Europe's environmental liability regime is getting tougher...

Europe's environmental liability regime is getting tougher, explains Jo Bain

The long-awaited European Commission proposal for a directive on environmental liability has been nearly a decade in the making. While it is not expected to become law before 2006, the proposed directive, published in January 2002, and its subsequent amendments are causing much speculation as to the effects on European companies. Once it is finally adopted, member states will have two years to implement it into domestic law.

Why an EU-wide regime?
There have been around 200 pieces of European environmental legislation to control and limit pollution. This legislation has been criticised on the grounds that it is piecemeal in nature and deals with particular environmental issues, rather than using an integrated approach. It is also difficult to implement across all member states. In theory, the new directive will address these problems.

According to the European Environment Agency, there are approximately 1.5 million potentially contaminated sites across Europe. Only some regions have so far made efforts to identify them, so the official number stands at only 300,000. Government policies throughout Europe encourage the re-use of brownfield sites, and the number of transactions involving them is increasing sharply. In the UK alone it is estimated that 3,000 brownfield transactions take place annually. Brownfield land can broadly be defined as land that has previously been developed, which means it could also be contaminated. However, it is worth noting that definitions vary widely through EU member states. Typical sites that could be contaminated include former waste tips and landfill sites, engineering works, iron and steel works, petrol storage, gas works, railway land, dockyards, scrapyards and chemical and pharmaceutical industries.

The proposed directive states that EU action is needed to address environmental damage and the loss of biodiversity. It is generally considered that liability rules are needed to prevent further contamination and damage. These will involve making site polluters liable for the costs of restoring environmental damage, and will also provide an incentive to avoid causing the damage in the first place.

Some member states, such as the UK and Germany, already have legislation in place; others have no specific environmental legislation and no regime establishing liability for contaminated land. Even those countries with a contaminated land regime do not always require the national regulatory authority to clean up the site if the polluter cannot be found or is insolvent. Despite the difficulties it may pose for some countries, this legislation is necessary for a framework at the EU level to address the problem of environmental damage.

Key features
The directive defines environmental damage very widely, and includes land contamination and water pollution which pose a threat to human health, as well as biodiversity damage. However, it is only intended to deal with serious or significant forms of damage. It establishes a framework to ensure that environmental damage is restored or prevented, and member states may adopt more stringent legislation if they wish. This would include for example, the UK Contaminated Land Regime.

The directive is based on the 'polluter pays' principle, ensuring that the person responsible for the damage is liable for the remedy. This means that, in most cases, the site operator would be the responsible person. The definition of operator is likely to be subject to amendment, but currently covers the person who directs the operation of an activity covered by the directive. While it is not proposed that a member state makes it a criminal offence to contaminate or to own contaminated land, there is a duty on member states to ensure that operators have an obligation to prevent significant environmental damage, and to require that operators take restorative measures if damage occurs. If operators fail to do so, member states can take appropriate action and recover the costs. Where contaminated land is concerned, the objective is to ensure that the contamination can no longer lead to serious, or potentially serious, harm to human health.

Environmental damage resulting from those activities specified in Annex 1 will result in strict liability (ie no fault or negligence required) for the operator. Annex 1 activities include operation of installations authorised under the IPPC Directive, water abstraction and waste management activities. Operators of non-Annex 1 activities may be liable for biodiversity damage if negligent.

Exclusions and exceptions
As expected, controversy already surrounds the proposed directive. On the one hand, some industry groups are concerned that it would expose companies to unlimited liability claims. On the other hand, environmental lobbyists have criticised the proposal, especially the exclusions and subsequent amendments, which they claim will water down the effect of the directive.

While the directive has a relatively wide scope of application, it specifically excludes certain activities, in particular those already regulated by, and subject to, a member state's own liability regimes. Thus environmental damage caused by nuclear activities, oil pollution or the carriage of noxious substances at sea is not covered by the proposal. Environmentalists who were keen to see retribution for the recent oil spills off the coasts of France and Spain will be disappointed.

Other key points which have arguably lessened the directive's impact are firstly that it will not apply retrospectively (unlike the contaminated land regime in the UK). Therefore, the main emphasis of the directive is for ongoing operational liability. It will in essence ignore past activities. Secondly, the Commission has left it to individual member states to determine appropriate restoration levels where environmental damage has occurred.

Two defences were added to the proposal at the eleventh hour. These have received wide criticism from environmental groups. The first of these is compliance with a permit. It is argued by critics that this will allow operators to avoid liability all too easily. Secondly, there is a defence for any emissions or activities which were not considered harmful according to technical knowledge at the time they were carried out. This led to accusations that the defences are far too wide and will allow liabilities to be avoided. In March 2003, the European Council's compromise text proposed that these two factors should be treated only as mitigating circumstances in deciding to what extent a company was liable for damage.

Most significantly, in recent weeks the European Council of Ministers postponed the requirement for mandatory insurance of environmental liabilities to give member states and the insurance industry time to develop financial security instruments and markets for dealing with environmental impairment This decision will be reviewed within five years from the directive's date of implementation, and mandatory financial security may then be forthcoming. The European Parliament considered that imposing mandatory insurance would upset the volatile market for environmental liability risks at a time when European businesses already face reduced choice, increased costs, solvency concerns and shortage of capacity for certain lines of business. However in countries such as the UK, this is disappointing news, as the environmental insurance market has been growing year on year.

How it affects you
Environmental risks involving previously developed land are now commonplace. Once the European directive comes into force, environmental liabilities will take on further significance, especially for those countries that currently only have minimal legislation in place. Because the directive will not apply retrospectively, it will have most impact on current operators or companies involved in mergers or acquisitions, where a potentially contaminative operation is ongoing.

