual

pollution. This is confirmed by the Exposé de Motifs of the Paris Convention: “an

uncontrolled release of radiation extending over a certain period of time is considered to be a

nuclear incident if its origin lies in one single phenomenon even though there has been an

interruption in the emission of radioactivity”.35

41. The Paris Convention defines a nuclear installation as follows: “reactors other than

those comprised in any means of transport; factories for the manufacture or processing of

nuclear substances; factories for the separation of isotopes of nuclear fuel; factories for the

reprocessing of irradiated nuclear fuel; facilities for the storage of nuclear substances other

than storage incidental to the carriage of such substances; and such other installations in

which there are nuclear fuel or radioactive products or waste as the Steering Committee for

33 According to Article I.k of the Vienna Convention nuclear damage means “ (i) loss of life, any personal injury or any

loss of, or damage to, property which arises out of or results from the radioactive properties or a combination of radioactive properties with toxic, explosive or other hazardous properties of nuclear fuel or radioactive products or waste in, or of nuclear material coming from, originating in, or sent to, a nuclear installation; (ii) any other loss or damage so arising or resulting if and to the extent that the law of the competent court so provides; and (iii) if the law of the Installation State so provides, loss of life, any personal injury or any loss of, or damage to, property which arises out of or results from other ionizing radiation emitted by any other source of radiation inside a nuclear installation”.

34 Exposé des Motifs of the Paris Convention, nr. 8. 35 Exposé des Motifs of the Paris Convention, nr. 8.


19

Nuclear Energy of the Organisation (hereinafter referred to as the "Steering Committee") shall

from time to time determine; any Contracting Party may determine that two or more nuclear

installations of one operator which are located on the same site shall, together with any other

premises on that site where radioactive material is held, be treated as a single nuclear

installation.” (Article 1.2 of the Paris Convention). According to Article I.j of the Vienna

Convention a nuclear installation means “(i) any nuclear reactor other than one with which a

means of sea or air transport is equipped for use as a source of power, whether for propulsion

thereof or for any other purpose; (ii) any factory using nuclear fuel for the production of

nuclear material, or any factory for the processing of nuclear material, including any factory

for the re-processing of irradiated nuclear fuel; and (iii) any facility where nuclear material is

stored, other than storage incidental to the carriage of such material; provided that the

Installation State may determine that several nuclear installations of one operator which are

located at the same site shall be considered as a single nuclear installation.”

42. The definition of nuclear installation in the Paris Convention is a negative definition:

if a reactor does not fall within the list of Article 1.2, it is to be considered as a nuclear

installation in the sense of the Conventions. Basically, the result is very similar under the

Vienna Convention: the Convention applies only to nuclear incidents occurring at or in

connection with certain nuclear installations. As such, the definition of nuclear installation is

quite broad. Especially risks associated with these kinds of activities are, in the spirit of the

Conventions, considered to represent an important risk, and thus will require the application

of the special nuclear liability regime.

43. Therefore, the Conventions will not apply to all accidents with nuclear material and

releasing radioactivity. E.g. if radioactivity release takes place in a hospital in the course of a

medical treatment or diagnosis, this will not be considered as an incident in a nuclear

installation as defined by the Conventions. In that case common tort law will apply.

44. It seems that the criterion of the drafters of the Conventions has been the criticality of

the installation and, associated to that, the risk of release of important quantities of ionising

radiation and thus capable of touching the population. The Exposé des Motifs of the Paris

Conventions refers to mining, milling and the physical concentration of uranium ores and

factories for the manufacture or processing of natural or depleted uranium, facilities for the

storage of natural or depleted uranium: they do not involve high levels of radioactivity and


20

therefore fall outsides the exceptional régime of the Convention.36 For the same reason, the

Steering Committee of the NEA has indicated that sub-critical assemblies should not be

included in the definition of “reactor” within the meaning of Article 1 (a) (ii) of the Paris

Convention.37 However, installations for the disposal of nuclear substances shall, for the

preclosure phase, be considered as a nuclear installation.38 Moreover, the Steering Committee

has indicated that the provisions of the Paris Convention should be interpreted as covering

nuclear installations in the process of decommissioning.39

45. The Exposé des Motifs of the Paris Convention indeed states at several occasions that

the Convention provides for an exceptional régime and its scope is limited to risks of an

exceptional character for which common law rules and practice are not suitable. Whenever

risks, even those associated with nuclear activities, can properly be dealt with through existing

legal processes, they are left outside the scope of the Convention.40 We read the same in the

Official Records of the Vienna Convention: the special rules of the Convention are

necessarily only applicable with respect to damage which, as compared to that resulting from

conventional activities, is of an extraordinary nature and cannot be covered by conventional

insurance arrangements.41

2.3.2 Territorial scope

46. According to Article 2 of the Paris Convention, the Convention does not apply to

nuclear incidents occurring in the territory of non-Contracting States or to damage suffered in

such territory, unless otherwise provided by the legislation of the Contracting Party in whose

territory the nuclear installation of the liable operator is situated.

47. The Vienna Convention does not have any specific provision with regard to its

territorial scope. The draft Vienna Convention, debated at the Diplomatic Conference

contained however a similar provision as the one in the Paris Convention. This provision was

rejected stating that it was contrary to international law that the benefits of the Conventions

should be applied to non-contracting States.42 Despite the absence of any specific provision in

36 Exposé des Motifs of the Paris Convention, nr. 9. 37 Interpretation of the Steering Committee of 8 June 1967 (NE/M(67)1]. 38 Decision of the Steering Committee of 11 April 1984 (NE/M(84)1]. 39 Interpretation of the Steering Committee of 28 April 1987 (NE/M(87)1]. 40 Exposé des Motifs of the Paris Convention, nr. 7. 41 Official Records Vienna Convention, p. 71. 42 Official Records Vienna Convention, p. 122.


21

this regards, it seems to be accepted that the Vienna Convention, like the Paris Convention,

only applies to nuclear accidents or damage suffered in the territory of a Contracting Party.

48. Note that the Protocol of the Vienna Convention states that the Convention shall apply

to nuclear damage wherever suffered. However, the legislation of the Installation State may

exclude from the application of this Convention damage suffered (i) in the territory of a non-

Contracting State; or (ii) in any maritime zones established by a non-Contracting State in

accordance with the international law of the sea. Such an exclusion may apply only in respect

of a non-Contracting State which at the time of the incident (i) has a nuclear installation in its

territory or in any maritime zones established by it in accordance with the international law of

the sea; and (ii) does not afford equivalent reciprocal benefits.

2.4 Principles underlying the international liability conventions of the first generation

49. The compensation regime introduced in the Paris and Vienna conventions is based

upon a variety of principles: strict liability, legal channelling of the liability to the nuclear

operator, limitation of liability, compulsory insurance and exclusive jurisdiction.

2.4.1 Strict liability

50. According to Art. 3 of the Paris Convention, the operator of a nuclear installation shall

be liable for: damage to or loss of life of any person; and damage to or loss of any property

other than the nuclear installation itself and any other nuclear installation, including a nuclear

installation under construction, on the site where that installation is located; and any property

on that same site which is used or to be used in connection with any such installation. This

liability is established upon proof that such damage or loss was caused by a nuclear accident

in such installation or involving nuclear substances coming from such installation. Thus, a

victim wanting to introduce a claim against a nuclear operator does not have to prove a fault

committed by the operator. This type of liability is generally known as strict liability.

51. However, the Paris Convention leaves in place liability of “any individual for

damage caused by a nuclear incident for which the operator, by virtue of Article 3(a)(ii)(1)

and (2) or Article 9, is not liable under the Paris Convention and which results from an act or

omission of that individual done with intent to cause damage”.


22

52. Article 3(a)(ii)(1) and (2) of the Paris Convention refers to damage to the nuclear

installation(s) itself and on-site property, whereas Article 9 refers to situations of force

majeure which is, except if further confined by national law, limited to nuclear incidents

directly due to “an act of armed conflict, hostilities, civil war, insurrection or a grave natural

disaster of an exceptional character”.43 Therefore, in such cases, the operator is not liable, nor

will its liability insurance coverage be triggered for compensating damage as a result of these

events. In this respect, is has to be noted that the nuclear liability regime in the Paris

Convention provides for a quite stringent liability of the operator, given the fact that the

operator will still be liable in cases where, under general tort law, classic exonerations would

apply.

53. According to the Exposé des Motifs of the Paris Convention: “the absolute liability

of the operator is not subject to the classic exonerations such as force majeure, Acts of God or

intervening acts of third persons, whether or not such acts were reasonably foreseeable and

avoidable. (…) The only exonerations lie in the case of damage caused by a nuclear incident

directly due to certain disturbances of an international character such as acts of armed conflict

and hostilities, of a political nature such as civil war and insurrection, or grave natural

disasters of an exceptional character, which are catastrophic and completely unforeseeable, on

the grounds that all such matters are the responsibility of the nation as a whole.”. The nuclear

operator is therefore liable for damage caused by acts of terrorism.44

54. The Exposé des Motifs of the Paris Convention qualifies this type of liability as

absolute liability. This type of liability was motivated by the fact that already in the fifties,

there was a long-established tradition of legislative action or judicial interpretation that a

presumption of liability for hazards created arises when a person engages in a dangerous

activity. It was further noted that, because of the special dangers involved in the activities

within the scope of the Convention and the difficulty of establishing negligence in view of the

complex techniques of atomic energy, this presumption has been adopted for nuclear

liability.45

43 We find a similar provision in Art. IV.3(a) of the Vienna Convention: “No liability under this Convention shall attach

to an operator for nuclear damage caused by a nuclear incident directly due to an act of armed conflict, hostilities, civil war or insurrection”.

44 Nathalie Horbach, Omer F. Brown, II, and Tom Vanden Borre, (2002), at 231. 45 Exposé des Motifs, n° 11.


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55. According to Article IV of the Vienna Convention, the liability of the nuclear operator

“shall be absolute”. This liability is subject to the same exonerations as under the Paris

Convention. However, nuclear liability under the Paris and the Vienna Conventions is

certainly not entirely absolute, given the fact that the nuclear operator will not be liable in a –

limited – number of cases of force majeure.

2.4.2 Legal channelling of liability to the nuclear operator

56. A good understanding of the concept of legal channelling of all liability to the nuclear

operator necessitates a deeper analysis of the principle of channelling itself (2.4.2.1) and of

the exceptions to legal channelling (2.4.2.2).

2.4.2.1 The principle of legal channelling

57. Article 6 of the Paris Convention introduces the principle of legal channelling of

liability to the nuclear operator. The text of the Convention reads as follows:

a. The right to compensation for damage caused by a nuclear incident may be exercised

only against an operator liable for the damage in accordance with this Convention,

or, if a direct right of action against the insurer or other financial guarantor

furnishing the security (...) is given by national law, against the insurer or other

financial guarantor.

b. Except as otherwise provided in this Article, no other person shall be liable for

damage caused by a nuclear incident (...).

c. (...) ii. The operator shall incur no liability outside this Convention for damage caused

by a nuclear incident.

58. Article II of the Vienna Convention reads:

5. Except as otherwise provided in this Convention, no person other than the operator

shall be liable for nuclear damage. This, however, shall not affect the application of

any international convention in the field of transport in force or open for signature,

ratification or accession at the date on which this Convention is opened for signature.

6. No person shall be liable for any loss or damage which is not nuclear damage

pursuant to sub-paragraph (k) of paragraph 1 of Article I but which could have been

included as such pursuant to sub-paragraph (k) (ii) of that paragraph.


24

59. This legal channelling has three aspects. 46 First, the right to compensation can only be

exercised against the nuclear operator (or his insurer) – under the conditions of the

Conventions. Second, no one else but the nuclear operator47 is liable for damage caused by a

nuclear accident. Finally, the Conventions are the only legal basis for a liability claim against

the nuclear operator in case of a nuclear accident. Victims cannot call upon other legal

provisions (especially those based on general tort law); not against the nuclear operator nor

again any one else (like the supplier or desginer of the nuclear power plant). Due to the

exclusion of any other basis for liability claims,48 victims of nuclear incidents may only sue

one person: the nuclear operator. This type of liability is therefore also referred to as

“exclusive liability”49 or concentration of liability.

60. According to the Exposé des Motifs of the Paris Convention, it is essential to the

notion of channelling liability onto the operator that “no actions may lie against any other

person and in particular, any person who has supplied any services, materials or equipment in

connection with the planning, construction, modification, maintenance, repair or operation of

a nuclear installation”.50 Indeed, under ordinary tort law, should an incident arise due to a

defect in design or in material supplied, a person suffering damage may well have a right of

action against the supplier, for example, on the basis of the so-called product liability.

61. Under the Vienna Convention, legal channelling was also presented as being

beneficial for victims and for the industry: “In order to facilitate, for the victims, the filing and

litigation of claims and for the persons liable the purchase of financial coverage for their

liability, the Convention channels liability for nuclear damage to one person”.51

62. We find a similar reasoning in the Paris Convention. Legal channelling was deemed

desirable to avoid difficult and lengthy questions of complicated legal cross-actions to

46 In doctrine a distinction is traditionally made between economic or indirect channelling and legal or direct channelling

of liability. Legal channelling means that only one single, designated person is liable for all damage caused by a certain activity or fact, even if other persons have caused the damage. A claim against these other persons is legally impossible, precisely because of the fact that liability is completely concentrated on one person – therefore channelling is also often referred to as exclusive liability or concentrated liability. Economic channelling means that the person causing the damage is in principle liable, but that only one designated person will bear the eventual economic burden of that damage. See H. Cousy (1974-1975), at 44; W. Daubler (1962); P.C. Mohr (1970); H.D. Mosthaf (1967), at 167; Tom Vanden Borre (1999), at 13 et seq.

47 The operator is the person designated by the competent authorities as the operator of a nuclear installation. See Art. 1(a) of the Paris Convention.

48 Norbert Pelzer (1994) at 9. 49 See, e.g., Julia Schwartz (2006), at 40. 50 Exposé des Motifs, Motif 17. 51 Official Records Vienna Convention, p. 72.


25

establish in individual cases who is legally liable. Secondly, it was argued that such

channelling would obviate the necessity for all those who might be associated with the

construction or operation of a nuclear installation other than the operator himself to buy

insurance also, and thus allows a concentration of the insurance capacity available.52 Note that

these arguments in the official Exposé des Motifs of the Paris Convention are the same as

those put forward by the Harvard Report.53 Also in literature we see a similar reasoning.

Several authors claim that legal channelling brings benefits to victims in terms of legal

certainty.54

2.4.2.2 Exceptions to the legal channelling

63. Basically, the nuclear liability Conventions provide for two types of exceptions to the

exclusive nature of the operator’s liability. In both cases there is, strictly speaking, no longer

an exclusive liability of the nuclear operator for damage caused by a nuclear accident

pursuant to the Conventions.

64. Article 6 (c) i) of the Paris Convention deals with the liability of others persons than

the nuclear operator.55 It says that the Convention does not affect the liability of any

individual for damage caused by a nuclear incident for which the operator, by virtue of Article

3(a)(ii)(1) and (2) or Article 9, is not liable under this Convention and which results from an

act or omission of that individual done with intent to cause damage.56 Article 3 (a) (ii) refers

to damage to or loss of any property other than (1) the nuclear installation itself and any other

nuclear installation, including a nuclear installation under construction, on the site where that

installation is located; and (2) any property on that same site which is used or to be used in

connection with any such installation. Article 9 refers to the limited cases of force majeure

applicable to nuclear accidents.

65. The second type of exception is where the Conventions allow for the operator to have

a right of recourse. When discussing the operator’s right of recourse, a careful distinction is to

52 Exposé des Motifs, Motif 15. 53 Cf. supra, section 2.2. 54 C. Stoiber, A. Baer, N. Pelzer and W. Tonhauser (2003), at 112. 55 The corresponding provision in the Vienna Convention is Article IV.7. 56 The Conventions also provides that it does not affect the liability of a person duly authorized to operate a reactor

comprised in a means of transport. But since we do not consider transport in our study, we do not further analyse this part of the Article.


26

be made between the right of recourse for compensation paid to victims of a nuclear accident

and for damage to on-site property damage.

2.4.2.2.1 Right of recourse for compensation paid to third parties

66. Both the Vienna and Paris Conventions provide for a right of recourse of the operator.

This means that the operator is liable for nuclear damage under the Conventions, but that he

has a claim against another person for the compensation he (or his insurer) has paid to

victims. According to Article X of the Vienna Convention the operator has a right of recourse

only if this is expressly provided for by a contract in writing; or if the nuclear incident results

from an act or omission done with intent to cause damage, against the individual who has

acted or omitted to act with. We find the corresponding provision under Article 6 (f) of the

Paris Convention.

67. The second exception provides for a right of recourse against an individual person

who has deliberately caused a nuclear accident (“act or omission done with the intent to cause

damage”); but this is less relevant for our analysis.

68. Truly interesting for our analysis however, is the other exception. Given the fact that

the Conventions provide for a right of recourse only if this expressly provided for by contract,

this right of recourse can, by definition, only be exercised where there is a contractual

relationship between the operator and that person. The question arises why it was deemed

necessary to limit the right of recourse of the nuclear operator.

69. The limitation of the right of recourse by the nuclear operator to cases where this has

been expressly provided for by contract was motivated by the fact that if recourse actions by

the operator against suppliers in respect of any sums which the operator has paid as

compensation were possible, each supplier would have to insure himself against the same risk

already covered by the operator’s insurance. This would, according to the authors of the

Convention, involve a costly duplication of insurance with no benefit to victims.57

70. The Official Records of the Vienna Conventon reveal that there has indeed been

discussion as to the necessity limiting the operator’s right of recourse. An amendment has

been discussed providing for an explicit right of recourse of the operator against any person

57 Exposé des Motifs, Motif 18.


27

having manufactured materials or equipment for, or who has furnished materials, equipment

or services in connection with the design, construction, repair or operation of the nuclear

installation.58

71. According to the authors of this amendment the principle of channelling was one of

the basic principles of the Convention, but it applied only to the relationship between the

nuclear operator and the victim. Once the operator had paid compensation, channelling had

fulfilled its role.59 The proposed amendment provided for a right of recourse of the nuclear

operator against his suppliers provided they comitted a “fault”, i.e. the operator would have

had to prove that the supplier was negligent in the process of production or in rendering

certain services to the nuclear operator. Moreover, if the nuclear operator knew he had a right

of recourse against his supplier, he would be more willing to provide adequate protection for

victims. 60 The main argument of the authors of the amendment was that without a right of

recourse, manufactures and suppliers would be completely absolved from all responsibility. In

other words, making suppliers liable (even by way of recourse under a system of fault

liability) would increase vigilance in ensuring that materials, equipment and service were

satisfactory.61

72. The opponents of the proposed amendment saw things differently. They claimed that

if suppliers were deprived from claims by the operator, the effect on the nuclear industry

would be disastrous62 and that the promotion of the atomic industry would be seriously

jeopardised if the amendement were adopted. 63 Another argument was that this Convention

would become unacceptable to a large number of countries, in particular for those who were

parties to the Paris Convention.

73. The amendement was rejected, 17 votes in favour, 24 against and 7 abstentions.

Amongst the countries having voted against were the US, UK, the former Soviet Union and

several west-European countries.

58 Official Records Vienna Convention, p. 436-437. 59 Official Records Vienna Convention, p. 293. 60 Official Records Vienna Convention, p. 294. 61 Official Records Vienna Convention, p. 295 and p. 300. 62 Official Records Vienna Convention, p. 295. 63 Official Records Vienna Convention, p. 297.


28

74. In case of a nuclear accident, it is fair to assume that also the nuclear operator will

suffer own damages: damage to the nuclear installation and to goods and materials on the

nuclear site, but also economic damages given the fact that due to the nuclear accident, the

power reactor will most likely not be able to produce power at least not for quite a while. The

question arises as to whether the nuclear operator can file a claim against e.g. his suppliers as

far as his own damage is concerned.

2.4.2.2.2 Right of recourse for on-site property damage

75. We already know that, with regard to third party liability claims, a right of recourse is

only possible if expressly provided for by contract. But what about possible claims of the

nuclear operator against his suppliers for onsite damage and other own damages. In literature,

we find two theses which are opposite to each other. 64

76. According to one thesis, legal channelling of liability under the nuclear liability

Conventions excludes every common tort law claim from the operators to his suppliers. This

thesis is based on three arguments.65

77. First, the Conventions do not make any distinction between third party liability and

contractual liability. They state that the right to compensation for damage caused by a nuclear

incident may be exercised only against an operator liable for the damage in accordance with

this Convention and that no other person shall be liable for damage caused by a nuclear

incident. Those who defend this thesis are of the opinion that they find support in the Exposé

des Motifs of the Paris Convention: “It is essential to the notion of channelling liability onto

the operator that no actions may lie against any other person and in particular, for example,

any person who has supplied any services, materials or equipment in connection with the

planning, construction, modification, maintenance, repair or operation of a nuclear

installation. In the ordinary course of law, on the contrary, should an incident arise due to a

defect in design or in material supplied, a person suffering damage may well have a right of

action against the supplier, for example, on the basis of the so-called products liability.”66

Article 6 c), i) of the Paris Convention provides for the limited number of cases where another

64 G. Vedel (1973), at 39 ff. 65 T. Wiwen-Nilsen (1997). 66 Exposé des Motifs, nr. 17.


29

person than the nuclear operator can be held liable. That Article refers to Article 3 (ii) (1) and

(2) which deals with damage to the installation.

78. The fact that Article 3 of the Paris Convention exonerates the nuclear operator from

damage to the nuclear installation or to any property on that same site which is used or to be

used in connection with any such installation implies that such damage does not need to be

compensated by the operator nor by anyone else (hereinafter referred to as “on-site damage”).

Therefore, the general wording of the legal channelling of liability to the nuclear operator

offer suppliers not only immunity from third party liability but also from claims by the

nuclear operator with regard to on-site damage.

79. Second, since the Conventions provide for a (limited) right of recourse by the nuclear

operator, contractual liability is being dealt with by the Conventions. The Contracting Parties

do have foreseen the possibility by the nuclear operator to file a contractual claim. Therefore,

the nuclear operator will only have a claim if this was provided for by contract. This holds

true for compensation the operator (or his insurer) has paid to victims of a nuclear accident as

well as for on-site damage. Should the Contracting Parties have wanted to leave common

contractual claims open, they would explicitly have indicated that rather than formulating

channelling in a very general way.

80. Third, the defenders of this thesis refer to the overall reason for introducing legal

channelling which is not to hinder the development of nuclear energy by concentrating all

liability to one single person (being the nuclear operator).

81. The other thesis defends the view that legal channelling of liability to the nuclear

operator does not imply that he does not have the possibility to introduce a claim for on-site

damage. According to this second thesis the Conventions only relate to the extra-contractual

liability and subsequent recourse actions. Also here we find three arguments.

82. First, Article 6 of the Paris Convention can only have one aim: it says that the right to

compensation for damage due to a nuclear accident can only be exercised against the nuclear

operator who is liable according to the Conventions. This provision can only aim at claims

introduced by other persons than the nuclear operator since the operator cannot be liable for

damage to his own property.


30

83. Secondly, reference is made to fact that a separate provision was needed in the

Conventions in order to limit the rights of recourse of the nuclear operator. The contractual

liability only applies to the rights of recourse of the nuclear operator with regard to

compensation he has paid. Therefore there is only a limitation of the right of recourse of the

nuclear operator with regard to claims third parties have filed against the operator; there is no

such limitation for claims by the operator with regard to the compensation of damage for on-

site property damage.

84. The third argument refers to aim of the Conventions. They concentrate all possible

liability claims after a nuclear accident to the nuclear operator because a nuclear accident

leads to an unlimited risk that cannot be insured. But this is only the case with regard to third

party liability. Channelling leads all possible claims of third parties after a nuclear accident to

the nuclear operator but it does not deny the operator the right to file claims for on-site

property damage. Reference is being made to the Exposé des Motifs of the Paris Convention:

“The Convention provides an exceptional régime and its scope is limited to risks of an

exceptional character for which common law rules and practice are not suitable. Whenever

risks, even those associated with nuclear activities, can properly be dealt with through

existing legal processes, they are left outside the scope of the Convention.” 67

85. According to this reasoning the Conventions provide for an exceptional regime which

is only applicable to exceptional risks that are not suited to be dealt with under common tort

law. With regard to damage to on-site property the risk is not considered to be that

exceptional and therefore common tort law can be applied. Moreover, the Conventions ony

deal with third party claims like mentioned in the title of the Paris Convention (“third party

liability”). This is confirmed in the Exposé des Motifs: “A special régime for nuclear third

party liability is necessary since the ordinary common law is not well suited to deal with the

particular problems in this field”.68

86. It thus seems that the defenders of the two theses do agree on one thing: the absence in

the Conventions of a provision with regard to the liability of the supplier of the nuclear

operator for on-site property damage. But whereas some say that this absence indicates that

67 Exposé des Motifs, nr. 7. 68 Our emphasis. Exposé des Motifs, nr. 2.


31

the supplier cannot be held liable under the Conventions nor on any other legal basis, the

others conclude exactly the opposite.

