Once just a ‘low likelihood’ technical concern, environmental liability is now seen as a standard business risk, moving fast up the priority list. More companies are considering using their captives

The Environmental Liability Directive (ELD) has now been implemented in all EU member states, yet many companies and risk managers remain unsure how it will affect them. With a number of cases now making it through the courts, companies are being advised that they need to start assessing their risks under the directive and consider how to make financial provision for them.

Ferma general secretary Pierre Sonigo says: “Companies and their risk managers remain unsure of how the ELD will work and many are simply waiting for something to happen.” He says this is a dangerous attitude that leaves businesses exposed to substantial uninsured costs and reputational damage.

Polestar Company group risk manager Gary Marshall says that in constrained times some companies may not buy environmental insurance. “There is a very developed sophisticated market for environmental insurance but it is an extra cost that people may not be prepared to bear at the moment, even though the legislation has extended the scope of our liability,” he says.

Captive managers say that writing the ELD through a captive could be a means to become more familar with it, and to gain some protection of the business at a controlled level, while the company builds up an understanding of the risk involved.


Historically, it was easy to pin liability on companies that had caused visible pollution, but invisible, more long-term damage was difficult to assess and companies would not be liable for it. This has changed with the ELD.

As Marshall explains: “The ELD has extended out the scope of those liabilities to a whole new area – the more invisible aspects of pollution, in so far as this affects habitats. Companies are now responsible for bringing the habitat back to the condition it was in prior to any incident occurring.”

Furthermore, if it is not possible to fully repair the land itself, the act states that “the remediation of the lost environment with identical, equivalent or similar natural assets must be undertaken”.

Cases are already going through the courts. In April, United Utilities became what is believed to be the first UK company to be censured under the new legislation.

The company was fined £14,000 for a serious water pollution in July 2009, which caused the death of 6,000 fish at Three Pools Waterway, in Southport. It was also ordered to pay the Environment Agency’s costs of £7,863.54.

But the seriousness of the incident means United Utilities may have to pay additional compensatory measures in order to return the habitat to “the same level of natural resource or service as would have existed if the damage had not occurred”.

Although in the UK cover against the ELD is voluntary, nine countries have opted for compulsory financial security guarantees.

This will be enforced this year in Greece, Hungary, Romania, Portugal and Spain.

Bulgaria, Czech Republic, Slovakia and Slovenia are set to follow suit over the next few years. How far operators are legally allowed to use captives to insure against liabilities is up to the individual member states.


So given the importance of insuring against the implications of the ELD, is a captive a good way to go to ensure your company is protected?

Broker Marsh’s head of environmental practice in EMEA, Cliff Warman, says it is already placing ELD risks through captives.

“There is a lot of interest at the moment in using captives for specialist lines of insurance, and environment is obviously top right-hand corner right now in terms of new risks for businesses,” he says.

“Environmental risk historically has always been seen by a lot of our clients as a low likelihood but high significance risk. If they do have an environmental issue, the perception is it will cost them a lot of money but is unlikely to happen.”

But as environmental insurance is now a requirement in certain countries, “in the client’s mind, that is taking it out of the ‘high significance/low likelihood’ category and putting it into mundane, everyday insurance category”, he says. Warman adds that most clients interested in writing environmental risk through a captive are “reliant on others tomake them comfortable that the risk is acceptable to them”.

“They are not necessarily technical people from an environmental perspective,” he says.

Due to the type of service offered, however, environmental risk is being seen as less of a technical risk issue and more of a business risk issue, he adds.

Aon Global Risk Consulting’s head of risk financing, Charles Winter, says as the environmental insurance market develops and as the legislation gets a higher profile, we will see more ELD risk written into captives.

“When we are looking at risks to include within captives, there are a number of criteria we look at and we apply these to environmental risks as much as any others,” he says. “For example, we look to see that it is not going to be entirely catastrophic. We would tend to look for some stability and we would be looking at the market and market pricing, and considering whether it would be attractive to take a proportion of that risk into a captive, to get better market terms.”

He adds that another way to look at environmental liability is as an extension of public liability. “If we can write public general liability into a captive, why shouldn’t we be able to write environmental risk?” he asks.

Companies are starting to take this much more seriously now, he says. “Any new area where companies have not bought it before, particularly in the current climate where they are trying to save money, a captive may be a way to gain familiarity, and elements of protection of the business at a controlled level, while they build up an understanding of the risk before making a decision to go further.”


Aon Environmental Services Group director of UK & EMEA Simon Johnson says that as long as companies understand the risk they are putting into a captive and understand the profile of the captive, there is no real problem in writing the ELD into it.

“When we talk about the ELD, this is mainly an operational risk and that is what you put in your captive – operational risk,”

he says. “The environmental programme sits very much alongside the general liability programme. It will drop down where there is no other coverage available. On that basis, we are finding increasingly that large clients for global programmes are considering using their captives for first layers.

“We have a couple of clients who almost have too much in their captive at the moment for various reasons, and this is a way of diversifying risk within it,” he adds.

But he says the ELD has caused some confusion mainly due to the fact that financial security is mandatory in some countries and not others (see ‘Essential insurance’, right). This is leading some companies to believe they do not need to insure against the ELD because it is not mandatory in the countries they operate in.

Johnson says: “They are only linking their risk with their requirement for financial security. But all companies have liability within the EU for damage to the environment. Although there is no financial security required in the UK, you are still liable.”

ELD risk is here to stay and must be taken seriously. But until companies are sure of the risk they are dealing with, writing it through a captive seems to be a good place to start.

Essential insurance

Financial security guarantees are compulsory in the following countries:
• Greece
• Hungary
• Romania
• Portugal
• Spain
• Bulgaria
• Czech Republic
• Slovakia
• Slovenia