Environmental liability - mind the gap
23 September 2009
Companies’ exposures have grown under the Environmental Liability Directive.
On 8 August 2009, an underground pipe spewed four thousand cubic metres of crude oil across two hectares of one of France’s most famous nature reserves.
The slick, on the edge of the Camargue national park – famous for its bird species, wild horses and bulls – is the only place in France and one of the few in the Mediterranean that the pink flamingo nests.
The oil spill is a disaster for the ecosystem and could set a precedent for how companies are held liable for damage to habitats under the EU Environmental Liability Directive (ELD).
Polluter pays
The ELD came into effect in the UK in March this year, some 20 months after the deadline for transposing it into UK law. It extends the “polluter pays” principle, which governs the bulk of EU environmental legislation, and is concerned with preventing and repairing any damage to the environment. This includes damage to water courses, protected species, natural habitats and sites of special scientific interest.
The source of damage does not have to occur as a result of an immediate action, such as an oil spill, but can take place over a longer period of time.
“What the directive has done is widened out the whole area of environmental liability,” says Gary Marshall, group risk manager at printing firm Polestar Company Ltd. “It’s saying to people you can be liable over a much wider period of time and for things that are unseen but become a cause of injury in the future.”
One area of uncertainty is how liable companies could be under the new rules. Should a company cause environmental damage it will be responsible for returning the environment to its original state.
“It may be very specific,” says Marshall. “It may involve the reintroduction of species at the site or elsewhere if it is not possible to reintroduce at the time.”
Where a damaged site cannot be returned to its former state, equivalent compensation has to be undertaken elsewhere. This means if a damaged site can only be remediated to 80% of its original condition the equivalent of the 20% shortfall needs to be spent improving another site.
Compensation confusion
The issue of compensation is confusing for many companies and one reason why the Camargue spill is being watched so intently.
While it occurred before the introduction of the ELD, the Bartoline case in 2003 set a precedent for how companies might be held liable for clean-up costs.
Bartoline is a small company that manufactures adhesives and packs hydrocarbons. A fire in its East Yorkshire premises in May 2003 caused damage to nearby rivers from fire-fighters’ foam and chemicals. While the company was insured, its claim was denied on the basis that it was not covered for clean-up costs and the firm was hit with a £600,000 bill from the Environment Agency.
Companies should reassess their exposures under the ELD, Marshall advises. “Businesses should be aware of what’s going into the air and water courses, and what effect activities are having on the surrounding environment.” This may be trickier for firms involved in cutting edge technologies with more uncertain risk profiles.
Companies with a ‘strict liability’ under the ELD, should be particularly vigilant, says Simon Johnson, environmental director of UK and EMEA at Aon.
“Companies operating under environmental permits or licences, such as mining or waste management is where the full force of the damage under the directive comes into play,” he explains. “So generally [the ELD] has extended liabilities.”
Aon is advising clients with strict liabilities to consider their exposures, not just from a pollution aspect but also in terms of operational risks. “Although we talk about the polluter pays principle, [the ELD] doesn’t actually talk about pollution. It’s about damage however that damage occurs.”
Gaps in cover
There is a concern that companies may not be adequately insured under their existing general or public liability covers.
“There are some ways that the public liability policy can be extended to provide some cover, but it’s still not covering environmental damage in the wider sense as meant by the ELD,” explains Johnson. “So there is a genuine gap there in the risks. Therefore our advice is that clients need to understand that gap and then it’s up to them whether they have the appetite to take that risk or if they want insurance to cover it.”
“It’s not an area companies can afford to ignore,” he continues. “Certainly as insurance service providers and brokers we need to alert companies to the fact they may have this risk and to help them understand what the risk is and what they can do about it.”
Last updated on 04 Jan 2010