87. We add two elements to this debate: the Harvard Report and the negotiations of the

Vienna Convention.69

88. As already mentioned, legal channelling has been introduced to exclude the liability of

(at that time US) suppliers. Two principles were introduced under the chapter “liability of

suppliers”: victims cannot file a claim against the suppliers of the nuclear operator and the

right of recourse of the latter is limited.

89. The same chapter of the report deals with the liability of suppliers and sub-suppliers

concerning on-site property damage. The Harvard Rapport reads: “The foregoing comments

are addressed only to third party liability as it arises on, suits by injured members of the

public against operators or suppliers of nuclear facilities, or in recourse actions by operators

against suppliers for the amount of their third party liability. There remains a serious

problem concerning the liability of suppliers and sub-suppliers towards the operator of the

nuclear facility for damage which has been caused to the operator himself, principally in the

form of on-site property damage.”70

90. This part of the Harvard Report demonstrates that the authors of the Report recognised

that the right of recourse of the nuclear operator only concerns claims paid by the nuclear

operator (or his insurer) for victims of a nuclear accident; damage to on-site property was a

separate issue.

91. The issue was also debated during the negotiations of the Vienna Convention. It even

seems that the principle itself that the nuclear operator could file a claim for on-site property

damage was recognised by several negotiators, a.o. by the US delegation: “He felt stronlgy

that the operator of an installation should keep his ordinary legal right to sue for damage to

his installation”.71 During the discussions, a vote was asked on the following principle: “That

an operator can, apart from the present Convention, sue any person under ordinary tort law for

69 See also T. Vanden Borre (2012) at 225 ff. 70 Harvard Rapport, p. 59. 71 Official Records Vienna Convention, p. 255.


32

damage caused to his installation, on-site property etc. (…)”. This principle was rejected by

12 votes in favour and 13 against and 18 abstentions. It seems that at a certain point there was

some confusion amongst negotiators.

92. In any case, the article-by-article comments of the Vienna Convention do seem to

offer guidance. We read that damage to the nuclear installation and to property of the operator

on the site is not subject to the system of the Convention. The normal rules of tort law apply

to such damage “which may enable the operator e.g. to sue suppliers under the principle of

products liability”.72

93. We therefore conclude that channelling of all liability to the nuclear operator as

provided for by the Conventions does not deprive the operator from introducing a claim

against his supplier(s) for on-site property damage.

2.4.3 Limitation of liability

94. According to Article 7 of the Paris Convention, the maximum liability of the operator

in respect of damage caused by a nuclear accident shall be 15 million SDRs or Special

Drawing Rights (€ 17.09 million or 22.91 million USD).73 According to Article V of the

Vienna Convention the liability of the operator may be limited by the Installation State to not

less than USD 5 million for any one nuclear incident.74

95. However, the Steering Committee of the NEA recommended Contracting Parties to set

a maximum liability of not less than 150 million SDRs75 (€ 170.93 million or USD 229.15

million). Article 7 of the Paris Convention allows for any Contracting Party to establish by

legislation a greater or lesser amount taking into account the possibilities for the operator to

obtain insurance or other financial security. Any Contracting Party, having regard to the

nature of the nuclear installation or the nuclear substances involved and to the likely

consequences of an incident originating therefrom, may establish a lower amount, provided

72 Official Records Vienna Convention, p. 84. 73 The exact value of the SDR is determined by the International Monetary Fund (IMF) and is published on its website.

For this study, we used the exchange rate of 11 November 2013: 1 SDR = 1.1395 € = 1.5276 USD. 74 Both the Paris and Vienna Conventions have opted for a limitation per incident. 75 Recommendation of the Steering Committee of 20 April 1990, NE/M(90)1, Paris Convention: Decisions,

Recommendations, Interpretations, Paris, OECD/NEA, 1990, p. 13.


33

that in no event any amount so established shall be less than 5 million SDRs (€ 5.7 million or

USD 7.64 million).76

96. The limitation of liability was considered to be necessary in order not to obstruct the

development of nuclear industry. The Exposé des Motifs of the Paris Convention reads that

“unlimited liability could easily lead to the ruin of the operator without affording any

substantial contribution to compensation for the damage caused”.77 The reason for this

limitation was therefore purely economical: the liability of the operator was limited to the

amount for which the insurance market was able to provide coverage.78 A similar reasoning is

put forward under the Vienna Convention: liability for nuclear damage is kept within limits

for which financial coverage can be obtained; the purpose of this limitation was to protect the

industry of incurring liability in excess of its financial capacity. The limitation of liability is

indeed clearly an advantage for the nuclear operator.79 Moreover, the Official Records of the

Vienna Convention mention the fact that the limitation of liability of the nuclear operator is

“to a certain extent” counterbalanced by the absolute nature of the operator’s liability.80

97. The liability of the operator is also subjected to a time limit. According to Article 8 of

the Paris Convention, the right to claim compensation will be extinguished if an action is not

brought within ten years from the date of the nuclear accident. The Contracting Parties have

nevertheless the option to establish a period longer then ten years, provided that the operator’s

liability is covered by insurance or any other financial guarantee. There is a similar provision

under Article VI of the Vienna Convention: Rights of compensation under the Convention

shall be extinguished if an action is not brought within ten years from the date of the nuclear

accident.

98. Also here financial constraints have motivated the limitation of liability in time. It is

recognised that not all latent effects of a nuclear accident will have become visible after ten

76 It is striking that, according to the wording of Article 7 of the 1960 Paris Convention, a maximum liability was

introduced. In practice, many countries did not implement this provision too strictly by either imposing a higher amount of liability (e.g. in Belgium an amount of € 300 million was set) or even by introducing a system of unlimited liability (Germany). Thus, contrary to the strict wording of Article 7 of the Paris Convention, several Contracting Parties took the liberty of going beyond the “maximum limit” set in the Convention (15 million SDRs) and maximum limit of the Recommendation of the NEA Steering Committee mentioned earlier (150 million SDRs). The wording of the Vienna Convention is different; there was no discussion that unlimited liability was in line with the strict wording of the Convention.

77 Exposé des Motifs, Motif 45. 78 Norbert Pelzer (1982), at 13. 79 C. Stoiber, A. Baer, N. Pelzer and W. Tonhauser (2003), 113. 80 Official Records Vienna Convention, p. 78.


34

years; but this period was to be considered as a “reasonable compromise since it is supposed

to cover most latent injuries with respect to which causation can be established with some

degree of certainty and does not expose the insurers to incalculable risks”.81 We find a similar

reasoning in the Exposé des Motifs of the Paris Convention, where reference is made to

concerns of the nuclear operators and their financial guarantors.82

99. Especially concerning bodily injury, some damage may not become visible or will not

be noticed until several years after the exposure to ionising radiation. However, the

Conventions do not address the problem that victims face when trying to establish the causal

link between their bodily injury and exposure to ionising radiation. According to Article 11 of

the Paris Convention and Article VIII of the Vienna Convention the nature, form and extent

of the compensation are governed by national law – being the law of the competent court.

2.4.4 Compulsory insurance

100. To cover his liability, the operator is required to have and maintain insurance or other

financial security of the amount of his liability and of such type and terms as the competent

public authority shall specify (Article 10 of the Paris Convention). This financial security may

be in the form of conventional financial guarantees or ordinary liquid assets, insurance

coverage or other. Also a combination of insurance, other financial security and State

guarantee may be accepted. Article VII of the Vienna Convention reads that the operator shall

be required to maintain insurance or other financial security covering his liability for nuclear

damage in such amount, of such type and in such terms as the Installation State shall specify.

101. Article 10 of the Paris Convention also indicates that it is for the competent public

authority to determine the type and terms of the insurance or other financial security which

the operator will be required to hold. The competent public authority must ensure that

insurance policies are satisfactory in that they do not contain clauses which might render them

ineffective, for example, that the insurer or other financial guarantor cannot put up any

defences such as non-payment of premiums against persons seeking compensation.83

81 Official Records Vienna Convention, p. 80. 82 Expose des Motifs, nr. 47. 83 Exposé des Motifs, Motif 49.


35

102. The question what should be done if something would happen to the financial security

(e.g. bankruptcy of the financial guarantor) is answered in the Exposé des Motifs of the Paris

Convention. Such circumstances could not set aside the obligation of the operator under

Article 10 or that of the State which is required to ensure that the operator always holds

financial security up to his maximum liability. The Contracting Parties may therefore be led to

intervene in such a situation “to avoid their international responsibilities being involved”.84

103. In literature, reference is often made to the “congruence principle”.85 According to this

principle, the operator’s liability is always covered by the same amount of financial cover (in

practice mainly insurance). The congruence principle applies in cases where the nuclear

operator’s liability is limited: the amount for which the operator must have a financial security

will equal the liability cap established by law.

104. The congruence principle will not apply where the liability of the operator is unlimited

since there is no unlimited financial cover (not in the nuclear insurance industry and not, to

our knowledge, in any industrial activity). In such a case, the operator will have to have a

financial security at least equal to the minimum liability amounts required by the

Conventions.

105. The obligation to have a financial security is to protect victims against the possible

insolvency of the nuclear operator.

2.4.5 Exclusive jurisdiction – obligation of having one single forum

106. Under common tort law, a nuclear accident can give rise to a great variety of civil

proceedings in courts in various countries (e.g. court in the country where the accident took

place, courts in the country where damage was suffered etc.). This would, according to the

authors of the Conventions, add costs to litigation86 and would hinder the equitable

distribution of compensation as soon as the damage would exceed the liability limit.

According to the Exposé des Motifs of the Paris Convention, a fair distribution of the

84 Exposé des Motifs, Motif 49. 85 Norbert Pelzer (2000), at 433 and Vanden Borre (2001) at 357 ff. 86 Official Records Vienna Convention, p. 84.


36

available amount for compensation would result in insoluble problems if the claims with

respect to one nuclear incident could be brought before different courts.87

107. The Vienna and Paris Convention therefore concentrate, in principle, all jurisdiction

over law-suits for compensation caused by a nuclear accident in one court which is a court in

the State where the nuclear accident occurred. According to Article 13(a) of the Paris

Convention, jurisdiction over actions under Articles 3, 4, 6(a) and 6(e) shall lie only with the

courts of the Contracting Party in whose territory the nuclear incident occurred.88 Where a

nuclear incident occurs outside the territory of the Contracting Parties, or where the place of

the nuclear incident cannot be determined with certainty, jurisdiction over such actions shall

lie with the courts of the Contracting Party in whose territory the nuclear installation of the

operator liable is situated. According to Article XI of the Vienna Convention, jurisdiction

over actions under Article II shall lie only with the courts of the Contracting Party within

whose territory the nuclear incident occurred.89 The Conventions thus exclude e.g. jurisdiction

of the courts of a Contracting Party where damage has been suffered.

108. Where the Conventions do provide for a single forum in the transboundary context

where several countries suffered nuclear damage, the text of the Conventions do not require to

have one single court per country. There is however a Recommendation of the NEA Steering

Committee to provide for a single court to be competent to rule on compensation under the

Paris Convention.90

109. In order to simplify the enforcement of judicial decisions, Article13(d) of the Paris

Convention provides that judgments entered by the competent court after trial, or by default,

shall, when they have become enforceable under the law applied by that court, become

enforceable in the territory of any of the other Contracting Parties as soon as the formalities

required by the Contracting Party concerned have been complied with. We find a similar

provision under Article XII of the Vienna Convention: a final judgment entered by a court

87 Exposé des Motifs, Motifs 54-57. 88 The competent court shall thus deal with all actions which might be brought against an operator, either directly by

persons suffering damage (Article 3 of the Paris Convention) or by other persons who might be liable under international agreements in the field of transport or under the legislation of a non-Contracting State (Article 6 d and e of the Paris Convention). The forum for actions in recourse by an operator under Article 6(f) of the Paris Convention or for actions for contribution by an operator against other operators in the case of joint and several liability is not fixed in the Convention and will be decided upon by national law.

89 There are some exceptions in the same Article of the Convention. 90 Recommendation NE/M(90)2, 3 October 1990, Paris Convention. Decisions. Recommendations. Interpretations, NEA,

Paris, 1990, p. 15 .


37

having jurisdiction under Article XI shall, in principle, be recognized within the territory of

any other Contracting Party.

110. The concentration of jurisdiction within a single court is said to create legal certainty;

it also excludes the possibility for victims to try to bring their claims before jurisdictions who

seem to be more open to address the victims’ concerns. Indeed, the obligation of having a

single forum excludes forum shopping. According to certain authors, forum shopping would

be costly for operators and may result in bankruptcy of the operator leaving a lot of victims

without compensation.91 Other authors criticise the fact that lawsuits will be dealt with in the

Installation State and argue that victims should be able to bring their claims before a neutral

tribunal, i.e. a tribunal with no economic links to the nuclear operator.92

111. This concentration of all claims for nuclear damage into one forum is also one of the

key messages put forward by the Harvard Report. A clear concern of the drafters of the

Harvard Report was the issue of jurisdiction outside the system put forward by the Report

and, as we know now, later adopted by the nuclear liability Conventions. Indeed, the link

between the concentrated liability and concentrated jurisdiction has always been of critical

importance: the protection of US suppliers would only be effective if there were no

jurisdictions that would not apply all the nuclear liability principles i.e. if there were

jurisdictions without legal channelling of all liability to the nuclear operator or if there were a

judge outside the system of the conventions accepting competence e.g. claiming that the

compensation awarded under the international scheme would be insufficient.

112. The authors of the Harvard Report were well aware of the difficulties in providing

effective and global protection of US suppliers. Therefore the Report proposed “as a

minimum” that all countries should require by special legislation that their courts shall apply

all the provisions of the law of the installation state regulating or barring causes of action

against suppliers.93 This also explains why the Harvard Report was more in favour of a

worldwide nuclear liability convention instead of a more regional NEA convention. The more

countries have acceded to the international nuclear liability conventions, the smaller the risk

for suppliers to be confronted with jurisdiction outside this system and thus, the smaller the

91 C. Stoiber, A. Baer, N. Pelzer and W. Tonhauser (2003), at 115-116. 92 D.E.J. Currie (2007), at 86 and J.M. Van Dyke (2007), at 231 ff. 93 Harvard Report, p. 60.


38

risk of having to face a general and “not-channelled” tort law claim. Given the low amounts in

the (at that time) draft conventions, the authors of the Harvard Report wrote this was an “open

invitation for injured persons to sue suppliers in the United States or in other countries, not

party to the convention, in which suppliers may have assets”.94

113. Even if the conventions were adopted, the authors continued to be concerned because

suppliers would not be protected in cases in which both accident and injury occur in countries

which neither are parties to a limitation convention nor have enacted national limitation

legislation. The Report mentions the possibility to cure this defect by providing no recovery in

American courts in such cases but the authors did “not advocate such a step” because such a

measure would “constitute international bad manners”.95

114. The authors of the Harvard Report have considered the option to join the conventions.

However, they considered that the US had traditionally been reluctant to enter into

agreements to limit liability. Moreover it would have required extensive modification of the

Price-Anderson Act96 - e.g. with regard to legal channelling.

115. Finally, we also need to emphasize the likelihood of a criminal procedure after a

nuclear accident. It is fair to say that after a severe nuclear accident has taken place the Public

prosecutor of the country where the accident took place, often together with the nuclear safety

authority, will start an investigation to look for any possible breaches of criminal provisions

like causing physical harm to any person. This criminal procedure might interfere with the

provisions of the conventions. This can cause an important delay in awarding the first

compensation to victims since in some countries the civil claim must follow the proceeding of

the criminal investigation. This is e.g. the case if Belgium.97

2.4.6 Public funding

116. The principles of the nuclear liability regimes of the Paris and Vienna Conventions

discussed above provide for a compensation regime which basically consists of private

funding, i.e. funding that is financed by the nuclear operator, via his insurer. However, the

1963 Brussels Supplementary Convention of the NEA adds another two additional tiers of

94 Harvard Report, p. 85. 95 Harvard Report, p. 85. 96 Harvard Report, p. 88. 97 T. Vanden Borre and O. Bonotto (1998).


39

public funds. Here we thus see a major difference between the IAEA and NEA regime of the

first generation: whereas the first only consisted of a system of private funding, the latter

provided for both private and public funding.

117. 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”.98

118. 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 (€ 341.85 million or USD

458.29 million USD). Such compensation shall be provided:

- up to an amount of at least 5 million SDRs (€ 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 € 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 (€ 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.

119. 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

98 Consideration of the Brussels Supplementary Convention.


40

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

Conctracting Parties.

120. However, the Installation State can escape from its obligation to make national public

funds available. Under the Brussels Supplementary Convention, each Contracting Party has

indeed a certain freedom. It can either: 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.99

121. Above we have already mentioned the Preliminary Report; it is this Report which

introduced the principle of limiting the operator’s liability and of making public funds

available. It seems to be taken for granted that any figure of limited liability enacted by the

legislator is arbitrary (given the order of magnitude of a nuclear accident) and that, as a

consequence, the State will inevitably step in and pay additional compensation.100 The two

principles are indeed closely linked: because the limited liability will not allow for the

compensation of all the damage suffered, public funds must step in.

2.5 Changes after Chernobyl

122. The international nuclear liability Conventions established under the 1960 Paris

Convention annex the 1963 Brussels Supplementary Convention and under the 1963 Vienna

Convention were in force at the time of the Chernobyl accident that occurred on 26 April

1986. Although damage was also suffered in several countries across Europe, the discussed

liability regime could not be applied because the former Soviet-Union was not party to any of

the Conventions.101

99 For more details, see T. Vanden Borre (2007) at 303 ff. 100 C. Stoiber, A. Baer, N. Pelzer and W. Tonhauser (2003), 113. 101 N. Pelzer (2006), at 100; This probably explains why none of the affected States filed an official claim against the

former Soviet Union for compensating the loss suffered in its territory. Nathalie L.J.T. Horbach (1999), 55.


41

123. In any case, it soon became clear that even if the former Soviet Union were a member

to the Vienna Convention, not all damage could have been compensated for. First of all, most

damage in European countries was inflicted by economic losses due to contaminated food and

animals and by preventive measures taken by European governments.102 The Soviet

authorities questioned the necessity of the preventive measures taken by several countries.

Moreover, economic damage was not covered by the definition of nuclear damage under the

Conventions.

124. A second problem was that western European countries participated in the Paris

Convention that operated independently from the Vienna Convention. The transboundary

effects of the accident revealed the deficiencies of the existing treaty regimes in case of

widespread transboundary damage. The limited geographical scope, limiting the liability to

nuclear damage in signatory States appeared to be detrimental to a comprehensive model of

liability and compensation for damage caused by a nuclear accident.

125. Finally, the limited amounts of compensation and the limited liability (in amount and

in time) appeared to be problematic given the potential astronomic size of a nuclear accident.

126. Thus the Chernobyl accident highlighted the importance of having a wide international

acceptance of the international compensation regime and of the adequacy of that regime. The

need to modernise the international nuclear liability conventions resulted in the start of the

negotiations to revise the conventions, shortly after the accident. Important however is the fact

that the negotiators and drafters of the revised Conventions agreed that the Chernobyl

accident did not require a change of (any of) the five principles of the international nuclear

compensation scheme.103 In order words, the revision would result in a new and extended

scheme but this new scheme would still be based on strict, limited and channelled liability,

compulsory liability insurance and jurisdiction of one court.

127. The first result of the revision exercise is the 1988 Joint Protocol which will not be

further discussed here: it links the private funding under the Vienna Convention and the Paris

102 Report on the radiological impact of the Chernobyl accident in OECD countries, Nuclear Law Bulletin, 1987, 30; One

decade after Chernobyl, summing up the consequences of the accident, IAEA, 1996; A.I. Iorisch and O.A. Supataeva (1993) at, 70 et seq.

103 N. Pelzer (2006) at 101.


42

Convention in such a way that the benefit of the special regime of civil liability is extended to

all parties falling under either the Vienna or the Paris Convention. In fact, the Joint Protocol

therefore creates a link between the territorial scope of the Paris and Vienna Convention.104

128. Changes were also made as far as the private and public funding of the

international compensation regime are concerned. Four conventions were created in this

respect: the Protocol to the Vienna Convention, the Protocol to the Paris Convention, the

Protocol to the Brussels Supplementary Convention and the Convention on Supplementary

Compensation.

129. In the IAEA regime, a Protocol to the Vienna Convention was adopted on 12

September 1997.105 Article 7 of the Protocol amends Art. V of the Vienna Convention with

regard to the limited amount of liability. It states that the liability of the operator may be

limited by the Installation State for any one nuclear incident, either to not less than 300

million SDRs; or to not less than 150 million SDRs provided that in excess of that amount

and up to at least 300 million SDRs public funds shall be made available by that State to

compensate nuclear damage.106

130. Also a new Article VI of the Vienna Convention was introduced, according to

which rights of compensation shall be extinguished if an action is not brought within thirty

years from the date of the nuclear incident with respect to loss of life and personal injury and

within ten years from the date of the nuclear incident with respect to other damage. The

Protocol thus provides for the possibility to make public funds available – which was not the

case under the “original” Vienna Convention. The state only has an obligation to make public

funds available if it would set a lower liability amount than 300 million SDRs.

131. In the NEA regime, the Protocol to the Paris Convention introduces a new liability

limit in the Paris Convention: according to the new Article 7 of the Convention, each

104 For more details, see O. Von Busekist (1989). 105 The Protocol to the Vienna Convention has a triple goal: to provide for a broader scope, an increased amount of

liability of the operator of a nuclear installation and enhanced means for securing adequate and equitable compensation. But for the sake of our analysis we only focus on the limitation of liability.

106 Moreover the Protocol provides for a so-called phase-in mechanism for a 15-year period. Indeed, for a maximum of 15 years from the date of entry into force of the Protocol, the Installation State can set to a transitional amount of not less than 100 million SDRs in respect of a nuclear incident occurring within that period. An amount lower than 100 million SDRs may be established, provided that public funds shall be made available by that State to compensate nuclear damage between that lesser amount and 100 million SDRs (see Art. 7 of the Protocol to the Vienna Convention, amending Art. V of the Vienna Convention).


43

Contracting Party shall provide under its legislation that the liability of the operator in respect

of nuclear damage caused by any one nuclear incident shall not be less than € 700 million.

According to the Protocol to the Brussels supplementary Convention the Contracting Parties

shall undertake that compensation in respect of nuclear damage shall be provided up to an

amount of € 1.5 billion per nuclear incident. This will now be divided as follows:

- up to an amount of at least € 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 € 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 1,200 million € and € 1,500 million, out of public funds to be made

available by all the Contracting Parties according to the formula for contributions.

132. Two other important changes to the Paris Convention also need to be mentioned.

First, Article I B of the Protocol to the Paris Convention changes the definition of nuclear

damage. This will include in the future not only personal injury claims and property damage

claims, but also – to the extent determined by the law of the competent court – economic loss

arising from loss or damage, the costs of measures of reinstatement of the impaired

environment, loss of income deriving from a direct economic interest in any use or enjoyment

of the environment, and the costs of preventive measures.107 Second, Article 8 of the Paris

Convention is being modified so that with respect to loss of life and personal injury, the

nuclear operator will be liable for thirty years from the date of the nuclear accident (10 years

for other nuclear damage). Note that also the Protocol to the Vienna Convention provides for

the same, if not very similar, changes.108

133. Finally, the Convention on Supplementary Compensation (CSC), adopted on 12

September 1997, is a new and independent legal instrument, which means that a state does not

need to be party to the Vienna or Paris Convention in order to become a party to the CSC.

134. According to Article III.1.a of the CSC, the Installation State shall ensure the

availability of at least 300 million SDRs ( € 341,85 million or USD 458,29 million). This

provision provides for an obligation of the Installation State to ensure that 300 million SDRs

107 For the exact definition of these damages, we refer to the text of the Protocol. 108 For a more detailed analysis see inter alia J. Schwartz (2006) at 40; R. Dussart Desart (2005) at 75; N. Pelzer (2006)

at 73 ff.


44

are available; the Installation State is free to choose how this amount is funded (private

insurance, regional agreement, …). A State meets its obligation under Art. III.1.a of the CSC

when it imposes a nuclear liability on the operator for the entire amount. So, as such this

Article does not oblige a State to make public funds available.

135. 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.109 Basically,

this formula provides the basis for an international fund of approximately 300 million SDRs if

all countries having a nuclear power plant on their territory become member to the

Convention.110

136. Hence, States that become member to this Convention have two obligations:

provide for the availability of the amount in the first layer (entirely via the nuclear operator’s

liability, or partially by this liability and by public funding) and contribute to the second layer.

Basically, the first layer is nothing more than the obligation which States that are party to the

international system have under the Paris or Vienna Convention. The funds of the second tier

supplement the first tier of liability. Art. XI of CSC says that the funds of the second tier shall

be distributed as follows: 50% of the funds shall be available to compensate claims for

nuclear damage suffered in or outside the Installation State; 50% of the funds shall be

available to compensate claims for nuclear damage suffered outside the territory of the

Installation State to the extent that such claims are uncompensated from the former amount.