If and when such potential hazards actually arise, clean up can be required under the directive. The ensuing costs can be substantial. In addition, the presence of contamination can seriously disrupt revenue generating activity on the site. The potential impact of such business interruption may make obtaining lending more difficult or financially prohibitive. Anyone involved in industrial activities therefore needs to be aware of the potential liabilities they could face.

Potential liabilities
Potential liabilities include the following.

  • Clean-up (regulatory) liability The directive states that where significant environmental or significant biodiversity damage has occurred as a result of an operation to which the directive applies, the competent authority shall either require the relevant operator to take the necessary restorative measures or shall itself take such measures. The aim is to restore the environment to the state it was in before the damage, so that the contaminated land no longer gives rise to serious or potentially serious harm to human health. In the worst case scenario, this may cost several hundreds of thousands of pounds per acre.
  • Associated legal and technical costs If clean-up liability is incurred, the operator is also bound to incur professional costs in either bringing or in defending a legal action. These professional costs will include legal and technical expenses.

    Minimising liabilities
    Where potential liabilities and costs present unacceptable risks, there are a number of solutions to consider.

  • Technical risk management This relies on total remediation or the permanent containment of contaminants (this is not suitable for all sites). The extent and quality of technical information is vital when assessing the extent and type of land contamination. Assessments are usually based on environmental data and soil sampling. By its very nature sampling is only able to give accurate information about the area directly sampled. Once remediation starts, unknown contamination could be found, or there could be unanticipated migration of contamination. These could result in heavy unbudgeted expenditure.
  • Contingency funding Setting aside contingency reserves for clean up is essentially a self-insurance exercise and can be appropriate for smaller sites where contamination is localised. However, in addition to requiring a greater financial provision than an insurance premium, it also ties up expensive capital, which could be employed in revenue generating operations.
  • Environmental insurance The directive has not made insurance mandatory, but insurance can have a number of advantages over other risk management tools. It will transfer any liabilities that might occur in the future, protecting against any residual liability, adding value to the site and ensuring a clean exit. In many cases insurance has enabled property transactions to proceed that otherwise would have stalled. The environmental insurance market in Europe is country specific. and it would be futile to talk of a European picture. Suffice to say that an environmental insurance market has not developed in Europe in the same way as it has in the UK. Some countries have environmental insurance available from 'pools' of insurers who keep a percentage retention. Belgium uses environmental impairment insurance products available from London, but the quantity is not substantial. Germany has limited environmental cover but environmental liability is generally excluded from commercial policies which have incepted since 1993.

    Insurance is available in the London market for Europe through insurers that include AIG, XL, Chubb, and. in the UK only, Allianz Global Risks. Typical products include: pollution clean up for first party which indemnifies the insured for costs of cleaning up its own property when a regulator has required action or there is a threat of action being taken, and pollution legal liability which indemnifies the insured against legal liability for environmental damage caused to the person and property of third parties. There are also policies which cover defence/appeal costs, cover for claims/losses arising from the removal of asbestos and policies which provide a cost-cap for remediation works. Policies cover a wide range of manufacturing activities.

    Watch this space
    While there are some weaknesses with the directive in terms of environmental protection, it will have a significant effect on industry and on any company contemplating a European merger or acquisition. Significantly, this is the first time that damage to biodiversity has been included in legislation within the member states, and this will be an interesting development to watch. The tighter liability rules with regard to all existing forms of environmental liability are leaving some in industry anxious.

    With the right advice, instead of being a burden and liability, brownfield land can become a manageable and valuable asset. For those in industry who are concerned about the effects, there is plenty of time to learn more and get expert advice. It is unlikely that the regime will be in force before 2006/7, and there is still further lobbying to be done from all sides, leaving the final form of the directive and its likely consequences largely unknown.

    Jo Bain is a senior solicitor for Certa (UK) Ltd, who provide strategic consultancy, financial and insurance advice and land investment services for brownfield sites, Tel: 020 7903 6522, E-mail

    Spotlight 2002
    The UK Environment Agency recently issued its report Spotlight 2002 on business environmental performance last year. Key findings were:

  • Poor management of waste an increasing concern. The waste sector was again responsible for the largest number of pollution incidents
  • Despite a significant improvement in overall operator performance of landfill sites, 3.5% still posed unacceptable risks to the environment. Landfill sites released substantial quantities of greenhouse gases, especially methane - amounting to 7% of the global warming potential of all processes reporting to the Pollution Inventory
  • Fly-tipping continued to rise - rising from 166 serious incidents in 2001 to 200 in 2002. One company director was jailed for 12 months for waste offences, including dumping soil polluted with mercury, arsenic and cyanide
  • Serious pollution incidents were down. There were 1,468 serious pollution incidents in 2002 - 21% fewer than 2001, but 14% more than 2000
  • The water industry was responsible for more than one in six pollution incidents affecting water. The farming sector was responsible for 12% of all serious pollution incidents in 2002. The chemicals sector was the only sector responsible for an increase in the number of serious pollution incidents, from 19 to 28
  • Most air emissions decreased. There were reductions in pollutants: particulates by 34%, sulphur dioxide by 14% and nitrogen oxides by 6%. Greenhouse gas emissions changed very little
  • A significant number of high-street companies were prosecuted for environmental offences, including Tesco, TotalFinaElf, Tiles-R-Us, BT, Stationery Box and Yoplait
  • Fines are increasing, but are still not enough to encourage some companies to respect the environment. In 2002 there were 34 fines of more than £20,000 compared with 24 in 2001. The average fine in 2002 was £8,744, a rise of 36%. There was an increase of fines against the farming sector, with three above £10,000.

    Lawyers Freshfields Bruckhaus Deringer have produced guides to some of the major principles of environmental law in the UK, Germany, Spain and France. These can be downloaded from environment/publications/en.asp