The Environmental Liability Directive has been on the agenda for years, but now that it has reached all corners of Europe, multinational organisations no longer have any excuse for turning a blind eye to the consequences of their environmental actions
Now that the European Union’s Environmental Liability Directive (ELD) has been rolled out to all member states, companies should have a clear understanding of how the rules affect them. Yet, according to AXA Corporate Solutions chief underwriting offi cer Philippe Jouvelot, few European risk managers seem to be aware of the risks.
The ELD, which came into force on 30 April 2004 (but has only recently been transposed into national law in all EU member states), has created new risks and exposures for companies that damage the environment. It is aimed at the prevention and remediation of environmental damage and builds on the ‘polluter pays’ principle by creating new legal concepts around compensatory and complementary remediation.
Several cases have been working their way through the courts. In April, United Utilities became what is believed to be the fi rst UK fi rm to be censured under the legislation, when it was given a €26,000 fine by the Environment Agency.
But Jouvelot believes that risk managers are taking a wait-and-see approach. A major environmental disaster that exposes the costly nature of the risks under the directive is yet to stir their consciences, he says.
His colleague, environmental underwriter Sylvie Monereau, believes most risk managers have yet to properly assess their exposures under the new system. Companies with facilities close to sites of special environmental importance are at a far higher risk, she says. “This is a new liability and a new situation for companies to take into account in their environmental management systems.”
While Jouvelot is keen to stress that AXA Corporate Solutions has the capability to underwrite the costs associated with a major environmental disaster, prevention is always the top priority. “Having a policy that covers the costs associated with remediating environmental damage is one thing. But much more important is for the disaster not to happen in the fi rst place.”
The ELD introduces some big challenges for European companies, not least of which is interpreting how the rules will affect them in each of the countries in which they operate. There’s also doubt about how to assess the level of cover required, because it’s unclear how regulators will interpret environmental remediation in a fi nancial sense – how much they will charge a company for polluting an important ecosystem, for example.
Jouvelot denies that insurers will have problems quantifying the environmental risks. “The range of cost associated with an environmental claim is not diffi cult to evaluate compared with the industrial risks that we underwrite frequently. It’s not a big problem. Particularly if you compare it with the standard deviation of costs associated with a bodily injury claim, which can be huge.”
The new environmental regime also brings with it some important legal changes. Certain natural habitats and species now have their own legal rights. If damaged, there may be a requirement for compensation to the regulator in the form of material action – called compensatory remediation.
In addition, complementary remediation may also be required if the polluted area cannot be brought back to its baseline condition after a clean-up. This could involve acquiring new land and creating a complementary habitat from scratch – potentially an extremely expensive undertaking. The table ‘The directive: remedial measures’, opposite, gives a detailed overview of the remedial measures provided for in the ELD.
While the directive outlines the baseline legal framework, each EU member state has introduced its own set of rules. Some have stuck to the directive closely, while others have implemented a stricter legal system. Some of them even insist that companies take out forms of fi nancial protection, which could include insurance, bank bonds and asset deposits, to cover the costs associated with a clean-up (see box ‘Guarantees wanted’, below right).
The minimum amount of fi nancial guarantee is determined by the enforcing authorities – usually the regulator responsible for environmental protection – but it’s likely to range from a few hundred thousand euros to tens of millions.
“In general, the countries where we know there will be compulsory fi nancial security have been stricter,” Monereau notes. These countries tend to be in southern and eastern Europe, countries that prior to the introduction of the ELD traditionally took a more lackadaisical approach to environmental protection.
The ELD has strengthened such environmental regimes along ‘polluter pays’ lines. In Spain, for example, a dam breach at the Boliden mine near Seville in April 1998 led to one of the most harmful environmental incidents in the history of the country. The rupture released around fi ve million cubic metres of toxic slurry, containing lethal levels of lead and heavy metals. The accident devastated the local environment, contaminating a 40km stretch of two local rivers as well as vast swathes of the surrounding farmland.
In total almost 40 tonnes of fi sh were killed, and around 5,000 geese and 20,000 water birds seriously harmed. Remedial activities required the excavation of 12 million tones of contaminated soil and resulted in a total economic loss in the region of €400m.
The disaster was particularly damaging because the Doñana National Park is one of Europe’s most important natural sites of biodiversity, thanks to its lagoons, marshland and scrubland. It is also an important resting place for migratory birds and the accident occurred in the middle of nesting season.
Perhaps because the Boliden incident looms so large in the Spanish collective memory, Spain has adopted the most stringent approach to the implementation of the ELD.
The differing approaches adopted by each member state adds complexity and means the risks vary across Europe, depending on where a company has facilities.
In addition, it is the responsibility of the enforcement authorities to determine how much a company will have to pay to remediate the environmental damage caused by pollution. This means identical pollution incidents could be treated very differently, depending on the country and its enforcement approach. In contrast to Spain, French environmental law was well established before the ELD came along. Recently France set in motion an imperative that will have major implications, particularly for oil companies transporting fuel via pipelines.
In August last year, the French government declared an environmental disaster in another of Europe’s most beautiful nature reserves after oil spilled from an underground pipeline in the southern region of Bouches-du-Rhône. More than 4,000 cubic metres of crude oil spilled over fi ve acres of agricultural land.
The pipeline, operated by the South European Pipeline Company, reportedly carried 23 million metric tonnes of crude oil to refi neries and petrochemical plants in France, Germany and Switzerland every year. The clean-up is ongoing and the costs still being worked out.
In this case, the French courts ruled that the operator was not bound by strict liability. As a result of the incident, however, a change in French law means that such activities will in future fall under a regime of strict liability, explains Monereau. That means the burden of proof falls on the operator to show that it is not liable for the incident.
Companies usually expect their public liability or property cover to protect them in the event of pollution. It is unlikely, however, that any standard public liability, general liability or property insurance programme will provide cover for any of the losses and damages under the ELD, except perhaps for some elements of primary remediation.
Even then it depends on the policy providing cover for damages imposed by a regulator and not the legal claims for damage of a third party.
Public liability policies are usually limited to sudden and accidental pollution. Property policies only kick in when pollution results from an ‘insured peril’, such as fi re or fl ood, and this is sudden or accidental.
These policies may also exclude the removal of contaminated soil. Yet most pollution claims arise when damage occurs gradually, leading to a clean-up involving the removal of large amounts of contaminated soil at considerable expense.
For those exposed to the risk of causing damage to the environment, protection is available through the environmental insurance market. This market has expanded coverage to include losses and damages under the ELD or by any national legislation or country law implementing the ELD.
Operators can reduce the likelihood of ever being caught out by the regulations by minimising the risks to natural resources. Strategies should pay close attention to preventing damage to species, habitats or water and to minimising risks to human health from contamination of land – though any type of environmental damage is covered by the ELD if it signifi cantly impacts humans or the environment.
Companies may wish to audit their sites to make sure they are carrying out suffi cient safety and risk mitigation activities. At the very least they should have assessed their exposures to see if they have any sites that run the risk of spilling poisonous effl uence into areas of natural beauty.
It’s also worth noting that if during an investigation a company fi nds environmental damage or the imminent threat of damage, then it is legally obliged to disclose this to the authorities. Regulators are likely to be more lenient with those companies that voluntarily confess rather than try to cover up a problem.
Given the tough economic climate, it is possible companies – and perhaps even the regulators – will decide to focus on other issues at the expense of the environment.
But perhaps as the environmental crisis in the Gulf of Mexico continues to unravel, companies will take a keener interest not only in preventing the worst from happening but also making preparations for dealing with the consequences if it does. ¦