137. Summarising the compensation system of the international nuclear liability

conventions, one could say that all the conventions together provide for three types of funding

mechanisms:

• First, there is the individual liability of the nuclear operator (in practice this is funding

via the nuclear operator’s insurance coverage) – this is the liability amount as foreseen

in the Paris and Vienna Convention.

109 According to the following formula: - the amount which shall be the product of the installed nuclear capacity of that Contracting Party multiplied by 300

SDRs per unit of installed capacity; and - the amount determined by applying the ratio between the United Nations rate of assessment for that Contracting

Party as assessed for the year preceding the year in which the nuclear incident occurs, and the total of such rates for all Contracting Parties to 10% of the sum of the amounts calculated for all Contracting Parties.

110 Ben McRae (2000), at 176.


45

• Second, there is an obligation on an Installation State to make certain amounts of

money available; it can do so either by providing for public funding, either 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. 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). However, the conventions seem to allow Contracting Parties to

charge nuclear operators for this – at least the conventions do not seem to prohibit this.

One could even question whether EU-Member States are not obliged to charge for

making public money available, in order not to cause problems related to the EC-

Treaty provisions on state aid.111

138. The evolution of the nuclear compensation regime can be summarized as follows:

Table 2: Available amounts of compensation under the international nuclear liability conventions

Amount in million €

What convention Who pays? First

generation

Second

generation

Paris Convention Nuclear operator 5.7 700

Brussels Supplementary

Convention

Installation State (or

nuclear operator)

193.7 500

Collective State Fund 142.4 300

Total NEA-regime 341.8 1,500

Vienna Convention Nuclear operator 4.2 170.9

Collective State Fund - 170.9

Total Vienna Convention 4.2 341.8

Convention

onSupplementary

Compensation

Operator/installation State 341.8

Collective State Fund 341.8

Total CSC 683.7

111 This issue will however not be further developed within the scope of this study.


46

139. 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

€ 1.5 billion will be available (of which € 700 million is financed by the operator) whereas the

total amount of the initial Paris and Brussels Supplementary Convention was 356 million €.

The total amount available under the Vienna Convention is equal to the amount set by the

1963 Brussels Supplementary Convention.

140. Table 2 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.112 In absolute terms, there is considerably more public funding in the

conventions of the second generation: under the 2004 Brussels Supplementary Convention the

public intervention has more than doubled113 and under the IAEA-regime no public

intervention existed under the conventions of the first generation.

141. Of one looks at the total amounts available for vitcims, the picture is as follows. If a

country is only member of CSC and not of any of the other nuclear liability conventions, the

total amounts available for victims will be € 683,7 million. The same holds true for a country

which is member of the Vienna Convention and the CSC – in this case, the total amount

available for victims increase with the amount of the second layer of CSC, being € 341.8

million, in which case the total amount available for victims is € 683,7 million. If a country of

the NEA regime were to join the CSC, the total amount available for victims would be €

1.841 billion (€ 1.5 billion + € 341.8 million).

142. It is important to underline that out of the four new nuclear liability instruments that

resulted from the revision exercise, only one has entered into force so far. The Protocol to the

Vienna Convention entered into force on 4 October 2003; eleven countries were members at

the end of 2013.114

112 Tom Vanden Borre (2007) at 303-304. 113 In the second tier of the Installation State the amount rose from € 202 million to € 500 million; in the third tier, the

Collective State Fund went from approximately € 150 million to € 300 million. 114 Argentina, Belarus, Bosnia and Herzegovina, Kazakhstan, Latvia, Montenegro, Morocco, Poland, Romania, Saudi

Arabia and the United Arab Emirates. Source: website of the IAEA on 16 November 2013.


47

143. The other discussed Protocols and Conventions of the second generation have not

entered into force yet. Therefore, the compensation regime as summarized in table 2 will

hence only exist once all these new legal instruments have entered into force. At the end of

2013 the CSC was not yet in force– only four countries had signed and ratified the

Convention: Argentina, Morocco, Romania and the United States. According to Article XX of

the CSC, it will enter into force on the ninetieth day following the date on which at least 5

States with a minimum of 400,000 units of installed nuclear capacity have deposited an

instrument of ratification, acceptance or approval.

144. The Protocol to the Paris Convention and the Protocol to the Brussels Supplementary

Convention were opened for signature on 12 February 2004, but in November 2013 none of

these instruments entered into force – despite the Council Decision of 8 March 2004,

according to which Member States which are Party to the Paris Convention shall take

necessary steps to deposit simultaneously their instruments of ratification of the Protocol with

the Secretary General of the OECD “within a reasonable time and, if possible, before 31

December 2006”.115

145. The European Commission is currently in the process of drafting a proposal with

regard to nuclear liability. Already in 2007, the Commissioner of Energy, mr. A. Piebalgs said

that the current nuclear liability regimes did not guarantee the same level of compensation of

nuclear damage everyhere in the EU.116 Subsequently, the European Commission ordered a

study on the accession of Euratom to the nuclear liability regimes.117 In the 2012

Communication on the nuclear stress tests, the Commission announced its intention to

propose binding legislation in the area of nuclear insurance and liability.118 Finally, in fall

2013, the Commission organized a public consultation with regard to nuclear liability and

insurance. It is generally expected that based in the input received, the European Commission

will launch its proposal in early 2014.

115 Council Decision of 8 March 2004 authorising the Member States which are Party to the Paris Convention of 29 July

1960 on Third Party Liability in the Field of Nuclear Energy to ratify, in the interest of the European Community, the Protocol amending that Convention, or to accede to it, OJ, 1 April 2004, L 97/53.

116 Andris Piebalgs (2008), at 1073. 117 Available on the website of the European Commission: www.ec.europa.eu/energy/nuclear/studies/nuclear_en.htm 118 Communication from the Commission to the Council and the European Parliament on the comprehensive risk and

safety assessments ("stress tests") of nuclear power plants in the European Union and related activities, {SWD(2012) 287 final}, 4 October 2012, p. 12.


48

146. At this point, the least one can say is that the international nuclear liability scheme is

very hard to modify. More than 27 years after the Chernobyl accident the big bulk of the

revised conventions have not yet entered into force – that is why we have called these changes

virtual.119 Moreover the international nuclear liability scheme has become very complex after

the Chernobyl revision exercise;120 this complexity is a serious hurdle on the way to a global

nuclear liability compensation scheme.121

2.6 Specific provisions with regard to ageing of a nuclear power plant

2.6.1 The applicability of the conventions to ageing

147. As such, the international nuclear liability Conventions do not specifically address the

issue of ageing nuclear power plants. That is not a surprise because the drafters of the

Conventions have never envisaged nor could envisage a possible lifetime extension of nuclear

power plants. A nuclear power plant that has been granted lifetime extension is subject to the

provisions of the nuclear liability conventions, just like a nuclear power plant that has not yet

been granted such an extension. If one would consider that ageing nuclear power plants

represent a higher risk, the question arises whether the Conventions allow for a higher liability

amount.

148. The Paris Convention seems to recognise the link between a certain risk and the level

of liability. Article 7 of the Paris Convention allows for any Contracting Party to establish by

legislation a greater or lesser amount, taking into account the possibilities for the operator to

obtain insurance or other financial security. Any Contracting Party, having regard to the

nature of the nuclear installation or the nuclear substances involved and to the likely

consequences of an incident originating therefrom, may establish a lower amount, provided

that in no event any amount so established shall be less than 5 million SDRs. A strict reading

of the text of the Convention therefore suggests that a lower or higher amount can be

established depending on the possibilities for the operator to buy an insurance coverage (or

other financial security) and that, depending on the risks, a lower amount can be established.

149. We are of the opinion that this does not prevent countries from providing a higher

liability amount. First of all, the Steering Committee of the NEA has recommended

119 T. Vanden Borre (2007), 303-304.

120 See inter alia N.L.J.T. Horbach (1999), at 81; P. Reyners (2010), at 93 ff. 121 N. Pelzer (2006), at 112.


49

Contracting Parties to adopt a higher amount than the one foreseen in the Conventions subject

to the availability of insurance cover.122 Moreover, the Conventions establish a minimal

framework. Countries wanting to offer more protection to their citizens by providing for e.g. a

higher liability amount for ageing nuclear power plants, seem to have a certain freedom to do

so. These arguments have been used by Germany for introducing a system of unlimited

liability even if the wording of the Paris Convention is to establish the nuclear operator’s

maximum liability.

150. A possible issue in this approach is however the link, throughout the international

nuclear liability scheme, between liability and insurance. According to the principle all

liability should be covered by a financial security.123 A country wishing to increase the

liability of a nuclear operator for ageing nuclear power plants might therefore be confronted

with the operator’s defence that it is not possible to increase the limit given the lack of

capacity on the nuclear insurance market. Of course, a country could also opt to introduce

unlimited liability whilst fixing the amount of compulsory insurance. In light of the

philosophy of the conventions, a country should fix that amount in function of the capacities

available on the insurance market or the capacities to have other financial securities. We will

discuss the nuclear insurance market later. The problem is that this insurance mainly operates

via nuclear insurance pools which are monopolists in their respective market and that

therefore it is far from sure whether the information received from a monopolist with regard

to the real capacity of the insurance market is accurate. At least for authorities it will be very

hard to challenge this information.

2.6.2 Legal channelling and ageing

151. A specific issue rises with regard to ageing nuclear installations and concentrated

liability (i.e. legal channelling of liability). Before an operator will be granted a license for the

extension of the lifetime of a nuclear power plant, he will be required to invest in the safety of

the power plant. This means that services and goods will be purchased with different

suppliers. Obviously, these suppliers will remain immune from claims of victims should there

be an accident after the extension of the lifetime of the plant. These suppliers will have little

difficulty in invoking that only the operator can be held liable for the damage caused by a

122 Recommendation of the Steering Committee of 20 April 1990 (NE/M(90)1]. Cfr. supra when discussing the limited

liability. 123 Cfr. supra.


50

nuclear accident and that no other legal bases exist than the special regime of the nuclear

liability Conventions. Therefore, it has no doubt that according to the text of the nuclear

liability conventions, contractors working for the nuclear operator in the framework of the

extension of the lifetime of the nuclear power plant, will not be liable should an accident

occur after the lifetime extension. As we agreed above: the conventions continue to be

applicable and hence also the channelling inherent in the conventions.

152. The only exception to channelling foreseen by the conventions is a contractual right of

recourse. Ideally, nuclear operators wanting to extend the lifetime of their nuclear power

plant, should be in a bargaining position vis-à-vis his suppliers to demand such a contractual

right of recourse. The text of the conventions weakens the position of the nuclear operator

since he can only exercise a right of recourse if expressly provided for by contract. We think

there are very little chances for any operator to be able to obtain such a clause.

153. Even if it were possible to hold contractors and suppliers liable, victims will still have

to face serious problems in proving who caused the accident. Suppose that certain contractors

rendered services, supplied several goods and performed specific works at the power plant

(replacing worn parts etc.) and that two months later a nuclear accident occurs. These

suppliers will most likely claim that the accident was caused by companies involved in the

initial design and building of the plant and not by the investments and works performed in the

framework of the extension of the lifetime of that plant. And if we would also suppose that

this would be legally possible, then the problem arises that many of the companies involved

with the construction and design of the initial “older” nuclear power plants may not even exist

anymore.

154. These issues became clear in relation to the problems in the nuclear power plants of

Doel 3 en Tihange 2. In July and August 2012, the Belgian Federal Agency for Nuclear

Control (FANC) published information stating that the Doel 3 and Tihange 2 reactor pressure

vessels contained a very large number of multiple nearly-laminar embedded flaws, occurring

in different planes. Both power plants remained out of service for almost a year. Relevant for

the analysis is the fact that questions were raised concerning the integrity of the reactor vessel

given numerous “nearly-laminar embedded flaws”. Later safety reports indicated that these

flaws have not been caused by the operation of the plant; the reports claim that the flaws seem

to result from the production process back in the seventies. Exactly this point is relevant for


51

our analysis, since the company that has constructed the reactor vessel was the “Rotterdamse

Droogdokmaatschappij” (RDM). However, RDM went bankrupt in 1983. Other companies

were involved in the fabrication of the reactor vessel. In this case Krupp made the steel for the

reactor vessel, whereas Cockerill and Framatome fabricated other parts of the reactor vessel.124

The last three companies, or at least parts or remainders thereof still exist today. Interestingly

these companies have assets in many countries across the world. However, it will for sure not

be an easy task to find sufficient grounds to hold these companies liable.

155. So, if we suppose that many companies will perform contractor’s work in the

framework of the plant lifetime extension, these contractors will not be held liable in countries

who are party to the nuclear liability conventions. It might be different for countries who are

not party and have not accepted the legal channelling of all liability to the nuclear operator. It

must be recognised that in these cases victims will face difficulties in establishing proof of the

conduct of the supplier and the causal link with the cause of the accident. However, given the

fact that the mere application of the international nuclear liability conventions would leave

victims largely uncompensated for, the option of trying to obtain some compensation via

other means might seem to be attractive.

156. Should an accident occur after extension of the lifetime of a nuclear power plant, also

here the question arises concerning on-site damage. Given our interpretation of the

conventions with regard to on-site damage, we think that the nuclear operator will have a right

to sue his suppliers for the damage he suffered. This will increase the assets of the operators

who, in turn, should at least in principle be beneficial for victims of a nuclear accident. But in

this case the burden of proof for the operator will not be easy. Contractor’s work at the

nuclear plant is very often done by a consortium, i.e. specific and temporary collaboration

between different companies for a specific project. A nuclear operator wanting to claim

damages will first have to be able to establish exactly the causes of the accident and what has

been the role of a single company in this respect. Moreover, it is likely that the nuclear

operator will not be able to introduce his claim on the basis of a specific strict liability rule,

thus requiring him to be able to prove fault or negligence from one of his suppliers or sub-

suppliers.

124 Vanden Borre (2012), 216.


52

2.7 Global system?

157. As already indicated above, there is not much enthusiasm for countries to sign the

nuclear liability conventions of the second generation. In fact, there is even an overall limited

adherence to the Conventions. Hereunder we will analyse some of the reasons that might

explain the limited adherence (2.7.1). We will also address the specific situation of EU

Member States that are not Party to any of the Conventions (2.7.2). The consequences thereof

will be dealt with in section 2.7.3.

2.7.1 Limited adherence to nuclear liability Conventions

158. In the year 2000, McRae calculated that of the 10 countries with the largest installed

nuclear capacity125, one half were member of the international scheme.126 This was confirmed

by a more recent analysis: in 2011, out of 440 nuclear power plants, less than half (about 197)

were subject to the international nuclear liability conventions.127

159. This was the case for the nuclear liability Conventions of the first generation. But it is

striking that this is even more so for the revised Conventions. Some 80 States have

participated in the Diplomatic Conference adopting the Protocol to the Vienna Convention;

yet only 15 have signed so far – 14 of which have signed in 1997 or 1998, thus shortly after

the adoption of the Protocol.128 There seem to be various reasons explaining the reluctance of

countries to adhere to the international nuclear liability conventions.

160. The most obvious reason seems to be that for some countries the Protocols (or even

the “basic” conventions) go too far; for other countries, at the contrary, they do not go far

enough. The new liability limits of the Protocols seem to be difficult to implement. This is the

case for the amounts of Vienna Protocol that are too high for many Vienna countries. But it is

also the case for the Protocol to the Paris Convention. An important obstacle in this respect

seems to be the lack of insurance capacity for the increased amount but even more so for the

30 years prescription period and the coverage of damage to the impaired environment.

Insurers have always claimed that this capacity varies from one country to the other. E.g. the

125 At that time Canada, France, Germany, Japan, the Republic of Korea, the Russian Federation, Sweden, Ukraine, the

United Kingdom and the United States. 126 France, Germany, Sweden, Ukraine and the United Kingdom. See B. McRae (2000), at 175. 127 S. Kus (2011) at 24. 128 J. Schwartz (2010) at 50.


53

capacity of the national insurance markets in the EU was said to vary between € 900.000 to €

315 million (without taking into account reinsurance capacity).129

161. But for other countries, the amounts provided for by the Conventions and especially

the limited liability is seen as an obstacle to adhere to the international nuclear compensation

scheme. This is the case for e.g. Switzerland, Austria and Japan.

162. There are also more straightforward reasons that can explain the lack of enthusiasm to

join the international nuclear compensation scheme. Countries like Canada or Australia are

geographically not connected to other Contracting Parties. As a result these countries may see

little advantage in joining the Conventions since the likelihood of transboundary nuclear

damage is remote.130

163. Some authors claim the CSC is the only international instrument with a realistic

probability of establishing a global regime.131 Yet, also with regard to the CSC, there is quite

some hesitation to sign and ratify. This hesitation may partially lie in the preferential

treatment given to victims outside the Installation State’s border.132 Moreover, the CSC is not

likely to attract many countries that are already part of the Paris and Brussels Supplementary

Conventions. Those countries indeed already participate in a supplementary funding system;

moreover, the mechanisms, allocation rules and the beneficiaries between the CSC and

Brussels Supplementary Convention are different.133 So, for those countries it does not seem

to be obvious to join the CSC as well.

164. The lack of success of the international conventions was already one of the main fears

of the authors of the Harvard Report.

2.7.2 EU Member States that are not party to any of the nuclear liability Conventions

165. The adherence of EU Members States to the international nuclear liability

Conventions is quite high: 23 out of 28 Member States are member of either the Paris or

129 D. Harbrücker (2010) at 255-256. 130 J. Schwartz (2010) at 54. 131 B. Mc Rae (2011) at 80. 132J. Schwartz (2010) at 55. 133 R. Dussart Desart (2005) at 24.


54

Vienna Convention. Are not part of the international nuclear compensation scheme: Ireland,

Luxemburg, Austria, Malta and Cyprus.

166. The fact that several EU member States are not member of any of the nuclear liability

conventions can have important repercussions, especially with regard to jurisdictional matters.

For those EU Member States jurisdiction might be found in Council Regulation (EC) No

44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of

judgments in civil and commercial matters (hereinafter called “Brussels I Regulation”).134

167. For sure, one has to take into account Article 71 (1) of the Brussels I Regulation

according to which the Regulation does not affect any conventions to which the Member

States are parties and which in relation to particular matters, govern jurisdiction or the

recognition or enforcement of judgments. The international nuclear liability conventions and

especially the Paris and Vienna Convention, are to be considered as conventions governing

jurisdiction. In those cases, the jurisdictional provisions of the Paris and Vienna Conventions

will apply and not those of the Brussels I Regulation. In other words, the rules of exclusive

jurisdiction of the state where the nuclear accident occurred bind all courts of the Contracting

Parties of the Paris and Vienna Convention.135

168. But there will be cases were the Brussels I Regulation will apply on nuclear accidents.

This will be the case where EU Member States which are not member of any of the

Conventions are involved in a nuclear accident. According to certain authors, the Brussels I

Regulation might also apply to cases where a nuclear accident happens in the territory of one

of the Conventions and damage is suffered in the territory of a state which is member of the

other Convention and where this state is not Party to the 1988 Joint Protocol.136

169. The Brussels I Regulation indeed offers several possible grounds for jurisdiction.

According to the general jurisdiction rule under Article 2 of the Brussels I Regulation, a

victim can sue the person liable in the country of his domicile. Another possibility would be

Article 5 (3) of the Brussels I Regulation, which provides that in matters relating to tort, delict

or quasi-delict, a person domiciled in a Member State may be sued in another Member State

134 O.J., 16/01/2001, L 012/1. 135 J. Handrlica (2010) at 33. 136 U. Magnus (2010) at 109.


55

in the courts for the place where the harmful event occurred or may occur. According to

jurisprudence of the European Court of Justice, this means both the place of the accident as

the place where damage has occurred.137 So, a citizen of Luxembourg (that is not member of

any of the nuclear liability Conventions) could find jurisdiction before a court of his home

country for damage suffered in Luxembourg after a nuclear accident in France.

170. The advantages for victims in trying to find jurisdiction outside the international

scheme are obvious. They will avoid legal channelling allowing them to sue also suppliers

etc. and they will escape limited liability. For sure, this could be quite a challenge e.g. if the

victim, under the applicable law, could not introduce its claim under a system of strict

liability.

171. Of course, finding jurisdiction and obtaining a favorable judgment is one thing. The

other issue is the enforcement of that decision, especially where the person liable has no

assets in the country of the plaintiff. In literature there is a lot of debate on the possibility to

enforce a judgment of a Brussels I Member State into e.g. a Member State that is Party to the

Paris Convention.138

2.7.3 Consequences

172. The international nuclear liability conventions do not seem to be able to convince

many countries to join. In our view, the most important reason why countries are reluctant to

join the nuclear liability Conventions has to do with the fact that the international scheme

deviates on crucial points from common tort law and thus offers a poor compensation scheme.

In other words, many countries consider, rightly so, the international nuclear liability

Conventions to protect the nuclear industry rather than the victims of a nuclear accident. We

are convinced of the fact that the international community would witness wide adherence to

the international nuclear liability Conventions if the scheme offered by the Conventions

would provide for a substantial compensation for victims of a nuclear accident.

137 ECJ, 1976, C21/76, Bier v. Mines de Potasse d’Alsace. 138 See J. Handrlica (2010) at 37 ff.; J. Handrlica (2012) at 159-160.


56

173. As already mentioned, the authors of the Harvard Report were well aware of the fact

that a limited participation of countries in the international compensation scheme would be

detrimental to its effectiveness.139

174. The limited adherence to the conventions has an important consequence because it

threatens the integrity of the system put forward by the conventions: as soon as a major

accident has links with countries that operate outside the system of the conventions, judges of

these countries are not bound by the principles of the conventions. These judges can therefore

be competent according to national law provisions – in the case of some EU Member States

even according to the Brussels I Regulation – and they are not bound by e.g. the limitation of

liability nor by channelling of all liability to the nuclear operator.

175. For sure, this offers interesting opportunities for victims of a nuclear accident. They

could wisely look for a forum where their chances of success are highest. So, they could e.g.

look for countries were several of the companies involved have assets and which are not

member of the conventions. In the EU, victims can try to start proceedings before the courts

of Austria or any of the other non-party States The Brussels I Regulation offers a legal basis

to file a complaint before the court where the damage was suffered. In countries outside the

EU, victims should look for other possible legal basis like e.g. the nationality of the company

that has taken decisions which have influenced the accident risk (e.g. a US supplier). This for

sure will not be easy, but since the system of the conventions offers them so little, they might

consider they do not have much to lose.

176. This conclusion is also entirely valid in cases of extension of the lifetime of a nuclear

power plant. It might be appropriate to closely monitor all the companies involved in this

operation, and look at the countries where they have assets. Should a nuclear accident occur

after a lifetime extension, all information on the most suitable forum would be readily

available.

139 Cfr. supra under section 2.4.5.


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3. Comparison of current limits and amounts available

177. One of the most striking provisions of the international nuclear liability conventions is

the limitation of liability. Despite the harmonisation of the principles of these conventions, we

notice important differences in various countries regarding the amount to which the nuclear

operator is liable, the degree of state intervention and hence, in compensation available for

victims of a nuclear accident. In this section, we will discuss the available amounts in

different countries and analyse the consequences thereof. First we will look at the situation in

the EU Member States (3.1). We will also discuss the situation in the United States by

analysing the Price-Anderson Act (3.2). After that we will look into a recent report about the

costs of a nuclear accident (3.3). The economic consequences will be dealt with in section 3.4.

3.1 Overview of amounts available in EU Member States

178. We have already indicated that 23 out of 28 Member States do participate in the

international nuclear liability regime. 13 of them are party to the NEA-regime (Paris and/or

Brussels Supplementary Convention). The other ten Member States participate in the IAEA

regime. The overall high participation rate of EU Member States to the nuclear liability

conventions of the first generation, would suggest a sufficient level of harmonisation of

nuclear liability provisions amongst EU Member States. Surely, all these Member States have

incorporated the major principles of the international nuclear liability conventions: strict

liability, channelling of liability to the nuclear operator, limited liability etc.140 As

demonstrated in table 3, there are significant differences in national nuclear liability

legislation in the EU Member States – even amongst those Member States that are party to the

same convention(s).

