“The tort system will take care of it” long has been the go-to response of classical liberals and libertarians when asked how a “free market” will mitigate harmful pollution.

This answer appears inadequate, as the modern administrative state has considerably weakened the tort system’s bite on polluters. Moreover, nearly a dozen states still have joint-and-several liability provisions on the books, meaning that liability may not correspond to the actual degree of harm inflicted by a specific tortfeasor.

Do all this mean we should just throw our hands in the air and embrace federal and state environmental enforcement?

Luckily, the private market can act as a “surrogate regulator” when operating in a legal framework that provides the right incentives. Liability insurers that cover businesses naturally have an incentive to prevent their clients from engaging in reckless actions that could trigger claims against the insurer. As legal scholars Omri Ben-Shahar and Kyle Logue point out, liability insurers often inspect the workplaces of client firms, looking for signs of trouble that could lead to lawsuits down the road. Insurers of ski resorts, as an example, “require insureds to have their lifts periodically inspected by the insurer’s safety experts as a condition of obtaining a policy.”

But does this private risk prevention apply to environmental liability? Although the number of environmental insurance policies has increased since the 1990s, the growth of “surrogate regulation” has been hampered by the Environmental Protection Agency’s continued insistence on using joint-and-several liability to clean up contaminated sites. The preference for strict liability, in which an accidental polluter can be held responsible despite investment in risk prevention, has also stunted the growth of environmental insurance products.

Kenneth Abraham, a legal scholar who writes extensively on insurance and tort reform, contends that insurers have “been reluctant to insure for property and economic losses caused by pollution, and terrified of insuring against liability for pollution” due to the incentives created by Superfund litigation. While Superfund has made more of an effort to tie liability to the share of wrongdoing in recent years, state Superfund programs have trended toward joint-and-several regimes.

Incoherent state and federal liability rules may have stunted the industry, but there are still some examples of environmental insurance taking root. The underground insurance tank market does not have to deal with the skewed Superfund litigation incentives; Superfund’s petroleum exclusion applies to nearly all UST operations. States are given free reign to design liability systems for UST releases, and many states have opted to use proportionate liability. Free from harsh liability rules and not subject to the Superfund program, UST liability insurance prices dropped significantly and coverage blossomed.

Faced with a robust market capable of acting as a surrogate regulator, Congress allowed states to set up mandatory insurance schemes for USTs as an alternative to state inspection programs. States such as Michigan opted for a mandatory environmental insurance scheme, while other states like Indiana and Illinois continued to use the state for inspection and cleanup.

Economists Haitao Yin, Alex Pfaff and Howard Kunreuther used this variation in state policy to see if the private insurance states experienced less UST spills than the states with government inspections. Strikingly, the releases in the private insurance states are “about 65 percent of the expected number of releases if the transition had never occurred.” Private regulators can actually perform better than their public counterparts if liability risk is predictable and corresponds to the degree of culpability.

While moving away from strict liability and joint-and-several liability regimes is key, it’s also important for the pendulum not to swing too far in the opposite direction. If firms perceive that litigation against them generally stands a good chance to fail, they may not see the need to buy insurance in the first place. If a polluter is technically in compliance with EPA pollution limits, he can argue these federal rules pre-empt the tort system. Though some recent court decisions are calling this into question, pre-emption remains the default.

Limiting the pre-emption doctrine through federal legislation could breathe new life into the tort system and goad firms into seeking insurance policies. States must do their part as well, and continue to push tort reforms that replace joint-and-several liability with proportionate systems. The tort system is an important part of the solution, but not the only part. If a robust tort system enables liability insurers to prevent risk, without running them out of the market, the rule of law can help keep pollution in check.