The news that the recent UK high court judgment in Bartoline Limited v (1) Royal & Sun Alliance Insurance plc & (2) Heath Lambert Ltd (2006) may now be going to the Court of Appeal has created even more uncertainty in an already confused situation. John Cooper and Bob Martin write
What has become clear through the discussion on the Bartoline case is that there are widespread misconceptions as to what pollution cover is, and is not, afforded by public liability (PL) insurance policies. Most of them have been brought about through understandings of cover being passed on by hearsay. To safeguard themselves, risk managers now need to examine whether the actual cover provided by their PL policies is adequate.
In 2003, Bartoline suffered a major fire and explosion at its solvent manufacturing plant in Yorkshire, which resulted in pollutants entering nearby watercourses. Emergency work to clean up the watercourses was carried out on behalf of the Environment Agency acting in conjunction with the local authority, the costs of which were charged to Bartoline. The Agency also ordered Bartoline to carry out additional work to treat the affected soil using its powers under the Water Resources Act. Bartoline then sought to recover the costs from its PL insurer, Royal & SunAlliance (RSA)
The court held that these costs were a statutory debt, not 'damages' and were thus not recoverable under a PL policy that covered 'legal liability for damages...'. In ruling in favour of RSA, the judge made some important points about the scope of the cover provided by their policy, including:
- liability to repay expenses incurred by the Environment Agency and liability to pay damages in tort are 'quite different animals'
- the difference is between protecting public interest in the environment and protecting individual interests in property
- the former confers a right to recover debt, the latter a right to recover damages by way of compensation for loss or damage
- the indemnity conferred by the policy extends only to legal liability for damages in tort (although many PL policies do, of course, afford a measure of contractual liability also, but this was not an issue in this case).
<B>Implications for PL policies</B>
While the ruling was obviously based on the particular version of the RSA wording, the majority of UK PL policies are unlikely to respond differently to a similar loss. Although there is no such thing as a standard PL policy in the UK market, on the basis of the available facts it would seem unlikely that coverage for the types of losses experienced in the Bartoline case would be afforded by most insurers unless it had been specifically negotiated and written in as a bespoke wording. The same applies irrespective of whether the limited form of pollution cover offered in the policy is part of the general PL coverage or provided by a separate section with its own indemnity limit.
Currently, PL underwriters are attempting to assess the implications of the initial judgment, but there appears to be a great deal of confusion and indecision as to the best way to react. The case has also thrown the spotlight on the difference between 'damages' and 'compensation' wordings. Although the judgment in the Bartoline case did not address it, there is a question as to whether a PL policy covering 'liability to pay compensation' would succeed where 'liability for damages' has failed. For the time being, it would be unwise to rely upon the existence of a 'compensation' form of wording in a PL policy, because Bartoline offered no clarification.
Some insurers that use this wording have already stated they would not expect their policies to provide this cover. Indeed, any policy having a wording that indicates it provides any element of pollution cover, such as general liability policies and even D&O insurances, must be re-examined in the light of this judgment.
<B>Environmental Liability Directive</B>
To add to the confusion, the EU's Environmental Liability Directive (ELD) is due to be implemented later this year. The ELD is concerned with the prevention and remedying of environmental damage, specified for the purposes of the ELD as:
- damage which has significant adverse effects on reaching or maintaining favourable conservation status of species and natural habitats protected under EU legislation
- damage that significantly affects the ecological, chemical and/or quantitative status of waters falling within the scope of the water framework directive
- land contamination that creates a significant risk of human health being adversely affected as a result of direct or indirect introduction in, on, or under land of substances, preparations, organisms and micro-organisms.
The liability introduced by the ELD is to remediate the damaged environment, hence the compounded significance of the Bartoline decision. However, 'damage' to habitats, species and the like is specifically not physical damage to material property; thus a PL policy cannot be expected to provide any cover, irrespective of the 'damages v compensation' debate or the outcome of the Bartoline appeal.
The first of only two rounds of consultation by DEFRA on the enactment of the ELD into UK national law ended on 16 February 2007. For news of this visit the DEFRA website <a style="TEXT-DECORATION: none"href="http://www.defra.gov.uk" target="_blank">www.defra.gov.uk</a>
<B>Too important to ignore</B>
In the midst of all this confusion, risk managers must now try to decide what is the best way forward. The Bartoline case has highlighted an unexpected shortcoming in PL coverage that could affect all companies. For multinational companies with insurance programmes having local territorial PL policies, the Bartoline judgment is a UK issue. Decisions taken with regard to policy disputes decided in English law courts are not necessarily indicative of overall coverage worldwide and are only one factor in insurance programme design. The Bartoline ruling would not be persuasive in the courts of other countries, nor have an influence on any judgments handed down in other territories.