140 Cf. supra under section 3.2.


58

Table 3 Liability of operator of a nuclear power plant and compensation amounts in EU Member States 141

Amounts in million €

Convention Liability of the

operator of a

nuclear power

plant

Limit of the

financial

security

Additional State

compensation (if

any)

Additional

compensation

(from

international

arrangements)

Austria PC (not ratified) Unlimited 446.6 - - Belgium PC 1,200 1,200 - 142.22 Bulgaria VC 49.1 49.1 - - Croatia VC 43.9 43.9 - - Cyprus - Unlimited - - - Czech Republic VC 232 232 - - Denmark PC Unlimited 700 - 142.22 Estonia VC Unlimited - - - Finland PC Unlimited 700 - 142.22 France PC 91.5 91.5 99.3 142.22 Germany PC Unlimited 2500 2,500 142.22 Greece PC 16.3 - - - Hungary VC 109 109 217.9 Ireland - Unlimited - - - Italy PC 5.4 5.4 185.2 142.22 Latvia VC 114.2 5.7 113.2 - Lithuania VC 154 154 - - Luxemburg PC (not ratified) Unlimited - Malta - Unlimited Netherlands PC 1,200 1,200 1930 142.22 Poland VC 345 345 - - Portugal PC 16.3 - - - Romania VC 345 345 163.5 - Slovakia VC 75 75 - - Slovenia PC 700 - 27.2 142.22 Spain PC 1,200 1,200 - 142.22 Sweden PC Unlimited 1,200 - 142.22 UK PC 156.7 156.7 34.2 142.22

179. Indeed, looking at the EU Member States who are party to the NEA-regime, we see a

major difference in the amounts for which the operator of a nuclear installation is liable and

the amounts of additional State compensation. The liability of the nuclear operator varies

between € 5.4 million and unlimited liability. The amounts of additional State compensation

vary from zero to € 2.5 billion in Germany and € 1.9 billion in the Netherlands. Germany is

141 Source: website European Commission “Insurance and compensation of damages caused by accidents of

nuclear power plants”, public consultation; "Nuclear operator liability amounts and financial security limits as of June 2011", www.nea.fr. For more details, see that table which also differentiates in case there are different liability amounts e.g. for research reactors or other specified nuclear activities. Our focus only lies with liability for nuclear damage caused by a nuclear power plant. No data for Malta and Cyprus were available. The amount of €142.22 million of additional compensation corresponds to the third tier of 125 million SDRs under the Brussels Supplementary Convention.


59

quite a striking example as it is the only EU Member State which has nuclear power plants in

operation having an unlimited liability of the nuclear operator.142 There is, however, a limit to

the insurance requirement, up to €2.5 billion,143 of which €256 million is to be provided by

each individual operator.144 The other part is to be provided collectively by the operators of all

the nuclear power plants reactors.145

180. The fact that all EU Member States that have nuclear power plants are member of the

international nuclear liability conventions did apparently not result in a high level of

harmonisation of compensation amounts available for victims of a nuclear accident.146 These

differences concern the level of liability of the nuclear operator and the limit of his insurance

as well as the level of additional State compensation.

3.2 US nuclear liability system

181. In the United States, nuclear liability is governed by the Price-Anderson Act, adopted

in 1957. A specific feature of the Price-Anderson Act is that it is revised every decade or

so.147 Hereunder we will discuss the most important issues of the Price-Anderson Act as well

as ist most important evolution over the years (3.2.1). After that, we will pay attention to a

specific feature of US nuclear law: the property rule (3.2.2). After that we will analyse a new

development in US-policy, being the ratification of the CSC (3.2.3) and we will analyse

which lessons can be learnt from the US (3.2.4).

3.2.1 The Price-Anderson Act and its evolutions over the years

182. The evolution of the Price-Anderson Act over the years can be summarised into three

periods: the initial provisions of the 1957 Price-Anderson Act (3.2.1.1), the shift from public

to private funding in 1975 (3.2.1.2) and the latest revision of 2005 (3.2.1.3).

3.2.1.1 The 1957 regime

183. The initial Price-Anderson Act, just like the international compensation regime,

wanted to spread the risk of the nuclear activities between the private industry on the one

hand and the nation that benefits from the development of nuclear energy on the other. The

142 § 31, (1) of the German Atomic law (“Atomgesetz”). Also Estonia, Ireland and Luxemburg have a system of unlimited liability; these Member States do not have nuclear power plants in operation (on 1 January 2010).

143 § 13, (3) of the German Atomic law (“Atomgesetz”). 144 P. Dangelmaier (1993), at 428. 145 For further details on the German system, Norbert Pelzer (2007), at 44–45. 146 Vanden Borre (2010). 147 It has indeed been revised in 1966, 1975, 1988 and 2005.


60

nuclear operator needed to buy all the insurance coverage then available, which at the time

was 60 million USD. On top of that amount, the government agreed to make available an

amount of 500 million USD. Several authors agreed that the Price-Anderson Act created a

favourable climate for the (American) nuclear industry.148 Thus, the major part of the

compensation scheme provided for by the 1957 Price-Anderson Act consisted of public funds.

184. The Price-Anderson Act today has the practical effect of imposing strict liability for

nuclear incidents. This is realised via the extraordinary nuclear occurrence (ENO), introduced

in the Price-Anderson Act in 1966;149 in case of a nuclear accident, the Nuclear Regulatory

Commission is given the power to determine whether or not there is an extraordinary nuclear

occurrence.150 If that is the case, the nuclear operator will not be able to invoke certain

defenses that are available under federal or state (tort) law.151

185. Under the “omnibus” coverage feature of Price-Anderson, the system covers “anyone

liable”152 for “public liability.” “Public liability” is defined in the Act as “any legal liability

arising out of or resulting from a nuclear incident or precautionary evacuation....”.153 The only

exceptions in that definition are for “claims arising out of an act of war,” worker’s

compensation claims, and claims for damage to on-site property at a licensed nuclear

facility.154 As a result of this provision, everyone who can be held liable for the damage of a

nuclear accident (including e.g. the supplier) can thus benefit from the liability insurance

coverage of the nuclear operator. The functioning of this system was demonstrated after the

Three Mile Island accident where all defendants (nuclear operator as well as the desginer and

148 E.B. Stason, S.D. Estep and W.J. Pierce (1959), at 572 and 780. 149 See for more details Vanden Borre (2001), 644. 150 This is defined as: “any event causing a discharge or dispersal of source, special nuclear, or byproduct material from

its intended place of confinement in amounts offsite, or causing radiation levels offside which the Nuclear Regulatory Commission determines to be substantial, and which the Commission determines has resulted or will probably result in substantial damages to persons offsite or property offsite”.

151 See inter alia: D. Berkovitz (1989) at 13 et seq; O.F. Brown (1993), at 4 et seq. 152 42 US Code Section 2210(t) (defining “person indemnified”). 153 42 US Code Section 2210(w). 154 The American Nuclear Insurers (ANI) – this is the American nuclear insurers pools, cfr. supra section 4.2 of this

paper – Facility Form nuclear liability policy currently may not cover “any legal liability” except for the exceptions in the statute: The policy provides it will “...pay on behalf of the named insured all sums which the insured shall become legally obligated to pay as covered damages because of bodily injury or property damage, or as covered environmental cleanup

costs because of environmental damage [emphasis added].” ANI Nuclear Energy Liability Policy (Facility Form) Amendatory Endorsement NE-71 (1/1/90). “Covered environmental cleanup costs” are defined as “...only those environmental cleanup costs which are incurred directly for monitoring, testing for, cleaning up, neutralizing or containing environmental damage as the result of an extraordinary nuclear occurrence or transportation incident; but covered environmental cleanup costs do not include on-site cleanup costs.” Id. In other words, the ANI policy already is written to exclude such environmental damages as those resulting from a simple “nuclear incident” and those to res nullius or res

communis. This could result in a situation where the facility operator would be liable, but not have primary insurance from ANI therefore. In this situation, coverage could be provided by retrospective assessments from all power plant operators.


61

constructor of the nuclear power plant) were represented by one single law firm.155 Thus,

unlike the international compensation regime, the Price-Anderson Act has a system of

economic channelling and not legal channelling.156

186. This, of course, is quite interesting. Our analysis above has shown that the United

States have played a decisive, if not very important, role in the negotiations and redaction of

the nuclear liability conventions. Two US studies have put forward several principles which

have been written into these conventions.157 One of the most crucial principles, for US

suppliers, has been the introduction of the exclusive liability by channelling all liability to the

nuclear operator. In this respect it is remarkable that on the one hand, the US has insisted on

introducing the legal channelling in the nuclear liability conventions but on the other hand, the

US domestic nuclear liability law, the Price-Anderson Act does provide for a system of

economic channelling. Indeed, unlike the international compensation regime, the Price-

Anderson Act has a system of economic channelling and not legal channelling. Intrestingly,

during the 1966 revision of the Price-Anderson Act US Congress has considered introducing

legal channelling in US-law. Congress opted for maintaining its system of economic

channelling because: “an adequate system to protect both the general public and the industry

can be established without introducing this drastic and novel principle”.158 We can indeed say

that the US has used its power to influence the nuclear liability conventions with the sole

purpose of protecting its own companies who are world leaders in the supply of goods and

services to the nuclear industry.159

187. Like the international compensation system, the Price-Anderson Act also limits the

liability of the nuclear operator.

3.2.1.2 1975: a shift from public to private funding regime

155 O.F. Brown (1999) at 481. 156 Under a system of legal channelling of liability a claim against other persons is legally impossible, precisely because

of the fact that liability is exclusively concentrated on one person. Economic channelling means that the rules of ordinary tort law remain applicable, but that the economic burden of such liability lies with one person only. Other persons than those to which liability is economically channelled can therefore be held legally liable, in the sense that they can reclaim the amounts paid from the one who is economically liable. This is exactly the case under the Price-Anderson Act: also suppliers can be held liable, but their liability is covered by the omnibus coverage of the nuclear operator. For more details, see T. Vanden Borre, (1999), 13-39.

157 Cfr. supra, section 2.1. 158 Hearings held before the Joint Committee of Atomic Energy, 1965, 89th Congress, 1st Session, 36-37. 159 Vanden Borre (1999).


62

188. An important step in shifting the burden to the operator was made in 1975. Although

the total compensation amount was at that time kept at the same level as in 1957, it was

decided that the part composed of public funds needed to disappear gradually. The Joint

Committee on Atomic Energy argued that in the early years the nuclear industry was not

capable of bearing the financial burden arising from nuclear electricity production but that

after several years the industry should take its responsibilities; this could be achieved by

shifting the burden of the government towards the industry160.

189. This was achieved by introducing a new tier in the compensation scheme, the so-called

retrospective premium. This is a premium to be financed by all American nuclear operators

which have received a licence from the US Nuclear Regulatory Commission (NRC); in case

the damage exceeds the amount of the nuclear operator’s individual liability coverage of 60

million USD, the retrospective premium comes into play. It implies an additional financial

protection per power plant and per incident, payable in annual installments up to a certain

maximum amount per incident per power plant. Basically, the 1975 amendment to the Price-

Anderson Act gradually replaced the public funding by a collective tier of all US licensed

nuclear operators.

190. The NRC was given the power to determine the amount of this premium; in 1975 this

premium was thus set at 5 million USD. It was also decided that the individual liability

insurance coverage of each nuclear operator should be consistent with the evolution on the

American nuclear insurance market.

191. The 1975 amendments to the Price-Anderson Act resulted in the fact that in 1982 there

was a total shift to private funding in the American compensation scheme for nuclear damage.

At that time, the operators had to buy an individual insurance coverage of 160 million USD

(first tier of the US compensation system); similarly, an amount of 400 million USD of

retrospective premiums was available (second tier). Thus, in 1982 the American nuclear

compensation scheme offered exactly the same amount as in 1957 (560 million USD), but in

1982 it was entirely financed by private funds: both the individual and the collective tier had

to be provided for by the nuclear operators. Thereafter, the amount increased as new nuclear

reactors became operational.

160 Report N° 94-648, House of Representatives (1975), 9; Senate Report N° 454, 99th Congress, 1st Session (1975) 10.


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3.2.1.3 2005 and beyond: further increase

192. The most recent amendment of the Price-Anderson Act took place in 2005, as a result

of the Energy Policy Act of 2005.161 The liability of the individual operator was increased to

$300 million. Moreover, the U.S. Nuclear Regulatory Commission (NRC) is required to

adjust the maximum and total annual deferred premiums not less than once during each 5-year

period in accordance with the aggregate percentage change in the Consumer Price Index.

193. In October 2008, NRC indeed adapted the amounts in the second tier to inflation: the

amount available in the second (collective) tier, was set at $111.9 million, plus an extra 5%

for legal costs, with a maximum of $17.5 million per reactor per year.162 With regard to the

first tier, American Nuclear Insurers (ANI) has decided to make available, as from 1 January

2010, a maximum limit of $375 million for domestic nuclear third-party liability (i.e. a 25%

increase from the limit of $300 million which was established in 2003).163

194. In July 2013, NRC adapted the amounts to inflation. As of 10 September 2013, the

following amounts apply: $ 375,000,000 in the first tier and in the second (collective) tier

$121,255,000 per reactor per accident, plus 5% for legal expenses. Thus, since that date the

total amount of compensation available in the US is $ 13,616,046,000 [375 million + (104 *

(121,255 million+ 6,062,750))], with a maximum contribution of $ 18.963 million per reactor

per calender year.

195. The US is, however, not the only country in the world to have such a two tier system.

In Germany, the liability of the nuclear operator is unlimited164; there is however a limit to the

insurance requirement, up to € 2.5 billion165, of which € 256 million is to be provided by each

individual operator.166 The other part is to be provided collectively by the operators of all 17

nuclear reactors.

161 Energy Policy Act, P.L. 109–58 (2005). See also “Legislative updates”, NEA News, 23.2, 32 (2005). 162 Decision of 9 September 2008, 73FR56451, 29 September 2008. This decision is applicable as of 29

October 2008. 163 See website of ANI: www.nuclearinsurance.com 164 § 31, (1) of the German Atomic law (“Atomgesetz”). 165 § 13, (3) of the German Atomic law (“Atomgesetz”). 166 P. Dangelmaier (1993) at 428.


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3.2.2 The NRC property rule

196. After the Three Mile Island accident, it became clear that the onsite damage of the

nuclear power plant would be far more important than the third party liability coverage of the

nuclear operator. The NRC argued that this could cause a delay in the decontamination of the

site, which of course would cause damage to third parties. The NRC argued that it was

necessary that the sums available for the property insurance of the power plants should in the

first place be used for decontaminating the nuclear site and for stabilising the nuclear reactor.

Therefore, the NRC introduced the so-called property rule167.

197. According to the property rule each power reactor licensee: “shall take reasonable

steps to obtain insurance available at reasonable costs and on reasonable terms from private

sources or to demonstrate to the satisfaction of the NRC that it possesses an equivalent

amount of protection covering the licensee's obligation, in the event of an accident at the

licensee's reactor, to stabilize and decontaminate the reactor and the reactor station site at

which the reactor experiencing the accident is located”. Every operator must have a minimum

coverage for each reactor station site of 1.06 billion USD.

198. It is further provided that in the event of an accident at the licensee's reactor, whenever

the estimated costs of stabilizing the licensed reactor and of decontaminating the reactor and

the reactor station site exceed 100 million USD, the proceeds of the insurance under the

property rule must be dedicated to and used, first, to ensure that the licensed reactor is in, or is

returned to, and can be maintained in, a safe and stable condition so as to prevent any

significant risk to the public health and safety and, second, to decontaminate the reactor and

the reactor station site in accordance with the licensee's cleanup plan as approved by the NRC.

199. The property rule thus implies that a first party insurance coverage (property damage)

can be beneficial to victims of a nuclear accident.

3.2.3 2006: Ratification of the Convention on Supplementary Compensation

200. In 2006, the US Senate adopted an Act to implement the Convention on

Supplementary Compensation.168 The aim of the Act is to establish a funding mechanism

167 10 CFR 50.54 (w). 168 S. 3879, Senate, 109th Congress, 2nd Session.


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under the Price-Anderson Act for the US contribution to the international nuclear liability

compensation system. It is also said that the “CSC benefits US suppliers who face potentially

unlimited liability for nuclear accidents outside the coverage of the Price-Anderson Act by

replacing potentially open-ended liability with a predictable regime that, in effect, provides

nuclear suppliers with insurance for damage arizing out of such an incident”.169 Also

important is that the Act requires the nuclear suppliers to participate in a retrospective risk

pooling program to cover the costs of the US contribution pursuant to the CSC. This means

that, according to the Act, the US Treasury will pay to the fund provided for by the

Convention; however the costs will be reimbursed by a payment program that suppliers have

to set up. Thus, the obligation of the US under the Convention will be shifted to market

participants, in this case the nuclear suppliers. This illustrates that the fact that a country has

an obligation to make public funds available (under an international convention) does not

necessarily mean that eventually the taxpayer will have to pay for this.

201. Eventually, the US has deposited its instrument of ratification of the CSC on 21 May

2008 at the IAEA. This is a remarkable evolution because the US has changed it policy by

entering the international nuclear liability regime (only CSC). The fact that the US ratified the

Convention is in itself not enough for the entry into force of the Convention. Moreover, given

the fact that to date the CSC did noy yet enter into force, the US is still outside the

international nuclear compensation system.

202. Of course, the question arises why the US has changed its policy and has decided to

become a member of the international nuclear liability conventions. In our view, the answer to

that question is quite simple: the lack of global adherence to these conventions. The US has

realised that the limited number of countries that is part of the international compensation

scheme poses a serious threat to the US suppliers of nuclear material and know-how. Indeed,

as already demonstrated above, the protection of US suppliers can only be effective if the

legislation of any party to a nuclear accident (nulcear operator, supplier or victim)

“recognises” the legal channelling. If this is not the case, victims could well try to introduce a

claim in a country operating outsides the compensation model put forward by the international

nuclear liability conventions.

169 S. 3879, Senate, 109th Congress, 2nd Session, p. 2-3.


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203. Finally, it is also interesting that the US has managed to become a party to the CSC

without having to adopt the legal channelling in their domestic nuclear liability provisions.

The text of the CSC uses the technique of the grandfather clause set in Article 2 of the Annex

to the CSC. In order to become member of the CSC, a country must adopt the principle of the

nuclear liability conventions, amongst which the legal channelling of liability. The Annex

however stipulates that a country which meets the conditions of the Annex on 1 January 1995,

is deemed to be in conformity with the convention. The only country who meets these

conditions is the United States which is therefore the only country that can use this

grandfather clause.170

3.2.4 Conclusions

204. The analysis of the legislation in the US teaches some interesting lessons with regard

to the international nuclear liability provisions. First, the major difference between the Price-

Anderson Act and the conventions is the dynamic character of the Price-Anderson Act. This

has enabled US policy first to phase-out public funding in case of a nuclear accident and

second to continuously increase the liability of the nuclear operator. Two features of Price-

Anderson are crucial in this respect: the fact that is has to be renewed every ten years and the

power given to the NRC to regularly adapt the amounts in the second layer (retrospective

premiums) according to inflation. This dynamic feature contrasts with the very static

conventions. It is very hard to change these conventions and it is even harder for these

changes to enter into force.

205. The second lesson is that legal channelling is still of major importance to the (US)

suppliers of the nuclear industry. At the time of the negotiations of the 1960 conventions, they

have pushed for the legal channelling; they also have played an important role in the

discussions on the revised conventions, amongst which the CSC. It is also interesting to note

that US suppliers have been very effective in convincing the US administration to require

legal channelling in the international conventions, but that they have been much less effective

in trying to convince the US administration to adopt the legal channelling under the Price

Anderson Act. This duality has necessitated the solution with the grandfather clause under the

CSC.

170 Ben McRae (1999) and (2006).


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206. Finally, the US law implementing the CSC obligations is interesting because the US

immediately shifted the financial burden it will have under the collective tier of the

Convention to the private sector (the nuclear suppliers). The US thus clearly has a policy not

to make the taxpayer pay for its international obligations.

3.3 Amounts of damage caused by a nuclear accident

207. The Fukushima nuclear accident has provided us with further insight on the possible

magnitude of the damage caused by a nuclear accident. Japan is not member to any of the

international nuclear liability conventions, but is has adopted in its own national nuclear

liability scheme. This scheme is largely based on the principles of the conventions like limited

and channelled liability. For the sake of this analysis it is relevant to point at the fact that

Japan has however adopted a system of unlimited liability.171 The nuclear operator is obliged

to have an insurance coverage up to JPY 120 billion (about € 980 million). By May 2011,

TEPCO had paid victims of the accident almost JPY 900 billion.172 According to figures of the

European Commission, the Fukushima accident caused for €130 billion of damage. The

question now arises whether a nuclear accident in Europe would cause the same amount of

damage.

208. A report by the French Institut de Radioprotection et de Sûreté Nucléaire (IRSN) has

indicated that a serious nuclear accident in France would cost about € 120 billion.173 A small

part of this damage relates to damage to the site (5% of € 6 billion). The other damages are:

radiological costs off site, costs of radioactive contamination, costs related to the production

of electricity and reputation damage. According to the study, the last two types of damages

account for about 75% of the total damage. This scenario assumes that about 3500 people will

have to be evacuated.

209. The other scenario in the study presupposes the evacuation of 100.000 persons and

assumes severe radioactive fall-out in neighbouring countries. According to this scenario, the

171 M. Faure and J. Liu (2012) at 170. 172 S. Matsuura (2012) at 36. 173 “Les Rejets radiologiques massifs different profondément des rejets contrôlés”, see website IRSN :

www.irsn.fr/FR/Actualites_presse/Actualites/Documents/FR_Eurosafe-2012_Rejets-radioactifs-massifs-vs-rejets-controles_Cout_IRSN-Momal.pdf


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total cost of the accident would amount € 400 billion. The damage caused to third parties

would be as high as € 300 billion.

210. The costs of the Fukushima accident as well as the recent French study demonstrate,

once again, that the amounts provided for under the nuclear liability conventions are

absolutely too low. Even assuming the Protocol to the Paris and Brussels Supplementary

Convention would be in force, this would mean that only half a percent of the damage is

compensated for (€1,5 billion available for damage of €300 billion).

211. Taking into account these figures, it is obvious that the fact that the liability amount is

not determined by the size of the potential damage is problematic. Moreover one can really

challenge whether the Conventions meet their goals: the compensation scheme created by the

Conventions claims to be applicable to risks of an exceptional nature. That is why non-

exceptional nuclear risks are being dealt with under common tort law. It seems however that

the exceptional nuclear compensation scheme is above all exceptional in the sense that it

derives from several and very sound principles of common tort law rather than providing for

an exceptional protective compensation scheme to the benefits of victims of a nuclear

accident.

212. In our opinion, the Conventions represent a different era with different values. In the

1950s and 1960s the principles put forward by the Conventions were simple: we provide for a

limited but guaranteed compensation scheme. It was recognized that this approach had certain

drawbacks for victims of a nuclear accident but the countries that have signed and ratified the

Conventions seem to have – at least implicitly – accepted that these drawbacks were

compensated by what at that time was perceived as the prosperous future of nuclear power

which would bring a lot of benefits to mankind. We can make two reflections in this respect.

First, one could wonder whether the drafters of the Conventions would still defend the same

principles would they be aware of the size of damage caused by Chernobyl, Tokaimura,

Fukushima etc.

213. Second, one has to take into consideration that times have changed. Whereas the 1960

Conventions might be considered as reflecting a good equilibrium between the various

interests, it is questionable whether there is still sufficient support from society to defend the

very same equilibrium today. The perception of the public towards dangerous activities


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generally and, more specifically towards the nuclear industry, has changed. Values have

changed. Therefore, a modern nuclear compensation scheme cannot simply take outdated

legal principles as a starting point.

3.4 Economic consequences

214. It became clear from the previous sections that nuclear liability has a few particular

features which differ to an important extent from the traditional liability provisions.

Especially the financial cap (the limit on liability) as well as the channelling of liability to the

operators are important features in addition to the state intervention (the additional funding

provided by the installation state and by all contracting parties). Since operators do not have

to pay for the additional funding provided by the state, this additional funding can be

considered as a subsidy.

215. We will now show that in economic literature this subsidy, more particularly created

through the financial limit on the liability of the operator, has been highly criticized and that it

has, moreover, potentially negative consequences, not only (obviously) for victim

compensation, but potentially also for the preventive effect of liability rules and hence for

nuclear safety.

3.4.1 Distortions created by the subsidy

216. The most problematic aspect, as often has been stressed in the literature, of the

international Nuclear Liability Regime lies in the financial caps. As was already mentioned,

putting a limit on the liability of the operator is from an economic perspective equal to

providing a financial subsidy to the nuclear operator. This subsidy comes under two headings.

First, there is the limitation of liability of the operator; second, there is the fact that the state

and all signatory states take over the compensation (up to certain limits) when the damage is

higher than the amount of the cap provided by the operator.

217. This legal regime is very peculiar. Indeed, it makes the national nuclear operator

benefit from a subsidy. This subsidy comes from its civil liability limit; our analysis above

has demonstrated that the limits in the conventions do not at all related to the possible

magnitude of the damage caused by a nuclear accident. This limit creates a bias against the

internalization of the risk costs by the operator because this latter internalizes these costs (and


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covers them) only up to the amount fixed by the Conventions, and thus only partially.

Therefore, it is implicitly admitted that as soon as a nuclear accident costs more than this limit

(which is more than probable), the nuclear operator will not provide complete compensation

to the victims. This regime thus protects the nuclear operator and artificially decreases its risk

costs. Furthermore, we mentioned before that beyond the operator liability cap, the State

intervenes to cover a second risk layer. Doing so, the State pays for the reparations that the

nuclear operator does not pay, and does not have to pay, pursuant to the Conventions. It thus

directly contributes to the lack of internalization of the risk costs by the operator since it

intervenes ex nihilo to cover the risk instead of him. The State in fact accepts a limited State

liability and substitutes for the nuclear operator in this second risk layer, without making the

operator pay any price for this financing. So, the taxpayer will pay this part of the risk; in

many cases the victim will be the taxpayer of the country concerned and thus, in fact, the

victim pays for part of the compensation himself.

218. This subsidy can potentially create three types of distortions: 1. it might create an

artificial competitiveness of the nuclear energy (which we will address below in 5); 2. the cap

may reduce the incentives of the operator to prevent nuclear accidents and 3. there may be a

lacking compensation to victims.

3.4.2 Artificial competitiveness

219. A first consequence of the subsidy (consisting both of the limitation on liability as well

as of the compensation provided by the state) is that operators may enjoy a preferential

situation compared to other producers that may not enjoy such a subsidy. Since operators of

nuclear plants do not have to internalize the full social costs of their activity, the result will be

that relative prices of nuclear power are too low (since they do not truly reflect social costs).

When operators of other energy sources for example gas fired power plants would not enjoy

this subsidy, a distortion of competition would emerge. The perverse effect of the subsidy

would hence be that nuclear energy would seem artificially cheap (since accident costs are not

reflected in energy prices for the nuclear), thus reducing the incentives to build other types of

power plants. This analysis is not altered by the fact that several types of power plants receive

different forms of subsidies. E.g. wind and solar energy receive subsidies; however, the

amount of subsidies is voted in Parliament and is known to society. Indeed, the amount of

feed-tariffs or green certificates can be found in several legal provisions. However, it is very


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hard to calculate the subsidy of the nuclear industry, and therefore this also poses a delicate

issue of transparency.

220. It is interesting at this stage to briefly summarize literature in which the value of the

subsidy to the nuclear industry has been analysed. Even though this is highly speculative (and

thus uncertain), given the uncertainties surrounding both the probability and the damage in

case of a nuclear accident, it is interesting to mention some of those studies.

221. Earlier studies on the Price-Anderson Act have examined what the scope of the

subsidy to the nuclear industry was. First, we should mention that as far as the situation under

the Price-Anderson Act of 1957 was concerned (where the operator was only liable for $60

million but the government provided additional funds for $500 million), the NRC argued that

the Price-Anderson Act provided a real subsidy to the industry, but that its magnitude was

difficult to estimate.174 In addition, Dubin and Rothwell estimated the cumulative value of the

subsidy to industry (in 1985 dollars) to be $110 billion by 1988 and growing to $131 billion

by 2001.175 Later, Rothwell argued that, in economic terms, it is not a direct subsidy in the

sense that there is no direct payment made by government to anyone; at the same time he

argues that there is a ‘potential (or expected) subsidy.’176

222. In the international regime the nuclear subsidy is related to the operator’s liability

limit. In a recent study, Fiore has taken the case of France where the new liability cap of the

nuclear operator is fixed at € 91 million to analyse the value of the subsidy.177 In the French

Nuclear Law, the liability cap of the nuclear operator is currently fixed at € 91 million,178 and

EDF (Electricité de France), the French nuclear operator, meets its coverage obligation in two

distinct ways. For two-thirds, it guarantees it by its financial provisions (up to € 60 million)

and for one-third, it purchases insurance (up to € 31 million).179 As his civil liability is limited

to € 91 million, the French nuclear operator benefits from a subsidy equal to the part of the

accident costs which would exceed this limit.

174 U.S. Nuclear Regulatory Comm'n, The Price-Anderson Act: The Third Decade G–12 (1983). 175 See, e.g., Dubin & Rothwell (1989); Heyes & Liston-Heyes (1998). 176 Geoffrey S. Rothwell (2002). 177 See Karine Fiore (2006), unpublished manuscript. 178 Law No. 68-943 of Oct. 30, 1968, Journal Officiel de la République Française [J.O.] [Official Gazette of France], Oct.

30, 1968 (amended by Law No. 90-488 of June 16, 1990, Journal Officiel de la République Française [J.O.] [Official Gazette of France], June 16, 1990).

179 This insurance is contracted through a pool of insurers, Assuratome (with AGF and AXA), and the European mutual ELINI. See Fiore (2009) at 4 n. 9.


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223. The default of internalization of the risk costs by the nuclear operator creates a bias in

favour of the competitiveness of his activity because all the costs are not reflected in the kWh

price. This argument is a classic embodiment of the theory of market failures and the theory

of externalities,180 according to which, all the costs generated by an economic activity must be

integrated into the sale price. On the one hand, this permits the producer to recover his costs

and to guarantee a minimal profitability. On the other hand, the price becomes an information

vector and a signal for consumers.

224. With regard to the large part of non-internalized risk costs by the nuclear operator, it

looks as if the observed competitiveness of his activity is, thus, artificial. Indeed, since he

does not internalize the whole risk costs, the nuclear operator integrates these costs only

partially in the nuclear kWh price and so passes them on the consumers only partly. As a

result, the nuclear kWh price is artificially low and sends wrong signals to final consumers

and potential investors. This might have two main consequences. First, the demand for

nuclear energy is not at its optimal level; it is “over-optimal”. It is higher than it would be if

the kWh price reflected the risk costs as a whole (and thus was increased). Secondly, this

artificial competitiveness of nuclear energy might stifle the demand for alternative energy

sources which, thus, appear much less attractive. Also here, the issue of transparency arises.

The energy consumer is happy with the commodity price he pays because these prices will be

artificially low – assuming a well functioning energy market. He is, however, ignorant of the

fact that the reverse side of the coin is that, in case of a nuclear accident, he will have to pay

himself for the damage (as we have demonstrated above that in case of a serious nuclear

accident about 1% of the damage will be covered).

225. Accordingly, one can wonder what would be the impact of the complete

internalization of the risk costs on the operator’s profitability. In other words, one can wonder

whether this internalization would be financially sustainable for the energy producer or not. In

a recent study, Faure and Fiore estimate such an impact of the subsidy under the international

regime, taking the example of France and its (monopolistic) operator of the fifty-nine nuclear

reactors in France, EDF.181 They take as a financial indicator the EDF’s average annual benefit

180 See, e.g., Alfred Marshall (1920); Arthur C. Pigou (1920); Ronald Coase (1960). 181 See Faure and Fiore (2008a).


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from EDF’s financial reports from 2000; that is, € 1.7 billion.182 In their study, they calculate

various scenarios and they moreover analyse how an abolition of the financial cap would

affect the prices of nuclear energy, also compared to other energy sources.

226. Faure and Fiore provide the following table illustrating the production costs of the

main power sources in 2008:

Energy Sources kWh production cost

(€)

Nuclear Energy 0,03

Coal 0,0337

Gas 0,035

Hydraulic 0,04

Fuel 0,05

Wind 0,06

Geothermic 0,06

Biomass 0,10

Solar 0,15

Table 4. KWh production cost of the main power sources in 2008183

227. In another study, Faure and Fiore also calculated the effects of abolishing the cap and

hence adding the additional costs of full liability to the price of the nuclear production costs.184

Without the implicit subsidy, it would amount between € 0.03002 and € 0.0004714 before the

2004 Protocol and between € 0.0300027 and € 0.0304 after. Note, however, that the estimates

in that (2008) study were based on variations in accident costs between € 1 billion and € 100

billion. As we mentioned above, more recent data from France which we discussed above

mentioned possible damage amounts in a range of € 300 billion; as a result, the amounts of

the implicit subsidy could today already be higher than in the estimates of 2008. Indeed,

according to the 2008 study by Faure and Fiore185 the price would be negligibly affected. This

study hence has important consequences: on the one hand, one can argue that the value of the

implicit subsidy is relatively low and hence does, differently than would be assumed on the

182 The annual benefits (in billion €) are : 1.141 in 2000, 0.841 in 2001, 0.481 in 2002, 0.857 in 2003, 1.3 in 2004, 3.2 in

2005 and 5.6 in 2006. 183 Faure and Fiore (2009), 441. 184 Faure and Fiore (2008a), 232-238. 185 Faure and Fiore (2008a).


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basis of theoretical literature, not substantially affect the competitiveness of the nuclear

industry; on the other hand, the relatively small impact of the subsidy on the nuclear

production costs is hence yet another argument against the financial caps since these

apparently do not substantially affect the competitiveness of that industry.

3.4.3 Prevention of nuclear accidents

228. Civil liability is a legal regime which, from an economic perspective, aims at

internalizing the costs of a damaging risk to third parties by inciting the potential actor to

prevention. This is a standard insight of the economic analysis of law since the early works of

Calabresi,186 Brown187 and Shavell.188 A basic notion is that the injurer should be fully

exposed to damage costs in order to provide him with the necessary incentives for

prevention.189

229. In this respect, the current international legal regime of nuclear civil liability is,

however, quite unsatisfying. Indeed, since the beginning of nuclearisation, the choice was

made to implement a strict, channelled, and limited civil liability rule.190 All of these

characteristics of the liability regime have already been addressed from an economic

perspective in literature. The principle of strict liability holds liable the nuclear operator

irrespective of his behaviour; there is no need for the victim to prove the fault or negligence of

the operator.191 It is a quite common rule used to manage catastrophic risks.192 The economic

rationale is that in these so-called unilateral accident cases (where only one party, the

operator, can influence the accident risk) only strict liability leads to a full internalization of

the accident risk.193 This rule will indeed provide the operator not only the incentives to

follow optimal care but also to adopt an efficient activity level.194 A requirement is, however,

that there is full solvency of the injurer or that the insolvency risk is in some way taken care

of (e.g. by insurance).195

186 Guido Calabresi (1961); Guido Calabresi (1970). 187 J.P. Brown (1973). 188 Steven Shavell (1980); Steven Shavell (1987). 189

See, e.g., Trebilcock & Winter (1997). 190 See, e.g., Paris Convention. 191 See Black's Law Dictionary, strict liability (8th ed. 2004). 192 See M.A. de Figueiredo, D.M. Reiner & H.J. Herzog (2005). 193

See Trebilcock & Winter (1997), 221-25. 194 See Shavell (1980). 195 Stephen Shavell (1986), 43-58.


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230. Channelled liability means that the nuclear operator will be exclusively liable in case

of accidents.196 The formal justification for channelling is that it avoids the multiplication of

procedures against constructors, suppliers or sub-contractors and thus, makes lawsuits for

victims easier.197 This rule is, however, debatable from an economic perspective, more

particularly since channelling excludes liability of others who could have contributed to the

accident risk as well.198

231. The operator’s incentives to prevent nuclear accidents may be affected by the partial

internalization resulting from the nuclear subsidy. Indeed, since the operator does not take

into account all of the risks he generates, his behaviour might be inadequate to prevent

accidents in an optimal way. Rationally, he will adopt the level of prevention corresponding

to the risks he generates. Therefore, if he takes, as a reference, an underestimated level of

risks, his preventive actions are necessarily maladjusted and, thus, insufficient to impede an

accident. Indeed, the optimality of his level of prevention is determined by the optimality of

the level of the considered risks. As a result, a suboptimal estimation of risks leads to a

suboptimal level of prevention. Such an economic consequence of the lack of internalization

has been analysed in the literature. The partial internalization of the risk costs, concurrent

with the operator’s liability cap, is, thus, inefficient in the supply of appropriate prevention

incentives. It leads to under-deterrence. This distortion created by the nuclear subsidy is all

the more problematic since the potential damages of a nuclear accident are very serious and

occur over very long periods of time.

232. Therefore, to guarantee an optimal level of prevention from the nuclear operator, he

should be exposed to his whole risk cost. Nevertheless, even though the operator’s level of

prevention may be lower than optimal because of the lack of incentives resulting from the

nuclear subsidy it is unclear whether this will actually be the case in practice. One should

point to the importance of safety regulation as well. The role of the nuclear safety authorities

may fill this gap. In this respect, we cited the important role of the IAEA, the NEA and

EURATOM in nuclear safety regulation. At an international level, these agencies aim to

196 The only exceptions is the situation when the operator would be able to prove that the accident results from an

intentional fault of one of his partners or when the damages are directly due to “an act of armed conflict, hostilities, civil war, insurrection or. . . a grave natural disaster of an exceptional character.” Paris Convention, art. 9; see also id. Art. 6(e).

197 See, e.g., Michael G. Faure & Karine Fiore (2008a). 198 Tom Vanden Borre (1998); Michael Faure & Ton Hartlief (1998).


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implement regulatory safety instruments in order to prevent nuclear incidents and accidents.

These instruments take the form of standards and recommendations. These safety agencies

also exercise a draconian control on the members’ countries nuclear installations. In France,

the national safety authorities are numerous and organized around the ASN (Autorité de

Sûreté Nucléaire) and the Ministries of Industry and Ecology. In the U.S., the NRC is in

charge of nuclear safety. All of these organizations contribute to improve the application of

safety rules on the nuclear installations, and, thus, work to avoid nuclear accidents.

233. However, these rules are regulatory and so, do not provide incentives, in a strict sense,

to the nuclear operator; instead, they provide obligations. Even though the purpose is identical

(the prevention of accidents), regulation and the liability rules do not employ the same means

to reach it. Regulation has a compulsory and external dimension. It is implemented and

controlled by an outside and superior authority. The operator is only required to apply and

respect the standards it imposes. Therefore, the operator’s behaviour changes with the

changes of the norms. On the contrary, with a liability rule, the operator is led to modify, on

his own, his behaviour in accordance with the risks he generates. Liability rules are thus more

dynamic than safety regulation (which is more difficult to change and, as a result, more

static). Especially in such a complex industry, it is often argued that liability rules are more

efficient, from the prevention of accidents viewpoint. Because the operator has more

information about his activity, and more information about its risks, as compared to anyone

else (e.g. the regulators), he would be in a better situation to evaluate his risks, and thus, his

corresponding level of prevention. Of course, liability rules maintain a punitive dimension by

applying sanctions to operators in case of any accidents (strict liability) or in case of accidents

resulting from negligence (fault liability).

234. To sum up, since the nuclear operator’s liability is limited, his incentives to prevention

are also limited. In such a context, the role of the nuclear safety authorities is crucial to

supplement the liability rule.

3.4.4 Reduced victim compensation

235. Another consequence of the nuclear subsidy refers to the compensation to victims in

case of a nuclear accident. Indeed, the current international nuclear liability regime fails


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regarding the compensatory capacity it provides.199 In this respect, it is striking to see how

low the available amount to cover the nuclear risk is. At a national level, the total nuclear

compensation capacity in France currently amounts to € 231 million (€ 91 million from the

operator plus € 140 million from the State). At a supranational level, with the additional € 150

million financed by the Conventions’ contracting Parties, this amount increases up to € 381

million. In other words, if a nuclear accident occurs today, the maximum available sum to

compensate the victims will only be € 381 million. In consideration of the costs of a major

accident, or even of a medium one, this sum is insufficient.200

236. With the 2004 Protocol, this total available amount raises in the international regime to

€ 1200 million at a national level, and at € 1500 million at a supranational level. Therefore, if

the goal of this Protocol was to make the Paris and Brussels Conventions (amended in 1982)

compatible with the other new instruments, such as the modification Protocol of Vienna

Convention (1997), its first purpose was to ensure a greater financial compensation of damage

in case of an accident.201 The increased new coverage caps were aimed at compensating a

larger number of victims and at covering a broader range of damages suffered.202 However,

in spite of the increase of the caps, the operator’s subsidy remains high and a large part of the

nuclear risk costs are still neither covered nor internalized. As a consequence, the new

amounts of coverage are still too small to cover, particularly major accidents. As already

demonstrated they will cover in many cases at most 1 % of the damage.

237. Of course, one could argue that insufficient compensation to victims is not an

economic consequence in the sense that whether or not a victim is compensated is primarily a

distributional issue rather than an efficiency issue. However, it has been shown that,

particularly with catastrophic losses potentially caused by nuclear accidents, that perspective

is too simple. The consequences of such accidents can be that devastating for entire (groups

of) countries that, for example, because of affected real estate, may have financial markets

that become completely disrupted, if no guarantee can be given that funds are available to

compensate the losses and assist in restoration.

199

See generally Melanie L. Oxhorn (1992). 200 Recall that we mentioned above the costs of a major accident were (in the various scenarios) estimated to vary

between € 10 billion and 100 billion. See DGEMP Report 2003; Schieber and Schneider (2002); Spadaro and Rabl (1998); Dubin and Rothwell (1989).

201 See 2004 Protocol.

202 See id.


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4. Insurance of the nuclear risk

238. As we argued in the introduction, it is important to focus on the way in which the

nuclear liability is currently covered, which is largely through the insurance market. It is

important to address this cover in detail for a number of reasons. First, as we already

mentioned when discussing the nuclear liability provisions in section 2, operators need to

show insurance or other financial security up to the level of the financial cap.203 The

conventions do not hold that the operators should necessarily use insurance. However,

insurance is de facto used to an important extent. The principle of the conventions is hence

that the liability should necessarily be covered through insurance or through other forms of

financial security.

239. Ageing and PLEX may of course have important consequences for the demand for

insurance and financial security and for the price of the cover provided. To the extent that the

probability of a nuclear accident would increase with aging, this would have consequences for

the premiums charged; to the extent that the magnitude of the potential damage could

increase, this may have consequences for the necessary scope of cover. The link between

operators’ liability and financial cover also has a second consequence: any debate on reforms

of nuclear liability (e.g. towards unlimited operators’ liability) was always stopped by the

argument that higher amounts of liability (than currently provided in the conventions) or

certainly unlimited liability would be uninsurable. As we will argue in this section and below,

this argument suffers from serious fallacies.

240. First, policy makers have been too much dependent on one-sided information provided

by the nuclear industry on which amounts would be insurable; more recent accounts, e.g. by

nuclear re-insurers, hold that substantially larger amounts could be covered as well (provided

of course that the nuclear energy industry cooperates in those constructions); moreover, it is,

as the examples in some Member States show, not necessary to link the scope of nuclear

liability (in amount) to the available amounts of insurance coverage on the market. Liability

could in principle (as is the case in Germany) be unlimited, but the necessary financial cover

could be limited to amounts that can be provided on the market. But in that respect policy

203 Art. X, the Paris Convention; art. VII of the Vienna Convention.


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makers should become much more critical and hence not only rely on one-sided information

provided by the nuclear lobby, but through a truthful analysis of availabilities on the financial

and insurance market, also taking into account information from relevant stakeholders such as

the large re-insurers.

241. In this section, we will first sketch the current cover of the nuclear risk and discuss

some of the limits and the alternatives. We will also briefly discuss the costs of nuclear

insurance and the importance of mandatory financial security.

4.1 The nuclear European insurance pools

242. Traditional insurance companies do not provide coverage for damage caused by a

nuclear accident; therefore their insurance policies exclude coverage for such damage.

Insurance for nuclear damage is generally provided for by nuclear insurance pools.204 The

insurance of nuclear risks by nuclear insurance pools should be regarded as a bundling of

resources at a national level. Such bundling allows the creation of a supply to the demand of

insurance coverage205 for damage resulting from nuclear incidents. As a result, small

insurance companies can participate in the insurance of nuclear risks without puting their own

financial capacity at risk. In this way, the market can provide for insurance coverage for risks

that would surpass the capacity of one individual member of the pool. Indeed, through the

existence of such pools, every insurance company that wishes so can conclude a contract with

the pool in which it will be decided which part of the coverage that company will insure.

Every pool member declares each year for which amount it is willing or able to provide

insurance coverage. The capacity of the pool is therefore equal to the contributions of all its

members. In case payments have to be made, each member of the pool will have to contribute

a ratio of its participation as contractually agreed with the pool. Re-insurance of the nuclear

risk will take place among pools.206 According to the insurers, this strategy results in a two-

fold advantage. Since every member of the pool knows exactly for which amount it will be

responsible, members are willing to insure a much larger part of the nuclear risk than with

204 See, inter alia, W.E. Belser (1959); J.C. Dow (1989); Nuclear Power: Insurance and the Pooling System, Special

Edition of the Nuclear Pools’ Bulletin (1992); S.M.S. Reitsma, (1993). 205 Most pools provide for coverage for third party liability as well as damage to the operator itself. The (mandatory)

liability insurance of the operator covers in general the compensatory consequences of extra-contractual liability of the operator of a nuclear installation for damage resulting from a nuclear incident, even if the incident was directly due to a grave natural disaster. This policy should be clearly separated from the policy covering potential damage to the operator itself.

206 That is why a large number of insurance companies worldwide had to interfere as reinsurer in respect of the Three Mile Island accident in 1979 (J.C. Dow (1985), at 172 et seq). The two American pools were reinsured with most other pools in the world.


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respect to conventional industrial risks. Moreover, re-insurance is directly established

between the different national pools without intervention of third parties, which minimizes the

costs.207

243. Most countries having nuclear power plants on their territory have their own national

nuclear insurance pool; the effect is that, as far as third party liability is concerned, a Belgian

nuclear operator can only buy insurance with the Belgian pool, the German operator with the

German pool, etc. Even if the nuclear operators tender for the most favourable insurance

offer, they only seem to receive offers from their national pool. The monopolistic position of

the nuclear insurers has been heavily critised in literature.208

244. These pools generally do not only provide for coverage for third-party liability but

also first-party insurance for the damage caused to the nuclear power plant itself. This is an

aspect of considerable importance since the amount available for third-party liability

insurance is limited by the amounts made available for the first party insurance for the nuclear

power plant. In other words, if the capacity of a nuclear insurance pool is partially used to

cover property damage tot the nuclear installation, there will be less capacity left for covering

third party liability. In some literature it is argued that the amounts that should be available for

coverage of the nuclear power plant should be much higher than the amounts to be made

available for the liability of the licensee of the power plant toward third parties.209 According

to some authors, first-party insurance even has priority over third-party liability insurance

since a nuclear plant accident will probably first affect the installation itself and only then the

surrounding area.210 This combination of first-party and third-party liability insurance through

the nuclear pools therefore leads to a limitation of the amount available for third-party

207 Nuclear Power: Insurance and the Pooling System, Special Edition of the Nuclear Pools’ Bulletin (1992); S.M.S.

Reitsma (supra fn. 57), 341 et seq. 208 M. Faure and R. van den Bergh, “Restrictions of Competition on Insurance Markets and the Applicability of EC

Antitrust Law”, [1995] Kyklos, 48, 65 et seq.; M. Faure, “Economic Models of Compensation Caused by Nuclear Accidents: Some Lessons Learned from the Revision of the Paris and Vienna Conventions”, [1995] European Journal of Law and

Economics, 21 et seq. 209 See J. Dow, (1985) at 180. 210 W. Muller, “The Role of Insurance Industry in Covering Nuclear Third Party Liability Risks”, Nuclear Third Party

Liability and Insurance, Munich Symposium, Status and Prospects, Paris, OECD, 1985 notes in this respect: “In view of the rising cost of erecting nuclear energy plants, nuclear property insurance, which is likewise borne by the nuclear pools, is under considerable pressure and, in turn, represents an involvement by the insurance industry to the machinery insurance which, in the case of a nuclear plant, also goes into the billions. Both forms of cover have priority over liability insurance, since a theoretical large scale nuclear occurrence would probably first affect the material assets within the plant, then the surrounding area.” “It is naïve to consider only the third party suffering loss or damage – as occasionally happens – and to regard property insurance as an unnecessary appendage which only absorbs capacity. Every reasonable person knows that a nuclear power plant requires a heavy investment and that not only the operators, but also their creditors, should be protected. It is quite simply foolish to regard the loss of this investment as a sort of ‘punishment’ for having brought about a nuclear occurrence and to ignore the interests of the power supply company and the investors in safeguarding their material assets.”


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liability insurance. It is also remarkable that brokers argued during an OECD conference in

Münich in 1984 that the first-party insurance should be removed from the pools; the

premiums would be relatively high due to the monopoly. They also argued that an exclusion

of competition was possibly justified thirty years ago at the beginning of the nuclear age but

could not be defended nowadays.211 Given this high concentration on the nuclear insurance

market in some countries initiatives have been taken by the nuclear industry, in cooperation

with some brokers, to withdraw the first-party insurance from the nuclear pools and to cover

this through a new mutual insurance fund of nuclear power plant operators. Before discussing

the existing nuclear mutual insurance scheme more into detail, it is important to highlight the

way the US nuclear insurance market is functioning, i.e. in respect of the first (individual) and

second (collective) layer of the nuclear operator’s liability.