While there has been a tendency for many companies either to ignore their potential environmental risks, or else to take comfort in the belief that they already had adequate pollution coverage in their PL, general liability, D&O and other liability policies, the Bartoline judgement brings into question whether this is wise. As a minimum, it must surely serve as a wake up call and influence the next round of insurance renewals.
First on the agenda is to create awareness at board level that these significant developments have taken place and that a detailed review of the business's approach to environmental risk management is justified. After all, the Turnbull guidance does promote a top-down approach to the assessment of internal control, as well as a bottom-up approach, so directors are well aware of their responsibilities.
In parallel to this, risk managers, in conjunction with their usual insurance advisers, are encouraged to undertake a thorough assessment of their company's PL (and other liability) policy wordings to see what is actually covered, as opposed to what, pre-Bartoline, they may have believed was covered. This will mean using insurance intermediaries to engage with insurers to get specific answers to particular concerns, and potentially for a higher element of manuscript wording to be introduced into policies to ensure that there is clarity.
Great care will be needed, as some insurers are now offering other environmental extensions to their standard PL wordings, or separate limited environmental impairment liability (EIL) policies sold in conjunction with PL. These often offer only minor elements cover, and wordings should be carefully reviewed.
<B>Environmental impairment liability (EIL) insurance</B>
So far as environmental clean up costs are concerned, the Bartoline judgment suggests that where costs are incurred by an insured under statute, these are different from common law claims for damages and do not constitute 'legal liability for damages' within the terms of a PL policy. By nature, the wordings of PL policies, when it comes to environmental risks, tend to be somewhat restricted. This is not the case with EIL insurance, which is designed to cover the insured's liability to pay for clean up and remedial work arising from pollution and contamination. Furthermore, EIL insurance does not discriminate on the basis of the underlying pollution event being either sudden or gradual.
Had Bartoline been covered by EIL insurance instead of relying on its PL policy, the outcome would have been different. EIL policy language does not depend on 'damage to property' nor on the insured's 'liability for damages'. Coverage is triggered by a legal obligation to pay for clean up and remediation imposed by a competent authority, such as the Environment Agency. EIL insurance can also be designed to cover 'pollution conditions' that are in existence at the time of inception of cover, as well as those that result from events during the policy period. In other words, it can cater for both 'sudden' and 'gradual' pollution. Unlike most PL policies, EIL cover is written on a 'claims made' basis and subject to aggregate limits of indemnity.
There are many misapprehensions about EIL insurance, primarily that it is hard to obtain, extremely expensive and can only be purchased when there is no history of contaminating operations for the site, or portfolio of sites, for which the insurance is being sought. These views are out of date. The EIL insurance market has undergone significant change and is continuing to do so. More capacity is coming into the market as interest grows, and it has become more flexible, more readily available and more affordable. Estimates are that premiums for like-for-like cover have fallen by up to 50% in the last 12 to 18 months. Certainly, in the current confused situation, separate EIL placements are worth serious investigation.
Risk managers who are concerned that their boards will not approve the necessary funds, must recognise the foregoing are mere aspects of the environmental challenge that insureds and PL underwriters are going to face. For example, a proposed EC Soil Directive is expected later this year or early next year.
In addition, when announcing the withdrawal of the mandatory requirement for an Operating & Financial Review (OFR), UK Chancellor of the Exchequer Gordon Brown stated that the matters the OFR was intended to address, including reporting on environmental exposures, would form part of any good system of corporate governance.
Board members need to be reminded that directors and senior managers can carry a personal liability for environmental issues, for which D&O insurance cannot be placed to indemnify them. This exposure is likely to be further compounded by the recently unveiled EC environmental crime directive that proposes jail sentences of up to 10 years for directors. That should focus their minds!
John Cooper is technical consultant, Risk Management Solutions, Aon Limited, and Bob Martin is director, Environmental Consulting & Solutions, Aon Limited, <a style="TEXT-DECORATION: none"href="http://www.aon.co.uk" target="_blank">www.aon.co.uk</a>