4.2 Third party liability insurance in the US

245. Just like in Europe, US operators only can operate their nuclear power plant when

having a licence and they can only have a licence when they are able to prove that they

comply with the liability insurance provisions of the Price-Anderson Act. NRC requires each

licensee to show proof that his liability insurance includes the 375 million USD of primary

insurance coverage, as required under the Price-Anderson Act. NRC and the licensee also sign

an indemnity agreement requiring the latter to maintain an insurance policy in the same

amount. However, NRC relies on American Nuclear Insurers (ANI) to send to NRC the

annual endorsements documenting proof of insurance after the licensees have paid their

annual premiums.212

246. In addition to the primary insurance coverage, licensees must also show proof of

secondary insurance to NRC – being the retrospective premiums. This is however not a

“genuine” insurance policy like the one in the first tiers, but it seems to be common practice

that every nuclear operator signs a bond for payment or retrospective premiums as proof of

the secondary insurance; every licensee needs to send a certified copy to NRC. This bond is a

contractual arrangement between the operator and ANI that obliges the operator to pay ANI

the retrospective premiums if necessary. If a nuclear accident in the US exceeds the primary

coverage of 375 million USD, ANI will immediately collect the retrospective premiums. If

211 See the discussion in Nuclear Third Party Liability Insurance, Munich Symposium, Status and Prospects, 192-196. 212 Nuclear Regulation. NRC’s Liability Insurance Requirements for Nuclear Power Plants Owned by Limited Liability

Companies, Report to Congressional Requesters, May 2004, 2.


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the operator fails to pay its share of the retrospective premiums, ANI needs to advance up to

30 million USD. However, if a licensee fails to pay the deferred premium, NRC reserves the

right to pay those premiums on behalf of the licensee and subsequently recover the premiums

from the licensee.

247. Of course, such a bond might cause problems in case of insolvency of the nuclear

operator. This specific issue has been analysed in the US, especially as limited companies are

concerned; the NRC does not seem to conduct an in-depth financial review to determine the

licensee’s ability to pay the retrospective premiums. What NRC does is reviewing a licensees

financial ability to safely operate their plants and to contribute decommissioning funds to the

future retirements of the plants. Apparently NRC is of the opinion that if an operator is able to

cover these two large expenses, that they are likely to be capable of paying their retrospective

premiums.213 However, ANI goes further than NRC and requires that licensees that are

limited liability companies to provide a letter of guarantee from their parent or other affiliated

companies with sufficient assets to cover the retrospective premiums.

248. As already indicated, the nuclear insurance pools generally offer insurance coverage

both for property damage and third party liability. This is however not the case in the US: the

American nuclear insurance pool (ANI – American Nuclear Insurers) is only active

concerning third party liability. In the US the nuclear insurance pool insures only the

individual third party liability of the nuclear operator; as such the retrospective premium is

not insured, but is a call to which operators need to respond after an accident takes place, and

only if the damage exceeds the liability limit of the American operator (375 million USD).

249. ANI writes nuclear liability insurance for nuclear facilities in the United States, and

assumes reinsurance shares on nuclear business written by other nuclear pools and mutual

insurers throughout the world214. Property insurance is being taken care of by Nuclear

Electric Insurance Limited (NEIL), a captive incorporated under the laws of Bermuda which

213 Ibidem, 9. 214 ANI’s Domestic Syndicate offers third-party nuclear liability insurance to domestic operators of nuclear power

reactors, nuclear fuel fabrication facilities, waste disposal and other nuclear facilities. It also writes nuclear liability insurance for suppliers of products or services (including transportation services), to these facilities. The Foreign Syndicate provides reinsurance to foreign nuclear pools for placement at nuclear facilities overseas and in Canada and Mexico. Reinsurance is assumed on a facultative basis. The Foreign Syndicate also writes direct liability coverage for U.S. suppliers of products or services to foreign nuclear facilities.


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has its place of business in Delaware (USA)215. NEIL is one of the existing nuclear mutual

insurance systems, the functioning of which will be discussed hereunder.

4.3 The nuclear mutual insurance systems

250. The origins of NEIL go back to 1973 when 14 American nuclear operators have

created their mutual insurance system, called Nuclear Mutual Limited (NML). After the

accident in Three Mile Island, a second nuclear mutual insurer saw the light: Nuclear Electric

Insurance Limited (NEIL). The reason why these mutuals (or captives) were created, is to

provide the nuclear operators with an alternative for the insurance offered by the American

nuclear insurance pool, ANI.216 217

251. Today, NEIL insures nuclear plants and their generating units for costs associated with

certain interruptions of electric generation (in case of accidental physical damage to insured

sites), decontamination expenses and other risks of direct physical loss at insured sites. The

primary property program provides insurance coverage of 500 million USD per occurrence;

the excess program provides property insurance coverage of 2.25 billion USD per

occurrence.218 Thus, total coverage of property damage in the US amounts 2.75 billion USD.

It is quite generally acknowledged that NEIL has been a success. According to Dow this is

partially thanks to the fact that they were able to attract important reinsurance support since

they only cover risks that are not insured with ANI and their supporters were therefore not

exposed to an accumulation of commitments as a result of their also being supporters of

ANI.219

252. In 1999 NEIL started the activities of its subsidiary, called Overseas NEIL (located in

Dublin), in order to expand their international activities. In 2001 ONEIL insured sites in

Belgium, Germany, South-Africa, South-Korea, Sweden and Switzerland.

253. Hence, in the US there is as such a clear distinction in nuclear insurance: the American

pool only offers third party liability cover. Property damage is insured with the operator’s

215 Note that a significant portion of NEIL is reinsured with ANI. 216 J.C. Dow (1985), 267-268. 217 In the seventies, there were two nuclear insurance pools in the US. Since 1998 ANI is the only remaining nuclear

insurance pool in the US. 218 NEIL, Annual Report 2006, 20. 219 J.C. Dow (1985), 268.


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own mutual insurance scheme, NEIL. However, NEIL and ANI seem to work closely together

as far as reinsurance is concerned. In Europe, there is not such a similar clear distinction

between third party insurance and property damage insurance, since the nuclear insurance

pools offer both. However, also in Europe several operators joined their forces into two

mutual insurance schemes.

254. In Europe, mutual insurance schemes have been created as a reaction of the nuclear

operators to the nuclear insurance pools. In 1978, European Mutual Association for Nuclear

Insurance (EMANI) was created and aimed at reducing the insurance premiums of its

members. EMANI offers cover for certain insurance risks relating not only to nuclear power

stations, but also to other nuclear facilities in several European countries. As EMANI is a

mutual insurance association of nuclear operators, the capacity offered by EMANI is

independent from the capacity of the nuclear insurance pools (the latter being basically an

association of “regular” insurance companies). EMANI more specifically provides for

insurance capacity for material damage and business interruption. However – and this again is

a difference between the US and Europe – American nuclear operators insure their business

interruption for quite considerable amounts; this is much less the case for European nuclear

operators who primarily seem to be concerned with covering damage to their installations.

255. At the end of 2002 also ELINI (European Liability Insurance for the Nuclear

Industry) was created. As EMANI, ELINI is a Belgian mutual insurance association; the aim

of ELINI is to provide insurance capacity for nuclear liability risks of its members. The

capacity of ELINI is independent from the capacity offered by the various nuclear insurance

pools. ELINI thus is able to provide for additional insurance capacity on view of the revised

Paris and Brussels Supplementary Convention. It can also offer insurance capacity for

terrorism and for the 30-years prescription period.

256. Thus, ELINI is worldwide the first mutual insurance company of nuclear operators

aimed at offering (nuclear) third party liability coverage. Whereas NEIL is primarily active on

the first party insurance market, ELINI is trying to develop a (European) third party liability

insurance market – and is thus active on the same market as the traditional nuclear insurance

pools. However, it seems that certainly in the next few years ELINI will not be a real

competitor to the pools, but will be offering access capacity, especially on issues that are

difficult to insure on the primary nuclear insurance market such as the 30 years prescription


85

period, terrorism coverage and environmental damage. As discussed earlier, these are

typically the issues raised by the nuclear liability conventions of the second generation

(especially the Protocol to the Paris Convention and the Protocol to the Vienna Convention).

257. Only private or public companies or authorities operating nuclear installations can

become member of EMANI and ELINI. Companies such as EDF, British Energy, Eon, RWE,

Vattenfall are member of EMANI and/or ELINI. The insurance capacity of EMANI amounted

to 700 million € in 2005; ELINI’s maximum insurance capacity in 2005 was 74 million €.220

258. One can thus notice considerable differences in the success of the mutual nuclear

insurance schemes in the US and in Europe. It is striking that the growth of EMANI was quite

slow. In the first decade of its existence the insurance capacity of EMANI remained rather

moderate (approximately 150 million €); the capacity increased to about 400 million € by the

end of the nineties and amounted 700 million € in 2005.221 An imported element explaining

this lack of enthusiasm from the industry to step into this European nuclear mutual insurance

scheme seems to be the lack of solidarity amongst European nuclear operators.222 It is indeed

quite striking that European nuclear operators have quite a different policy as to their

coverage of property damage: some buy that coverage with the nuclear pools, others are

member of the European captive (EMANI) and still others opt for the American captive

(NEIL).

259. These different policies in insuring property damage have two consequences that

interact with the coverage or at least the capacity available for covering third party liability.

The fact that some nuclear operators insure their property damage with the pool first

decreases the overall capacity of the pools to cover other risks, i.e. third party liability.

Second, due the fact that European operators – in contrast to the American nuclear operators –

seem to be reluctant to massively join their forces into a European mutual structure, the

capacity of EMANI remains rather moderate. This is aggravated by the fact that, as

mentioned, European nuclear operators do buy large insurance coverage for property damage

to their nuclear installations, but seem to be less interested in buying coverage for business

interruption.

220 ELINI, Annual Report 2005, 16. 221 EMANI, Annual Report 2005, 16. 222 M. Debaets (1991), 196.


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260. Also remarkable is the fact that the overseas activities of NEIL seem to grow (slowly)

and that, little by little, NEIL seems to become a competitor of EMANI since NEIL insures

the property damage of some European nuclear operators. It is not within the scope of this

paper to explain why – at least some – European nuclear operators seem to favour the

American instead of the European nuclear captive. However, one has to bear in mind an

important difference in operation of both captives: whereas the activities and membership of

NEIL is strictly limited to nuclear electricity operators, EMANI’s activities extend to nuclear

waste companies, fuel fabrication facilities, nuclear research laboratories etc.

4.4 Limits of the pools

261. As we just sketched, insurance of the nuclear liability risk largely takes place via the

so-called nuclear pools. With the nuclear pools in this respect we refer to, as mentioned

above, pools between insurance companies. It is important to distinguish this since the term

“pooling” is sometimes equally used for risk-sharing agreements between operators, which

are obviously something else.

262. The nuclear pools have been able in the US and in Europe to provide cover for the

nuclear liability of the operator, but at the same time the insurance system is in a way largely

deficient. One problem is that most countries with nuclear power plants have their own

national nuclear insurance pools.223 The effect is that, as far as third party liability is

concerned, a Belgian nuclear operator can only buy insurance with the Belgian pool, the

German operator with the German pool, and so forth.224 Even if the nuclear operators tender

for the most favourable insurance offer, they only receive offers from their national pool. The

monopolistic position of the nuclear insurers has been heavily criticized.225 It may clear that

these pooling arrangements basically consist of a cartel whereby insurers exclude competition

specifically for the nuclear risk and decide to join forces in order to provide coverage. For

obvious reasons, those pools have been debated both from an economic as well as from a

legal perspective. From an economic perspective, the question arose to what extent pools that

essentially operate on a non-competitive basis can be reconciled with competition policy.

223 See, e.g., Dow (1989), at 178.

224 Cf. American Nuclear Insurers, About ANI, http://www.nuclearinsurance.com/About%20ANI.html (last visited Oct. 1, 2008) (“We directly write nuclear liability insurance for nuclear facilities in the United States . . . ”).

225 Michael G. Faure & Roger Van den Bergh (1995); see also Faure (1995), at 31-32 and Vanden Borre (2001) at 706.


87

263. A third problem is that these pools provide coverage for both third-party liability and

damage to the nuclear power plant itself (first party liability).226 These two forms of liability

coverage draw against each other in the pools.227 In other words, if the capacity of a nuclear

insurance pool is partially used to cover property damage to the nuclear installation, there will

be less capacity left for cover third-party liability. Some argue that first party liability coverage

should surpass third-party coverage.228 One justification for increased first party coverage is that

nuclear accidents will always affect the nuclear power plant, causing first party damage, but will

not always affect the surrounding area, which would trigger third-party liability.229

264. The, for the public opinion probably cynical, conclusion is that nuclear insurance

pools consider it, if one would put it in popular terms, more important that the damage to the

nuclear installations is repaired so that energy provision can be guaranteed than that victims

are adequately compensated.

265. The fact that there is insufficient competition between nuclear insurers also leads to a

lack of capacity and limited coverage. Nuclear insurers have urged for the removal of first party

liability from the nuclear insurance pools.230 Under current arrangements, the insurers would

still retain a monopoly in the nuclear insurance market, causing the premiums on first party

insurance to be relatively high.231 Insurers have spoken favourably of the undoing of the

protectionism of the early civil nuclear age and the introduction of a more competitive system for

nuclear insurance.232 Given the high concentration on the nuclear insurance market in some

countries, initiatives have been taken by the nuclear industry, in cooperation with some

226 See Dow (1989), at 179-80. 227 Faure (1995) at 26. 228 Dow (1989), at 80. 229 W. Müller (1985). Müller notes: In view of the rising cost of erecting nuclear energy plants, nuclear property

insurance, which is likewise borne by the nuclear pools, is under considerable pressure and, in turn, represents an involvement by the insurance industry to the machinery insurance which, in the case of a nuclear power plant, also goes into the millions. Both forms of cover have priority over liability insurance, since a theoretical large scale nuclear occurrence would probably first affect the material assets within the plant, then the surrounding area. It is naive to consider only the third party suffering loss or damage - as occasionally happens - and to regard property insurance as an unnecessary appendage which only absorbs capacity. Every reasonable person knows that a nuclear power plant requires a heavy investment and that not only the operators, but also their creditors, should be protected. It is quite simply foolish to regard the loss of this investment as a sort of ‘punishment’ for having brought about a nuclear occurrence and to ignore the interests of the power supply company and the investors in safeguarding their material assets.

230 See id.; Michael G. Faure & Véronique Bruggeman, Presentation at the 24th Annual Conference of the European Association of Law and Economics in Copenhagen, Denmark: Catastrophic Risks and First-Party Insurance 15 (Sept. 13-15, 2007), available at www.cbs.dk/content/download/67298/930270/file/ Véronique%20Bruggeman.pdf (indicating that pooled insurance may fail to provide coverage because of a lack of competition in the insurance market).

231 See Michael G. Faure (1995) at 26. 232 L.L.J. Vigneron (1985), at 192.


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brokers, to withdraw first- party insurance from the nuclear pools and to cover this through a

new mutual insurance fund of nuclear power plant operators.233

4.5 Alternatives: pooling by operators

266. As we already mentioned when discussing the current cover in Europe,234 it is more

particularly the dissatisfaction of the nuclear operators themselves with the monopolistic

insurance pools that has driven nuclear operators to develop the mentioned alternatives, more

particularly EMANI and ELINI. Indeed, two mutual pools are established in Europe: the

European Mutual Association for Nuclear Insurance (EMANI) and the European Liability

Insurance for the Nuclear Industry (ELINI). They are both mutual insurance associations and

both provide not only coverage to nuclear power stations but also to other nuclear facilities.

EMANI was established in 1978, and provides coverage for material damage, business

interruption, machinery breakdown, terror and erection all risk. The overall insurance capacity

in 2010 is 600 million Euro and the capacity for terrorism is 500 million Euro.235 The

decontamination costs for installations in case of an accident are also covered in the material

damage policy within the limitation of 600 million Euro. However, since there is no legal

obligation for nuclear operators to seek financial coverage for their onsite decontamination, as

is the case in the US, the coverage for decontamination costs by EMANI may be not

significant. EMANI can either act as the leading underwriter or as a coinsurer to provide

insurance directly, or act as a reinsurer. Since EMANI can act either as a leading underwriter

or as a coinsurer with national pools, two different types of policies exist: the national pool

policy and the EMANI policy. They may have different coverage and prices.

267. ELINI was created at the end of 2002 to provide insurance capacity for nuclear

liability risks. It is the first worldwide nuclear pooling system aimed at providing nuclear

third-party liability coverage.236 ELINI is not designed as a competitor to the national pools,

but instead to offer excess liability coverage: it provides coverage to all the headings under

the revised Paris and Brussels Supplementary Conventions and also coverage for terrorism

233 Faure (1995), at 26. 234 See supra 4.1. 235 EMANI Annual Report 2010; http://www.emani.be/EMANI_AR_FINAL_2010.pdf. 236 Faure & Vanden Borre (2008), 257.


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and the 30 years prescription period.237 The capacity to provide coverage for the less

predictable risk is because of the special structure of ELINI.

268. There are three types of membership for ELINI: the insured members who have an

insurance policy and have contributed to the constitution of the guarantee fund; non-insured

members who take part in the constitution of the guarantee fund (supportive members) and

non-insured members who do not take part in the constitution of the guarantee fund but pay

an administration fee.238 Both insured members and supportive members make annual

contributions to the guarantee fund according to the agreed ratios. If the total losses exceed

the contributions, an additional call can be made up to 20 times the annual contributions. The

availability of additional calls makes an ex ante calculation of premiums for the unpredictable

risks less necessary. It is worth noting that ELINI is different from national mutual pools

established in the US and Germany. Under the national regimes, the insurers and insured are

the same; the operators make contributions according to pre-set ratio when a major accident

happens to one of the operators. However, under the system of ELINI, supportive members

who are not insured parties can also make contributions to the guarantee fund. ELINI can

either act as a leading underwriter or a co-insurer. Thus the individual insurance policies can

be varied from one to another; the extent of involvement of ELINI and the percentage of each

contributor in different policies may also be different. The insured parties are also free to

choose the amount of insurance. Through cooperation with national pools, ELINI works more

like a combination of a traditional insurer and a mutual pool.

269. To guarantee sufficient compensation for future damage, ELINI makes reserves. The

contributions made by members are put into a special bank account and can only been

withdrawn after the dissolution of the pool or 30 years after the expiration of its policies. In

2010 the maximum insurance capacity per policy is € 89 million, of which € 37.5 million is

provided through retention.

270. ELINI can provide insurance by itself, as a leading underwriter or co-insurer with

national pools. The content of the contract and insured amount depend on national laws, since

different countries have divergent liability limits and liability and insurance requirements.

When it acts as a co-insurer to national pools, ELINI relies on the national pools to decide the

237 Annual report ELINI, 2010, at 16. http://www.elini.net/ELINI_2010_(2011)_FINAL.pdf. 238 Ibid, at 17.


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content of the insurance contract but can decide its own premium. Usually, the basic premium

among electricity producers is the same, which are subject to increasing or decreasing

according to the grading made by ELINI. When accepting one as a member of ELINI, ELINI

has to make a risk review and grades the risks according to technical, insurance and financial

features. The grading can be used to adjust the premium later.239

271. ELINI makes an attempt at establishing an international pooling system for nuclear

liability. If the revised Paris Convention comes into effect and is accepted by many countries,

the additional capacity provided by ELINI may become more attractive. However, given the

divergent liability requirements among different countries, and given the lack of consistent

and harmonized standards on nuclear safety, nuclear operators may not have a strong interest

in establishing a mutual pool. That may be one of the reasons why the mutual pools have

developed so slowly since its birth. After several decades, the capacity of EMANI only

increased from € 150 million in the first decade of existence to € 600 million in 2010,240 while

the capacity of ELINI is still only € 89 million in 2011.241

4.6 Cost of insurance

272. The fact that nuclear operators have, as we just mentioned, largely turned away from

the nuclear insurance pools and created their own alternatives should not come as a surprise.

The reason is obviously that, given the high concentration (de facto in monopoly) on the

nuclear insurance market, insurance premiums could be excessively high. In a recent study,

Faure and Fiore have analysed the costs of nuclear insurance for the case of France. The

current liability limit of the French nuclear operator is € 91 million. For the first € 60 million,

the operator (EDF) covers this through his own financial reserves; the remaining € 31 million

through insurance.242 To cover € 31 million cost damages, the final third of his total coverage,

EDF currently pays an annual insurance premium of € 6.4 million for his whole nuclear

operation. This "excess loss" insurance covers his civil liability in the event of an accident on

239 The pool in the US, NEIL can rely on some self-regulatory organizations, such as WANO and INPO to control the

safety of members. WANO is the World Association of Nuclear Operators, INPO is Institute of Nuclear Power Operations in the US. They fulfil important roles in checking the nuclear safety in nuclear power plants. In the US, NEIL cooperates with INPO. However, to be a member of WANO or INPO, one should be the operator of nuclear power plants. But the members of ELINI vary: they can be either operators for nuclear power plants or other nuclear installations. Thus, unlike NEIL, which can rely on INPO’s information in setting premiums, ELINI are not affiliated with those institutions. Hence, ELINI cannot affiliate with a nuclear self-regulatory organization like WANO or INPO to control the nuclear risks.

240 Faure & Vanden Borre (2008), at 257; EMANI 2010 Annual Report, at 16. 241 Annual report 2010 ELINI, at 18. 242 For details see Faure and Fiore (2008a).


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one of its installations. In other words, it covers the material and human damage suffered by

third-party victims of an accident.243

273. As with traditional insurance, the premium paid by EDF is determined by the insurer

with the aim of meeting the contractual obligation in the event of an accident while also

recovering his internal costs and expenses. The premium currently paid by EDF differs

greatly from its actuarial value.

274. The premium actually paid by EDF was compared in this study to the actuarially fair

premium that should have been paid by the French nuclear operator. The study reveals that

the actuarial insurance premium based on the various probabilities would vary between €

1,798 and € 179,800 per year.244 These amounts are spectacularly lower than the insurance

premium actually paid by EDF, which is € 6.4 million per year. The current premium paid by

the operator in France hence is 355 times higher than the actuarial one. This high premium is

probably related to the structure of the nuclear insurance market. Indeed, one of the reasons

behind the current premium level can be found simply by observing the structure of the

nuclear insurance market. Indeed, loading costs superior to 30%, or a very high profit level,

are only possible and feasible on a monopolistic, or at least, a non-competitive insurance

market. This is precisely what the current nuclear insurance market is. In fact, since the

beginning of the development of the civil nuclear industry, the nuclear insurance market has

been organized on a national and non-competitive basis245 through so-called nuclear pools

which we just discussed.

275. There exist 28 nuclear pools in the world (Assuratome in France, the American

Nuclear Insurers in the USA, the British Nuclear Insurers in the UK, Syban in Belgium, etc.).

In these pools insurers have brought together capacity in order to cover the nuclear risk from

the installations on their territory. Therefore, these nuclear pools effectively function as

monopolies. Moreover, there is no competition between the various nuclear pools and nuclear

243 Damage suffered during transport or damage to the installations themselves is covered through other specific

insurance contracts. 244 These differences of course correspond to different estimates of the probability of a nuclear accident. See Faure and

Fiore (2008a), at 235. 245 Faure and van den Bergh (1990).


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operators cannot insure their risks with a foreign pool.246 As a consequence, the nuclear

insurance pools can determine their premium as they wish and include an additional cost in

the premium in order to capture a monopolistic profit as a rent. Understandably, this

concentration on nuclear insurance markets has been criticized by the European Commission

from the point of view of competition law.247 The EU Commission more particularly

expressed concerns on the concentration on the nuclear insurance market (via the pools) in its

reports on the functioning of the regulation that exempts specific insurance activities from

competition policy (provided particular conditions are met).

276. Hence, given this market structure, the assumption that nuclear insurers will be able to

charge a significant profit is certainly realistic. Although of course other factors may explain

the excessively high premium paid by the operator in France,248 the fact remains that insurance

premiums for operators are apparently spectacularly high. Given this structure of the nuclear

insurance market, one understands that it becomes worthwhile for nuclear operators to

develop other alternatives to finance the nuclear risk.

277. This brief discussion of the current cover of the nuclear risk also shows that with

respect to the discussion on nuclear ageing and PLEX it would be, from a policy perspective,

dangerous to rely too largely on claims of the nuclear insurance pools on the available cover

for the nuclear risk. As we just explained, the nuclear insurance market is highly concentrated

and reliable information on insurability can hence not be expected from those monopolists.

Therefore, it seems from a societal perspective, especially with a view on nuclear aging, more

important to make objective actuarial calculations of the potential damage that the nuclear

accident could cause and look for alternative financing sources. It is obviously important to

accompany this with mandatory financial security, but this should not be a reason to limit

liability.

4.7 Financial security

278. Given the many problems that exist in the current regime with financial caps that de

facto create a subsidy for nuclear operators (as argued in section 3.4.1) we believe that there is

as a principle matter no reason to treat nuclear operators differently than operators in other

246 Thus, for example, a nuclear operator in the Netherlands would not have the possibility of obtaining coverage from

the Belgian nuclear pool (Syndicat Belge des Assurances Nucléaires, abbreviated SYBAN) since the latter only covers the nuclear risk in Belgium. The pools do not cooperate with one another. They only purchase reinsurance together.

247 Faure and Van den Bergh (1995, 2002); Faure and Hartlief (2003). 248 For an overview of those other explanations see also Faure and Fiore (2008a), 236-238.


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high risk sectors. E.g. the chemical industry or an operator of a gas fired power plant are in

principle exposed to unlimited liability. They should, as has been repeatedly argued in the

literature, also constitute the basis for a liability regime for nuclear accidents. However, only

introducing unlimited liability, without providing any form of financial coverage, would of

course create exactly the same problem as a financial cap, i.e. an insolvency problem.

279. Hence, given the substantial risks related to the nuclear industry, there should be

mandatory financial security as well. In law and economics research several criteria have been

advanced to argue where mandatory financial security may be indicated. The most important

reason for introducing compulsory insurance is insolvency. Insolvency may, however, pose a

problem of underdeterrence. If the expected damage largely exceeds the injurer’s assets, the

injurer will only have incentives to purchase insurance up to the amount of his own assets. He

is only exposed to the risk of losing his own assets in a liability suit. The judgement proof

problem may therefore lead to underinsurance and thus to underdeterrence.

280. Jost has rightly pointed out that, in these circumstances of insolvency, compulsory

insurance might provide an optimal outcome.249 By introducing a duty to purchase insurance

coverage for the amount of the expected loss, better results will be obtained than with

insolvency whereby the magnitude of the loss exceeds the injurer’s assets.250 In the latter case,

the injurer will only consider the risk as one where he could at most lose his own assets, and

will set his standard of care accordingly. When he is under a duty to insure and exposed to full

liability, the insurer will obviously have incentives to control his behaviour. Via the

traditional instruments for the control of moral hazard, the insurer can make sure that the

injurer will take the necessary care to avoid an accident with the real magnitude of the loss.

Thus Jost and Skogh argue that compulsory insurance can, provided that the moral hazard

problem can be remedied adequately, yield better results than under the judgement proof

scenario.

281. Indeed, this economic argument shows that insolvency may cause injurers to

externalise harm: they may be engaged in activities which may cause harm and which largely

exceed their assets. Without financial provisions, these costs would be transferred to society

249 Jost (1996). A similar argument has recently been formulated by Polborn (1998) and by Skogh (2000). Skogh has also

pointed out that compulsory insurance may save on transaction cost. 250 See also Kunreuther (1987) & Friedman (1982).


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and would hence be externalised instead of internalised. Such internalisation can be achieved

if the insurer is able to control the behaviour of the insured. The insurer could set appropriate

policy conditions and an adequate premium. This shows that if the moral hazard problem can

be dealt with adequately, insurance leads to a higher deterrence than a situation without

liability insurance and with insolvency. Hence, since insolvency can lead operators to

externalize risk and social costs, mandating financial security could force them again to

internalize these social costs by paying a contribution or insurance premium.

282. But again: given the limits of the nuclear insurance market, it is important to stress that

a legislative provision should be formulated to provide financial security (or reserves) in order

to be able to cover the costs of a future nuclear accident. This should obviously not be limited

to insurance, given the high concentration on the insurance market. Various alternatives have,

however, been developed to provide those financial reserves for substantially higher amounts

than the current limits in the international conventions. Hence, especially with a view on

nuclear aging, it is important to examine alternatives for the nuclear insurance pools that

could lead to a new compensation model.

5. The need for a new compensation model

283. Especially with ageing nuclear reactors and PLEX providing adequate financial

security and/or reserves to cover the potential damage becomes a necessity. One of the main

problems with the nuclear liability conventions is that they suggest that all liability should be

covered by insurance. This is quite problematic given the monopolistic situation on the

nuclear insurance market. It may be clear from the previous exposé on insurance that an

important degree of “out of the box”-thinking is necessary to develop alternatives to the

current monopolistic insurance market that has never been able to generate substantial

amounts of compensation. Various proposals have been formulated in the literature, but

increasingly also by relevant stakeholders from the international reinsurance industry. We will

argue that the pooling by operators, such as it has been developed in ELINI and EMANI may

be a good alternative to the nuclear insurance pools.

284. Obviously, a new compensation model is also based on several principles that may or

may not differ from the principles of the international nuclear liability scheme. This model

and these principles should be applied to all nuclear activities, be it currently operating


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nuclear power plants, nuclear power plants that have been granted lifetime extension or newly

built nuclear power plants. We will first discuss the principles of such a model (5.1) and

second we will present a few alternative schemes enabling to generate higher amounts (5.2).

5.1 The basic principles of a new compensation model

285. Before discussing the principles of a new compensation model we do need to

emphasise that despite our criticism towards the current international nuclear liability

conventions, we do favour a compensation model based on an international convention. Given

the possible transboundary effects of a nuclear accident, an international arrangement is

necessary. This arrangement would, however, on some crucial points be different from the

current nuclear liability conventions.

286. It goes without saying that a new compensation model for nuclear damage should keep

the positive elements of the international nuclear liability conventions: strict liability and

compulsory liability insurance. Under a system of strict liability, a victim does not need to

demonstrate any fault or negligence; for this reason strict liability applies to different

dangerous activities. Also from an economic viewpoint it makes a lot of sense to have strict

liability. In these unilateral accident cases (where only one party, the operator, can influence

the accident risk) only strict liability leads to a full internalization of the accident risk since

this rule will indeed provide the operator not only the incentives to follow optimal care but

also to adopt an efficient activity level.251 Law and economics research has also demonstrated

the usefulness of compulsory liability insurance. Relevant for our case is especially that

compulsory insurance protects victims against insolvency of the nuclear operator.

287. Our analysis above illustrated that limited liability is a subsidy to the nuclear industry.

Under the international nuclear liability conventions, even the revised ones, only about one

per cent of the costs of an accident will be compensated for. The alternative is obvious: an

unlimited liability should be introduced.

288. Traditionally various arguments are used against unlimited liability. A first argument

against unlimited liability is that there is no such thing as an unlimited liability since all

liability is, by definition, limited to the value of the assets of the person liable. As such, it is

251 See Trebilcock & Winter (1997), Shavell (1980) cfr. supra, section 3.4.3.


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correct that the maximum liability cannot be more than the value of the assets, especially in

cases where the damage exceeds this value. However, this is true not only for the risk of a

nuclear accident: we could think of many cases where someone causes a damage which

exceeds his assets. This will e.g. be the case for many Seveso-companies but also for an

individual who has caused a lethal car accident. In none of these cases the liability is limited.

Hence it is not clear why only the nuclear industry should benefit from a limitation of

liability.

289. A second argument which is often used is that liability should be limited because there

is no sufficient insurance capacity. In this respect we can note that in all, if not most sectors

and activities there is no unlimited insurance cover available and yet in these sectors there is

an unlimited liability. The idea that every liability must be insured is wrong; the nuclear

industry would be the only industry where this would be the case. We can put it even

stronger: most likely there are no liabilities which are covered by an insurance without any

limitation, so we can question why this should be the case only for the nuclear industry.

290. Third, opponents of unlimited liability claim that this would have an upward trend on

prices of final consumers. In other words: in case of unlimited liability, the nuclear operator

would pay a higher insurance premium and this will be reflected in the power prices paid by

households and businesses. Research by Faure en Fiore has indicated that the effect of an

unlimited liability on the costs of a nuclear operator is rather limited. This seems to be

confirmed by the fact that power prices in Germany (with a system of unlimited liability) are

not higher compared to the prices in some neighbouring countries. According to a study by

the Belgian federal energy regulator commodity prices in Germany are even lower than in

Belgium.252

291. We also refer to economic literature which points at the positive effects on taking care

when someone is still, at least partially, exposed to a part of the damage. 253 The reasoning is

the following: if someone’s liability is covered by an insurance, this could alter his behaviour

towards that risk. Indeed, that person could well consider being less careful because in case of

a damage he will not have to pay (but his insurer will). This risk (called moral hazard) can be

252 Study (F)120131-CDC-1134 over ‘de hoogte en de evolutie van de energieprijzen’, 31 januari 2012, 110 ff. see

website of CREG (www.creg.be). 253 S. Shavell, “On Liability and Insurance”, Bell Journal of Economics, vol. 13, 1982, 120.


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limited if that person will remain exposed to a part of the damage, even though he is insured.

This goal can be achieved e.g. if the insurer is not paying for all the damage.254 Therefore it

makes certainly sense, from an economic viewpoint, that the insured will pay part of the

damage himself. Indeed, this will have as an effect that the insurance will not alter his careful

behaviour.

292. We can apply this reasoning to nuclear liability. If the entire liability of a nuclear

operator is covered by insurance, this will, from a theoretical economic viewpoint cause a

moral hazard problem. It is therefore useful to have an unlimited liability combined with a

compulsory insurance up to a certain amount. If the nuclear operator is liable without

limitation and if he is obliged to buy an insurance (or other financial security) up to a certain

amount, than he will continue to be liable for a part of his assets. Of course, also safety

regulation will contribute to more nuclear safety and this will somehow alleviate the moral

hazard risk. Nevertheless, we are of the opinion that is makes economically a lot of sense that

the nuclear operator will remain exposed to liability on top of the amount of his insurance or

other financial security.

293. Also the public funds that countries make available in the case of a nuclear accident

are a subsidy to the nuclear industry. Also here, the traditional argument used is that given the

catastrophic nature of a nuclear accident, the State should at least partially step in. However,

also other industrial activities are capable of causing catastrophic damage. But we are not

aware of any other sector where the State has consented ex ante in making public funds

available.255

294. Moreover, from an economic point of view, there are arguments that can explain why,

in an initial phase, a country intervenes and makes public money available for compensating

damage caused by a private entity. Indeed, in the sixties of last century the role of the State

was basically an answer to the information asymmetry that existed at that time. At the start of

the development of nuclear power plants, no-one, not even insurers had any reliable data

about neither the probability nor the possible costs of a nuclear accident. From an economic

254 M. Pauly, “The Economics of Moral Hazard: Comment”, American Economic Review, vol. 58, 1968, 5635 ff. 255 The situation is different ex post when government may, e.g. after a national catastrophe, provide disaster relief. But

that usually also only occurs when no solvent debtor can be identified, like with terrorism or natural disaster, less so with

manmade disasters.


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point of view it can make sense for the State to put public funds on the table for a short period

of time. Exactly these reasons were put forward by the authors of the Preliminary Report to

call for government intervention.256 The US has, however, been faithful to the economic logic

of making public funds only temporarily available and they have abolished the public funding

since 1982. The international conventions seem to have forgotten this economic lesson since

the revised nuclear liability conventions even provide for more public funding (higher

amounts in the NEA-regime, amounts now foreseen in the Protocol of the Vienna Convention

and amounts in the CSC).

295. We have already indicated some of our objections against legal channelling of all

liability to the nuclear operator. It is worth looking at the alleged advantages of legal

channelling from an economic viewpoint. Both the Harvard Report as the preparatory works

of the international nuclear liability conventions claim that the exclusive liability of the

nuclear operator has several advantages on the costs of trials following a nuclear accident.

The reasoning was that reducing the number of possible defendants would reduce the

administrative costs, especially the claims handling after an accident. Although one could

argue that if more people will be potentially liable for the damage caused by a nuclear

accident, this would increase the administrative costs of handling the claims. However

Vanden Borre indicated that in case of a catastrophic accident, the administrative and legal

costs relate in the first place to the huge number of plaintiffs (the victims of the accident) and

much less to the number of defendants (in our case the nuclear operator and his suppliers).257

296. Moreover, the reduction in the number of possible persons liable (only the nuclear

operator and not his suppliers) is, according to the preparatory works of the conventions, said

to be beneficial to victims of a nuclear accident. But from the viewpoint of victims it will be

beneficial to be able to address a claim against several persons/corporations because this can

have a positive effect on their chances of getting the damage compensated. This also has a

positive preventive effect since all persons having an influence on the risk will have an

incentive to avoid damage.

256 Cfr. supra, section 2.1.1. 257 Vanden Borre (2001) at 698.


99

297. The argument that legal channelling will help victims because they do not need to look

for the possible person(s) liable is not very convincing either since victims will be able to

benefit from qualified legal assistance via specialised attorneys etc.

298. We therefore see no reason to maintain the legal channelling. The economic

channelling used in the Price-Anderson Act does not have the negative features of the legal

channelling and should therefore be favoured. It is also important to emphasise the negative

effect of the combination of exclusive liability and limited liability.

299. Based on the elements above, we are of the opinion that countries that consider plant

lifetime extension, should abolish public funding, allow for the liability of suppliers of the

nuclear power plant, and introduce a system of unlimited liability of the nuclear operator

whilst requiring the latter to have a third party liability insurance or other financial security up

to a certain amount.

300. Before analysing different possibilities for such alternative financial schemes it is

worth addressing another specific issue. Under a system of unlimited liability and a

compulsory insurance up to a certain amount the problem of underdeterrence may still exist.

Since the damage after a nuclear accident is likely to exceed the nuclear operator’s assets, the

latter will only have incentives to purchase insurance up to the amount of his own assets (the

judgement proof problem).258 Moreover, it will be very difficult for the legislator or regulator

to set the level of compulsory insurance at the correct level given the monopolistic situation of

the nuclear insurance pools and the resulting information asymmetry.

301. This problem of underterrence and underinsurance could at least partially be solved by

giving the nuclear operator an incentive to have a high insurance or other financial security. In

this respect, it is worth mentioning that quite often the damage to the nuclear installation is

insured for a higher amount than the amounts available for third party liability. Vanden Borre

proposed that the amount available for damage to the installation should not be higher than

the amount for third party liability.259 A nuclear operator who is risk averse will look for

solutions to find enough financial security; this will partially resolve the problem of

258 Cfr. supra, section 4.7. 259 Vanden Borre (2001) at 725.


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information asymmetry and can have a positive effect on the amounts available for third party

liability as well.

5.2 Alternative financial schemes

302. Hereunder, we will explain why it is possible to generate higher amounts of cover via

risk sharing than via insurance (5.2.1); the experience with marine oil pollution also shows the

effectiveness of a risk-pooling scheme, combined with funding by industry, since in that

domain substantially higher amounts are generated than currently available for the cover of

the nuclear risk (5.2.2). So far, notwithstanding suggestions in the literature, an EU risk-

pooling scheme has not developed, which is largely due to lacking harmonized safety

regulation (5.2.3). This is different in the US where a Nuclear Regulatory Commission (NRC)

regulates the nuclear risk US-wide, which equally provides scope for the development of a

retro-active pooling scheme which could be a model for the EU as well (5.2.4). Recently,

Munich Re has formulated a few interesting proposals, not only with respect to nuclear

liability, but also for the domain of liability for damage caused by offshore installations.

Those proposals are surely worth considering, also for the cover of the nuclear risk (5.5).

5.2.1 Advantages of risk sharing

303. A risk sharing agreement or a pool is a system whereby operators mutually agree to

share each other’s losses. It resembles insurance, but there are, as will be explained in more

detail, a few fundamental differences. The basic difference is that insurance involves a third

party (the insurance company) whereas in a risk sharing scheme the operators are both insured

and insurer; there is hence no involvement of a third party.

304. Nuclear pools260 and pools under Protection and Indemnity Clubs (hereinafter as P&I

Clubs)261 are examples of pools or risk sharing agreements. It are the potential injurers

themselves that finance this risk pool: they can either make an advance payment or constitute

260 In the nuclear industry, insurance is often supplied by a monopolist in a jurisdiction, which leads to high premiums and limited coverage. Thus, as we explained above, an effort has been made by nuclear operators to establish risk pools to cover their third party liability or their own property damage (onsite damage). The retrospective premium system under Price-Anderson Act and the pool established by NEIL are some examples. The Price-Anderson Act is originally enacted by Congress in 1957 to amend the Atomic Energy Act of 1954. Public Law 85-256. A retrospective premium system was introduced in its 1975 amendment. Public Law 94-197. NEIL is a nuclear insurer called Nuclear Electric Insurance Limited, which insures nuclear plants and their generating units for some first party damage.

261 A P&I Club is a non-profit making mutual insurance association, which is established by ship-owners and charterers to cover their third party liabilities related to the use of operation of ships. Now thirteen separate and independent principle clubs cooperate together to comprise the International Group of P&I Clubs (hereinafter the Group), accounting for approximately 90% of the world’s ocean-going tonnage. See the website of the Group: <http://www.igpandi.org/Home>.


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an ex ante risk-sharing agreement (it can be referred to as risk sharing, risk sharing

institutions262 or mutuals263 in the literature).

305. A significant feature of this mechanism is that the members of this pool are both

insurers and insured. Commercial insurance can play an important social function to remedy

the risk aversion of the injurer without increasing the size of the expected losses.264 Both the

insurers and insured can influence the likelihood of environmental accidents and of their

losses. But interests of insurers and insured are not fully congruent.265 Rather than minimizing

the risk, the insured tend to externalize their costs and get lower premiums; the insurer, a

profit-maximizing firm itself, may limit and deny coverage and may, depending upon the

market situation, overcharge premiums. In a risk-sharing agreement, potential injurers are

both the providers and recipients of insurance. Thus the conflicts of interest between insurers

and insured are avoided in a risk-sharing agreement.

306. In a risk-sharing agreement, mutuality is created, whereby the contribution paid by one

member depends on the claims made by all other members.266 It is in the interests of all other

members’ claims to be as low as possible and thus a mutual interest of risk minimization is

created.267 To reduce risks, the members of such a group have incentives to differentiate risks

to align a member’s contribution to the risk each member poses and to monitor each other.

Mutuality is established usually when the members are subject to similar safety rules, exposed

to a comparable level of liability and is usually formed in highly technical industries. The

members are faced with the same type of risk and have often more expertise and precise

knowledge compared to a third party insurer.268 Therefore they can evaluate the risk each

member creates and can better monitor each other’s behaviour.

307. Unlike in the case of commercial insurance, where ex ante information about the

probability of a certain risk and its magnitude should be available to allow the calculation of

an ex ante charged premium, in a risk-sharing agreement policy, each member’s contribution

can be agreed upon on beforehand and only actually paid ex post. This characteristic makes it

262 Faure and Skogh discussed a risk-sharing agreement as an alternative compensation mechanism for environmental

damage and nuclear damage. See Faure (2004); Faure and Skogh (1992); Skogh (1999); Skogh (2008). 263 See Bocken (2009). 264 Faure and Van den Bergh (2002), 279. 265 Boyer and Porrini (2008). 266 Bennet (2001), at 15. 267 Ibid. 268 Faure and Fiore (2008a), at 302.


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possible for a risk-sharing agreement to deal with an uncertain risk, for which the statistical

data about the occurrence are rare or the probability and size is less predictable. As long as a

risk differentiation can be made among the members, a risk-sharing agreement can be

feasible, since an ex ante charging of premiums is no longer necessary. Only the relative

contribution of each member to the risk has to be known.

308. Another difference between a risk-sharing agreement and insurance concerns the costs.

In an insurance policy, the risk is shifted to the insurer at the price of a premium. The

premium is not recoverable by the insured no matter whether the insured risk materialized or

not. In a risk-sharing agreement, a member only contributes if an accident happens; the duty

to contribute can either be postponed or the contribution can be carried over for the following

year if there is no accident. A member can also recover his contribution by stopping creating

the risk and leaving the pool.269

309. Summarizing, a risk sharing agreement has a few important theoretical advantages

(and differences) compared to insurance:

- it creates strong incentives for mutual monitoring since the members are dependent on

each other; i.e. a bad risk can create the likelihood that the pool will have to intervene;

- for highly technical and complicated (often new) risks operators themselves may have

better information (compared to insurers) on optimal preventive technologies which

they can reflect in a differentiation of the contribution to the pool (or excluding

membership for bad risks);

- a risk sharing agreement does not require actuarial information ex ante on the

probability of an accident and the scope of the damage for the simple reason that no ex

ante premium has to be fixed. Only information is needed on the relative contribution of

each member to the risk, but this does not necessarily have to be translated into a

premium. Ex ante costs to administer a risk pool can hence be lower, especially in cases

where actuarial information (for example because the risk is new and statistical

information is lacking) may not be available;

- since ex ante premiums do not have to be paid, risk sharing creates less liquidity

problems. It can be based on an agreement of the members to share in case the risk

emerges;

269 Ibid.


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- differently than with insurance when the risk would not emerge there are no premiums

paid to an insurance company that are (at least in the view of the operator) “lost”. If the

risk for which the risk sharing agreement is concluded does not emerge the members of

the risk pooling scheme simply do not have to contribute;

- this also points at the relative flexibility of a risk pooling mechanism: when during a

particular period many accidents happened the risk pool can ex post ask additional

contributions from the member on an ad hoc basis;

- however, such a risk pooling mechanism may have all these advantages if the number of

members in the pool is relatively restricted; the comparative benefit (compared to

insurance) mostly applies to highly technical (new) risks. When, however, the members

of the pool would be very large (e.g. all car drivers in a particular area) the

administrative costs of running the pool would become huge and the comparative

benefits vis-à-vis insurance would disappear.

5.2.2 Risk-pooling for marine oil pollution

310. The international regime specifically dealing with marine oil pollution compensation

has been developed since the late 1960’s as a reaction to some major oil spill incidents.

Initially, as a reaction to the Torrey Canyon spill in 1967, two international conventions were

introduced to provide compensation for pollution victims, being the International Convention

on Civil Liability for Oil Pollution Damage 1969 (the CLC 1969)270 and the International

Convention on the Establishment of an International Fund for Compensation for Oil Pollution

Damage 1971 (the Fund Convention 1971).271 The CLC 1969 imposes strict liability

exclusively on the registered ship-owner up to a certain amount and it has a requirement of

compulsory insurance or financial guarantee for pollution liability. The Fund Convention

1971 was later adopted to provide a second tier of compensation, given that the CLC 1969

imposed strict liability on the ship-owner which was considered harsh at the time. With the

contribution of oil cargo owners to the Fund, it was believed that the harsh burden on the

270 The original CLC was adopted in 1969, and it was revised in 1992 (hereinafter the 1969 CLC and the 1992 CLC).

THE 1969 CLC, 973 UNTS 3, RMC I. 7.30, II 7, 30; the 1992 CLC, Misc 36 (1994), Cm 2657, RMC I, 7.51, ii. 7.51. 271 The original Fund Convention was adopted in 1971, and it was revised in 1992 (hereinafter the 1971 Fund Convention

and the 1992 Fund Convention). The 1971 Fund Convention, 1110 UNTS 57, Cmnd 5061, the 1992 Fund Convention, RMC I.7.111, II.1.7.111, Misc 37 (1994), Cm 2658.


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shipping industry could be alleviated to a certain extent. Since then, an international regime

on marine oil pollution compensation has been established.

311. To guarantee the availability of compensation, the CLC regime requires compulsory

financial security. The CLC requires the owner of a ship registered in a contracting state and

carrying more than 2,000 tons of oil in bulk as cargo to maintain insurance or other financial

security up to his limits of liability. In addition to insurance, the financial security can also be

in the form of a bank guarantee or a certificate delivered by an international compensation

fund.272 The most popularly used instrument is insurance, especially Protection and Indemnity

Policies (P&I Policies).

312. The insurance for ocean-going ships is mainly provided by Protection and Indemnity

Clubs (P&I Clubs).273 Thirteen P&I Clubs form the International Groups of P&I Clubs (the

Group). The Group arranges reinsurance together for the Clubs. It is reported that the thirteen

principal clubs provide liability cover for approximately 90% of the world’s ocean-going

tonnage274 and 98% of the world’s tanker tonnage.275

313. P&I coverage usually includes “unlimited” reimbursement for claims arising from:

liabilities in respect of persons, liability in respect of cargo, collision with ships, or with fixed

and floating objects, salvage, compulsory wreck removal, fines imposed by government

agencies, quarantine expenses, towage liabilities, “sue and labor” and legal costs, any other

liabilities which the club’s directors deem proper to cover as well as limited reimbursement

for oil pollution claims which arise from the entered vessels.276 The oil pollution claim means

“a liability, cost, loss or expense, howsoever incurred, in respect of or relating to an escape or

discharge of oil or any threat or consequence of such escape or discharge, but excluding

liability for loss of or damage to such oil.”277 The term “liability” in this expression is

272 The 1992 CLC, art. VII. 273 See on those P&I Clubs further Coghlin (1984) and Faure & Hartlief (2003). 274 British Maritime Technology Ltd, Outline of Insurance Practices for Third Party Liability in the field of Marine

Transport, 2005, at 8, available at: http://www.maritime-transport.net/mtso/downloads/Public_Information/ MTCP_report_Maritime_Insurance_Study.pdf (Last visited 15 February 2013).

275 Id. 276 Ronnerberg (1990). Ronnerberg’s analysis was based on the Swedish Club’s 1990 rulebook. The similar coverage can

also be found in the 2010 rulebook of the United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Limited. (Bermuda Rulebook) In the rulebooks, the “unlimited” reimbursement does not mean that the Club should pay the full costs which fall into the categories. Instead, the reimbursement is subject to the limitation of liability set by law. While for oil pollution claims, the compensable sums are determined by Directors of the Club. See Rule 5,B of the Bermuda Rulebook, http://www.ukpandi.com/ukpandi/resource.nsf/Files/2010Rules/$FILE/2010Rules. pdf. (Last visited 15 February 2013).

277 See Rule 5,B, the Bermuda Rulebook.


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determined by international conventions and national legislations applicable in each case. One

important source in that respect is of course the CLC.

314. One important characteristic of the P&I Clubs is that they are risk sharing agreements

rather than private insurance. The shipowners are both insurers and insured. This gives them

incentives to exercise a mutual monitoring via the P&I Clubs.

315. The International Group provides reinsurance for the P&I Clubs. At this moment, for

the shipowners’ policies, each Club retains the first $ 8 million as their retentions. The amount

between $ 8 million and $ 60 million is divided among all the Clubs. The captive insurer of

the Group—Hydra Insurance Company, and reinsurance with the international insurance

market also play an important role in providing reinsurance for the upper layers. This brings

the upper limit of the reinsurance program to $ 3060 million. In this amount, the limit for

compensation for oil pollution is limited to $ 1060 million. 278 The large market share of P & I

Clubs and the potential restrictions on competition by its Pooling agreement and International

Group Agreement have lead to anti-competition concerns from the European Commission.279

316. In addition to the financial security, compensation funds are also established to

complement the compensation available from the CLC. There are three international funds at

this moment. The IOPC Fund 1971 established under the Fund Convention 1971 has been

denunciated by most countries, and the Fund Convention ceased to be in force as of May

2002. The current amount of maximum compensation under the 1992 Fund after the increase

in 2000 is 203million SDR (311.99 million USD) (including the payment under the CLC

1992), and the compensation under the Supplementary Fund reaches 750 million SDR

(1152.69 million USD) (including the payment under the 1992 Conventions).

317. The total amount available for compensating oil pollution damage under the

international regimes is hence:

278 http://www.igpandi.org/Group+Agreements/Pool+reinsurance+programme. 279 The European Commission opened formal proceedings to investigate whether the agreements between the P&I Clubs

might infringe European anti-trust rules on 26 August 2010 (http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/1072&format=HTML&aged=0&language=EN&guiLanguage=en (visited 9 November 2010)). This investigation closed in 2012 with the conclusion that the investigation cannot confirm the concerns over anti-trust issues (Antitrust: Commission closes investigation in P&I Clubs case, available at: http://europa.eu/rapid/press-release_IP-12-873_en.htm).


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CLC 1969 (SDR)

CLC 1992 (SDR) 2000 Protocol (SDR)

Ships ≤ 5000 tons

133 (204.41 USD) per ton

3 million (4.61 million USD)

4.51 million (6.93 million USD)

Ships > 5000 tons

133 (204.41 USD)per ton

3 million (4.61 million USD)+ 420 (645.5 USD)/additional ton

4.51 million (6.93 million USD) + 631 (969.8 USD)/additional ton

Aggregate amount




IOPC Fund 1971 (SDR)

IOPC Fund 1992 (SDR)

2000 Protocol (SDR) 2003 Supplementary Fund (SDR)

Overall limit 60 million (92.22 million USD)




Table 5: Compensation for pollution damage under the international regime

5.2.3 Toward an EU nuclear risk pooling scheme?

318. Given the theoretical advantages of a risk-sharing agreement compared to insurance

and given the positive experiences in the maritime insurance sector (with the P&I Clubs and

the International Oil Pollution Compensation Fund financed by operators), the suggestion has

been made in the literature that a risk-sharing agreement could also constitute a solution for

nuclear liability at the international level. It has also been argued that when the Paris and

Vienna Conventions were revised risk pooling between operators would be able to generate

substantially larger amounts than are currently available for nuclear damage under the

international conventions.280

319. More recently the possibilities of a risk sharing by operators in Europe has also been

worked out in further details whereby the financial consequences were calculated.281

Notwithstanding the theoretical advantages of using pooling by operators also in the nuclear

sector at a larger scale a European wide nuclear liability pool has so far not emerged. To some

extent this can also be understood. In spite of the promising features mentioned above, several

requirements need to be satisfied for operators to pool effectively, especially at the

international level. The states whose operators wish to participate in the pool should have

comparable political, legal and economic backgrounds; the pooling members should have

280 Faure (1995), at 21-43. 281 Faure and Fiore (2008b).


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equal or comparable levels of nuclear safety and security.282 The countries with nuclear

installations have varying political, legal and economic background, which creates a challenge

for international pooling. This may be less a problem in the EU, where the members share

more transboundary risks. However, with the enlargement of EU member states, the

development status of the members are more diverging now. It is even more problematic as

far as nuclear liability legislation is concerned.

320. The EU states have a so-called patchwork nuclear liability regime.283 They are subject

to different nuclear liability conventions or do not join any convention at all.284 The domestic

legislations have different attitudes towards many important issues such as limited/unlimited

liability; amounts required for financial security, and so on.285 As for levels of nuclear safety

and security, it is still problematic. Since pooling is based on trust and confidence, it should

be possible for the operators to make mutual monitoring or an organization should exist to

control the risks of its members. However, an EU-wide approach towards safety regulation

and standards, and a single regulatory body is still missing in Europe. In spite of those

weaknesses, it is worth noting that the EU is now making efforts towards a more harmonized

system of nuclear liability, and many scholars are supporting this idea.286

5.2.4 An EU Price-Anderson Act: retrospective pooling?

321. Above, we already discussed the multiple layers under the Price-Anderson Act of

1957 which regulates nuclear liability in the US. We explained this in the context of the

current coverage of the nuclear risk in the US. There is one particular aspect of the

compensation in the US system which merits specific attention. If an accident creates damage

in excess of $375 million, a retrospective premium needs to be called upon all American

nuclear operators licensed by the regulatory party Nuclear Regulatory Commission (NRC).

This premium is payable in annual instalments up to a certain maximum amount per incident

per power plant and is determined according to the size and number of reactors each plant

282 Pelzer (2007). 283 See Reyners (2009). 284 Cfr. supra in section 2.7.2. 285 For example, in Austria and Germany, unlimited liability was adopted. But in most member states, the liability is

capped. Within those countries with limited liability, the required limitations also vary. For an overview of the liability limit in EU member states, see Final Report TREN/CC/01-2005, Legal Study for the Accession of Euratom to the Paris Convention on Third Party Liability in the Field of Nuclear Energy, p. 22-23, available at <http://ec.europa.eu/energy/nuclear/studies/doc/2009_12_accession_euratom.pdf>.

286 For example, Ameye (2009); Handrlica (2009).


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has.287 The amount of this second tier is now set at $121.255 million, with a maximum annual

retrospective premium of $18.963 million per reactor per year.288 If a catastrophic accident

happens, which needs the collection of retrospective premiums through years, the victims do

not need to wait until the operators paid all the premiums. The NRC guarantees those

retrospective premiums, or in other words, advances the compensation in the second tier and

later collects this from the operators.289

322. The premium under the second layer of the Price-Anderson Act is financed through a

so-called retrospective premium scheme. Hence, premiums do not have to be paid ex ante, but

only ex post after the nuclear accident materialised. This retrospective premium scheme was

introduced in 1975. Initially, the financial requirement was satisfied with the coverage from

private insurance and a government indemnity agreement. This was because it was regarded

that the nuclear industry was not capable to bear all the burdens at its infancy period and the

PAA intended to encourage the development of the nuclear industry. However, after years of

development, it was believed that the industry should take its responsibilities.290 This was

achieved by phasing out federal indemnity and establishing a system of retrospective

premiums paid by nuclear operators.

323. Under the retrospective premiums scheme, if an accident leads to the damage in excess

of $ 375 million, all qualified nuclear operators are obliged to pay the retrospective premiums

up to $ 121.255 million. This arrangement is a form of a risk sharing agreement. However,

different from the usual understanding about risk sharing agreements, this arrangement is a

mandatory system. It is effectively imposed by statute. Rather than the voluntary pooling of

operators, the retrospective premiums scheme is established according to the legislative

requirement of the amended PAA. This arrangement ensures that all nuclear power plant

operators participate in the system and provide strong capacity. Besides, this system is used

only when the primary instrument - the insurance market fails to cover the full damage. In

other words, the retrospective premiums scheme provides an upper layer of compensation for

victims.

287 Faure and Vanden Borre (2008), at 243. 288 10 C.F.R. § 140.11 (4); 75 FR 16646, Apr. 2, 2010. 289 Faure and Vanden Borre (2008), at 260. 290 H.R.Rep.No. 94-648, 10.


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324. The retrospective premiums are collected only when damage with a magnitude in

excess of the primary coverage happens. The premiums can be charged through years with an

annual amount within $ 18.963 million per incident. Since the obligation of payment only

comes due after the occurrence of damage, a special arrangement is needed to ensure that the

operators can pay their retrospective premiums in the case of damage. According to NRC

regulations, the operators need to provide one of the following guarantees: surety bond, letter

of credit, revolving credit/term loan arrangement, maintenance of escrow deposits of

government securities, annul certified financial statement and other type of guarantee

approved by NRC.291

325. Since late 1990s, the bond for payment of retrospective premiums an operator made

with ANI was accepted as a guarantee complying with the NRC regulations. The bond is a

contractual arrangement between ANI and operators, under which ANI will collect

retrospective premiums in the event that claims exhaust primary coverage. If the operator fails

to pay the retrospective premium, ANI would pay for up to $ 30 million in one year of the

premiums and collect it later from the defaulting operator.292 According to NRC regulations, if

an operator fails to pay the retrospective premium, NRC reserves the right to pay those

premiums on behalf of the licensee and recover the amount from the operator.293 After the

deregulation of the electricity industry, 31 out of the 103 operating commercial nuclear power

plants in the US were limited liability companies till 2004.294 The NRC does not differentiate

the limited liability companies from the others and does not conduct in-depth financial

reviews to determine the operators’ ability to pay retrospective premiums. However, ANI

goes further than the NRC. It requires limited liability companies to provide a letter of

guarantee from their parent or other affiliated companies with sufficient assets to cover

retrospective premiums as a condition to issue the bond for payment of retrospective

premiums.295

326. One of the reasons why risk pooling emerged successfully in the US is the role which

is played by the Nuclear Regulatory Commission (NRC) which guarantees US wide nuclear

safety standards. This obviously facilitates a risk pooling by operators since they know that all

291 10 C.F.R. § 140.21. 292 GAO (2004), Report to Congressional Requesters, Nuclear Regulation: NRC’s Liability Insurance Requirements for

Nuclear Power Plants Owned by Limited Liability Companies, p. 8. 293 Ibid. 294 Ibid., p. 6. 295 Ibid., p. 9.


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operators within the US at least have to comply with the minimum requirements imposed by

NRC. A same harmonisation of safety standards is largely lacking in Europe which explains

the reluctance of some operators in relatively “safe” member states to pool with operators in

member states where lower safety requirements would apply. This comparison between the

US and Europe teaches at least one important lesson: if one wishes pooling between operators

to be successful at least a minimum safety requirement needs to be imposed by government

(and seriously enforced) to facilitate mutual monitoring between operators.

5.2.5 Munich Re proposal

327. So far, we have argued that either pooling via operators or a retrospective pooling

arrangement (like in the Price-Anderson Act) may anyway be more adequate than the current

international conventions and therefore a good model for European action. Such a model

could also create the desired level playing field by removing the current distortions. Another

issue is obviously how this could be effectuated and to what amounts cover could be made

available.

5.2.5.1 Compensation for oil spills

328. In that respect, interesting proposals have been developed by the largest reinsurer in

the world, Munich Re. Munich Re, after the Deepwater Horizon incident in the Gulf of

Mexico, developed an interesting instrument referred to as SOS (Sudden Oil Spill) which

would be able to generate aggregate limits of 10 billion US$ to 20 billion US$ for companies

engaged in offshore oil exploration.

329. It would require the participation of multiple insurers and reinsurers and would

strongly rely upon improved risk management. There would be three different models under

which this facility could work: 1/ a consortium of insurers and reinsurers, each providing

uniform prices and conditions and fixed capacity; 2/ traditional insurance or reinsurance on a

subscription basis, with flexible pricing, conditions and limits; 3/ a pool for oil drilling

companies with contributions reflecting market share.296 It was added that this would require

to raise the current limits under the US Oil Pollution Act above the 75 million US $ currently

stipulated in the Oil Pollution Act. Coverage would moreover only be provided above a

296 See <http://www.businessinsurance.com/article/20100912/NEWS/100919977>.


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retention of $ 1 billion to $ 1.5 billion.297 Munich Re itself would commit as much as $ 2

billion to provide the total cover of $ 10 billion to $ 20 billion.298 The concept was developed

by Munich Re to cover drilling operations in the USA and more particularly in the Gulf of

Mexico.299

330. So far Munich Re has developed two projects. One is for the Gulf of Mexico (the

SOS-cover) which could in principle be operational immediately; the second model is the EU

oil spill project, showing that a similar model could be developed for the EU as well.

331. The basic structure of the model that is developed for the Gulf works as follows:

- capacity MR 2,00 billion USD

- another insurer 0,25 billion USD

- another large insurer 7,75 billion USD

Total 10,00 million USD

In addition to retention by the oil industry this would already create an amount of 12 billion

USD.

332. Forty other insurers have shown interest in this model and have argued that they will

participate if the model works. This would hence lead to an additional 6 billion, with

retentions the total coverage available under the new model would already be 20 billion

USD.300

333. The basic reason why much higher amount can be generated is that not, as is the case

today, separate coverage would be provided in liability for separate installations. The high

amounts can only be provided if the cover is constructed as a natcat (natural catastrophe)

cover. Although de facto third party liability would still be covered, the construction of the

facility would be different. The cover would still follow the liability but to a modest extent.

The essence of the new facility would be that it provides so called parametric trigger-

coverage. This means that coverage is triggered by particular events that have been specified

beforehand. This is also the case with natcats where it is for example determined that when a

297 Ibid. 298 <http://www.bloomberg.com/new/2010-12-21/munich-re-brokers-work-on-drilling-cover-after-gu...>. 299 <http://reinsurancemagazine.com/article/munich-re-first-create-potential-pollution-liability-solution>. 300 Interview with Dr. Philipp Wassenberg, representative of Munich Re on 6 May 2013.


112

hurricane with scale 5 hits and/or winds of 150 km/power take place, cover will be provided.

These types of triggers are binary: either there is trigger of not, it is all or nothing.301

334. With a normal liability cover for offshore there is indeed on average only one billion

in liability coverage available. The reason is that those liability covers are potentially long tail

liability risk. After 10 years still claims could be handed in. That creates a lot of uncertainty

for shareholders which are considered highly undesirable. Hence the trick in the new facility

is to transform a long term in a short term risk, just like in the case of the natcats. Today

natcats are insured on a worldwide basis for several billions in many countries. These types of

natcat coverage hence allow to generate much higher than traditional liability cover.302

5.2.5.2 Proposal for nuclear liability

335. Obviously, offshore installations are different than nuclear installations. However, the

model proposed by Munich Re is interesting in the sense that it shows that substantially

higher amounts can be provided for particular liability risks than via the traditional

commercial liability insurance market.

336. Within the European Commission an expert group has been working on a proposal to

generate substantially higher amounts than are currently available in nuclear liability. Again,

an important role is played there by the largest reinsurer in the world, Munich Re. They

presented a proposal within their working group whereby the nuclear pools (the nuclear

insurers) would provide coverage up to 2 billion €. Munich Re could create a second layer

providing coverage for between 2 and 10 billion €. The coverage type would be the same as

the one for natural catastrophes (NatCats). This would mean that others could participate in

the facility and e.g. provide coverage for e.g. ten million € for one year. Long-tail risks would

hence be excluded. It would hence be more like a capital market solution. If during the year

nothing happened, the participant could take his benefit and leave the facility.303 A condition

for intervening through such a facility would hence be that the damage is of a sudden and

accidental nature, which hence excludes the long-tail risks. Moreover, Munich Re itself would

of course not generate the total capacity, but would invite others to participate in the facility.

301 Ibid. 302 Ibid. 303 Interview with Mr. Hermann Kramer, Munich Re Insurance Company, 12 March 2013.


113

Risk differentiation via the facility would be minimal. The assumption would hence be that

there would be an EU wide regulation of the nuclear risk which would result in stringent

mandatory standards for all operators.304

5.3 Pooling as a solution to generate higher amounts of cover?

337. The examples of risk-sharing in the nuclear sector showed that the theoretical

advantage of a risk-sharing agreement (strong incentives for mutual monitoring) are only

materialized if there is a minimum level of harmonization of safety regulation. If the operators

can at least rely on the fact that all members will have to comply with minimum safety

regulations, their additional task a mutual monitoring will be relatively limited. Since such

safety regulation is enforced in the US (via the Nuclear Regulatory Commission) risk-sharing

is easier in the US than in Europe where there was large reluctance given the absence of

mandatory safety requirements.

338. That may hence be an important lesson at the policy level: if the policy maker (like the

EU Commission) would like to stimulate risk-sharing by operators, it can play an important

role in providing a facilitative strategy, i.e. providing minimum safety standards, thus

reducing the need for very intensive mutual monitoring. In the absence of minimum safety

standards, there will always be a risk of negative redistribution and adverse selection since the

risk-sharing agreement will then be most attractive for the bad risks as a result of which the

good risks will not be willing to join.

339. In that respect yet another interesting lesson may be drawn from the nuclear example

(although the policy implication may not be that straightforward). In the Price Anderson Act,

substantial amounts are generated in a second layer (differently than in the nuclear liability

regimes under the international conventions, where large subsidies to the nuclear industry are

generated). However, the risk-sharing is in fact mandated by the Price Anderson Act and

hence not voluntary. The way it is arranged in the Price Anderson Act has, however, the

advantage that funds do not have to be available upfront as a result of which one avoids to

immobilize important financial capacity. Moreover, the Nuclear Regulatory Commission

again prefinances the compensation in the second layer and then only asks contributions from

all operators via annual retrospective premiums. Hence, funds should only be made available

304 Ibid.


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ex post and, moreover, guarantees are provided that the operators will be able to meet their

obligations. The model followed in the US Price Anderson Act seems more attractive than the

compensation regime under the international conventions.

6. Conclusions

340. The international nuclear liability conventions were written in order to try to find a

balance between the interests of the nuclear industry and those of victims of a nuclear

accident. Some of the principles of the nuclear liability conventions were aimed at remedying

a market failure being the lack of knowledge, in the middle of last century, about the nuclear

risk. It seems however that some of these principles such as limited liability and State

intervention are the cause of market failure in the 21st century. This holds more so if one is

opting for the extension of the lifetime of existing nuclear power plants. We are therefore of

the opinion that the extension of the lifetime of a nuclear power plant should be an

opportunity to dramatically change this situation.

341. The U.S. model demonstrates that if a compensation regime were to be organised as a

collective responsibility of the nuclear industry, thus excluding public funding, much higher

amounts of compensation can be provided to victims.305 This, however, presupposes

cooperation between nuclear operators which currently fall under the international regime and

also assumes there are possibilities of a mutual monitoring which is essential in a system of

collective responsibility, such as the Price-Anderson Act. Perhaps socio-economic or

institutional impediments have thus far prevented the creation of a similar arrangement among

EU nuclear operators.

342. We are therefore of the opinion that countries which opt for the extension of the

lifetime of a nuclear power plant should only do so if it substantially improves the

compensation of victims – as we have demonstrated, a higher liability will not only be

beneficial for the victims of a nuclear accident but will also have an important preventive

effect.

305 Michael G. Faure and Tom Vanden Borre (2008).


115

343. There seems to be little doubt about the advantages of some of the principles of the

international nuclear liability regimes, especially as far as strict liability and compulsory

insurance are concerned. Literature has, however, been quite critical with respect to legal

channelling, limited liability and state funding.

344. Strict liability and compulsory insurance favor victims because they do not need to

prove negligence or a fault of the operator in order to be compensated. Compulsory insurance

guarantees that certain amounts are available even if e.g. the nuclear operator would go

bankrupt after a nuclear accident. The other principles of the conventions were created in

favor of the nuclear industry: the limitation of liability is most striking. Moreover, the amount

of limited liability was set not in function of the potential amount of the damage, but in

function of the capacity of the operator to buy financial security for his third party liability.

The limited liability is a subsidy for the nuclear industry that should be abolished. The nuclear

operator must be subject to unlimited liability just like any other industrial activity.

345. Clearly also the concentrated liability (legal channeling) favors the nuclear industry

because suppliers of the nuclear operator cannot be held liable for damage caused by goods

they supplied or services they rendered (e.g. calculations etc.). Closely linked to the

concentrated liability is the concentrated jurisdiction. The aim of this provision is to guarantee

that no judge would accept jurisdiction and apply legislation denying limited and concentrated

liability. Overall, the balance of these Conventions is largely in the advantage of the nuclear

industry which is not a surprise given the fact that the principles of these conventions are

based on studies made on behalf of the U.S. Atomic Forum and thus protected above all the

interests of the nuclear industry.

346. Given our view that a nuclear operator should not be able to benefit from any

limitation of liability, we see little advantages in advocating that in case of lifetime extension,

the liability levels for power plants that have been granted lifetime extension should different

from other nuclear power plants. Indeed allowing such a difference would implicitly mean

that one would favour a limited liability for “non extended” nuclear power plants. We see no

reason why non-extended nuclear power plants should continue to receive such a subsidy.

347. The question arises whether a nuclear power plant that has been granted lifetime

extension should then perhaps be subject to a different (higher) amount of compulsory


116

liability insurance. Also here we are not convinced. Certainly in light of our proposal to pool

the operators in an US-like system of retrospective premiums, the operators will mutually

monitor each other. We can assume they will not allow a bad risk into their system. If an

extended nuclear power plant would indeed represent a higher risk, this for sure will be

reflected in the insurance premium he pays. Therefore we consider there to be no need for a

specific arrangement only applicable to extended nuclear power plants.

348. Again we hold that the current nuclear compensation system offered by the

conventions is particularly poor since it offers about 1% of compensation for the damage

potentially caused by a nuclear accident. This should be changed in the framework of the

extension of the lifetime of a nuclear power plant, but also in order to change the

compensation system applicable to all current and newly built nuclear power plants.

349. Another crucial issue is the determination of the level of liability of the nuclear

operator and the total amount of compensation. Nuclear liability amounts are the same in all

U.S. States, thanks to the Price-Anderson Act. There are differences in tort law amongst U.S.

States, but the amounts for which the nuclear operators are liable for nuclear damage are the

same in all U.S. States, the reason is that the federal Price-Anderson Act determines the level

of liability without any possibility for States to implement lower amounts (neither in the first

nor in the second tier). Moreover, the Price-Anderson Act has given important powers to the

(again federal) NRC to adjust the liability amounts to inflation, at least once every five years.

This demonstrates the risk of introducing a liability amount into a (rather static) international

convention or in any instrument that makes it virtually impossible to regularly adjust the

amounts to inflation. Therefore, a country opting for lifetime extension should provide for a

regular update of the amounts on liability insurance (e.g. every two years adapting to

inflation).

350. In order to create an incentive for the nuclear operator to search for all available

capacity, a rule should be introduced according to which the insurance of the damage to his

installation can never be higher than the amount available for third party liability.

351. Given the clear advantages of the American nuclear liability and insurance system, the

other countries should envisage the creation of a similar model – even if the U.S. system is

not perfect either, since e.g. it also limits the liability of the nuclear operator. One can


117

however say that the U.S. Price-Anderson Act internalises the costs of a nuclear accident to a

much greater extent than the system under the nuclear liability conventions. Also the

retrospective premium creates a potential insolvency risk. And beyond the second tier, it is to

be feared, that also in the U.S., government would intervene if the damage were to exceed the

second tier.

352. The key issue in an enhanced model would be the phasing-out of all state funding in

nuclear compensation schemes. In other words, the current collective state funding needs to

be replaced by a collective tier funded by the EU nuclear operators. The implementation of a

Price-Anderson type regime at EU-level would not be too difficult givent that in the 13 EU

Member States which are party to the Paris Convention alone, there are 125 nuclear power

plants in operation, which is more than the current 104 reactors in the second tier of the U.S.

compensation system. If all these operators would contribute, for example, € 50 million in the

second tier – less than half of the current amount of the second tier in the U.S. – an amount of

€ 6.25 billion of private funding would be immediately available in the second tier.

353. We are convinced of the fact that this enhanced model might change the reluctance of

many countries to join the current nuclear liability conventions. A wider adherence will

follow with bigger harmonisation and more guarantees to victims of a nuclear accident. If

nothing really changes, the only option for victims is to take advantage of the current

patchwork and look for the most optimal way for forum shopping. This should allow victims

to escape the exclusive and limited liability of the nuclear operator. For sure, this will not be

easy task, but given the fact that the current system only offers 1% of compensation victims

have little to lose.


118

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