Sweeping changes to environmental liability regulations are causing problems for insurers in their attempts to create suitable products, says Nathan Skinner

Environmental issues have never been higher on the public and corporate agenda. The timetable is ruled by pressing issues affecting the health of the planet and an expectation that those in power must act against the destruction of the natural world.

During his debut presidency of the EU in the first half of 2008, the Prime Minister of Slovenia announced sweeping energy and climate change regulations, as well as special attention to issues regarding the preservation of biodiversity.

In January this year, the European Commission tabled a package of proposals outlining some of these measures, notably to increase the total share of renewables in the EU’s overall energy consumption to 20% and to reduce greenhouse gas emissions by the same amount. In the midst of an over-abundance of environmental regulations, one of the most significant recent moves to protect the natural world involves the implementation of the European Environmental Liability Directive (ELD).

A common market relies on common laws, and the ELD is a brave attempt to harmonise environmental regulations across the 27 EU member states. The EC adopted a proposal for a directive, specifically aimed at the prevention and remedying of environmental damage, in January 2002. The ELD was meant to come into force in all member states on 30 April 2007, but the majority failed to reach this target on time. According to the most recent information available, 19 member states have still not implemented the EU directive, six months after the deadline to do so. Brussels is said to be considering taking action against those countries that have failed to meet the deadline. In the UK, one of the countries in which the regulations remain unenforced, a parliamentary inquiry is currently under way into why the Department of Food and Rural Affairs (Defra) – the department in charge of transposing the directive – has taken so long to transpose the ELD and the accuracy of the consultation it undertook.

In addition to the confusion surrounding the state of transposition across Europe, the new framework establishes a number of complex legal concepts with which lawyers are now wrestling. These include the much lauded ‘polluter pays’ principle, complementary and compensatory remediation and enhanced protection for habitatsand biodiversity.

Considering the complexity of the situation and the potential for unprecedented remediation costs that go way beyond financial penalties, companies are well advised to take a more proactive approach to handling their environmental obligations. Meanwhile, environmental lobbyists continue to mount pressure on governments to enforce the directive in its strictest possible sense.

One of the principal issues is that the directive establishes the environment as a legal entity for the first time. National governments will have the responsibility to bring claims against polluters on behalf of the environment, and damages may not be in the form of financial payments, but as resti-tution of the environment to its state before the pollution occurred. This means that if a firm commits an offence which causes harm to protected species and biodiversity that did not exist before, the polluter, as well as remediating the soil, may also have to provide a habitat to replace that which was damaged. Most general liability insurance policies as they are now would not respond to a claim of this type.

The ELD also establishes a number of new duties and responsibilities. One of these empowers third parties – such as lobby groups or disgruntled neighbours – with the right to require an enforcing authority to act against the polluter. Another is a positive duty on operators to report if environmental harm is occurring.

Managing liability risk

The Europe-wide delay in transposing the new law has led to its own problems, not least of which is the issue of establishing what the new liabilities are, and then building the financial instruments to deal with them.

It was left to the discretion of member states whether or not to enforce compulsory financial protection for the new liabilities. So far only a handful have decided to enforce this obligation. The EU intends to review this position in 2010, yet as things stand there is a danger that some countries may still be in the process of implementing the directive - and therefore incapable of imposing an obligation for financial protection.

The Federation of European Risk Management Associations currently opposes any compulsory financial security schemes but instead wants to see a competitive insurance market for environmental risks, within which pools could operate if they served a purpose.

Worryingly, in those jurisdictions where environmental insurance is compulsory, such as Spain, firms may be required to undertake an intrusive, and costly, investigation of their sites, which could unearth nasty surprises. If, as a result of this process, a firm discovers that they have contamination on their land, they may have a legal duty to inform the authorities. Furthermore, this duty should make selling land that is known to be contaminated much harder. However, the duty only applies to knowledge gained after the 30 April 2007. Historical environmental liabilities are much more difficult to deal with, but a procedure –already well established in the US – is emerging.

Towards the end of last year, property developers in the north west of England completed an environmental liability transfer deal, following the acquisition of a former Kodak factory site. The deal was thought to be the first of its kind outside the US. In it, a property developer passed on the obligation for cleaning up the site – known to be contaminated – to a third party. On completion of the deal, the buyer and seller were free to negotiate the transfer of assets without the cost uncertainty associated with historical environmental liabilities.

General liability insurance policies, which usually include pollution exclusions, do not respond to environmental contamination clean up costs. A legal case resolved towards the end of last year, demonstrates how the situation currently stands – in the UK at least. The case concerns manufacturer Bartoline, which was ordered to pay for the cleanup costs following severe pollution to nearby watercourses. It claimed for the costs under its public liability policy. Bartoline’s insurer Royal & Sun Alliance refused to pay the claim and Bartoline sued for breach of contract. The court ruled that Bartoline could not claim its clean-up costs as ‘damages’ under its public liability policy. ‘Public liability policies cover civil liability only, not the sort of liabilities the ELD is seeking to introduce,’ notes Phil Bell, group casualty director, Royal & Sun Alliance.

Public liability insurers should consider providing more cover for environmental liability, says Gary Marshall, group risk manager, The Polestar Group. He says that since insurers introduced the pollution exclusion, limiting cover to sudden and accidental events, the situation in the UK has changed. ‘We are more regulated than before, local authorities know about most of the contaminated land in their areas, and insurers have more means of gathering that information,’ he explains. In response to some of these issues, a new product line which is already common in the US, is becoming more popular in European jurisdictions.

Environmental liability insurance policies come in a number of shapes and sizes, with some international insurers even advertising policies designed specifically for liabilities under the ELD. But most insurers are nervous about offering products to cover liabilities that are, as yet, undefined in all but a few European jurisdictions. That is because, from an insurer’s point of view, they need to know what the quantified risk is, so they can write profitable cover.

Another reason why insurers are put off writing ELD specific policies is because, under the directive, they can have no control whatsoever over the claims process. ‘That is not normally the basis for writing insurance,’ comments Bell. ‘In the UK we don’t know which way the Government will go so we can’t offer insurance where the liability is not yet established.’ But those insurers who currently offer the coverage say they are able to analyse the risks based on the framework directive. ‘Environmental liability is not uninsurable,’ emphasises Simon White, environmental manager, XL Insurance. White acknowledges that the directive is very complex. ‘It is introducing new ideas which we have not seen before in the EU,’ he says. ‘There are still a lot of question marks with regard to the details. But the specialist environmental insurance market has spent a lot of time and effort in examining the directive and its implications, and amending covers to meet the new requirements.’ Nevertheless, there may be a price to pay for the privilege of covering ELD liabilities. Christopher Norton, a partner at Lovells, says premiums in the ELI market are so high as to be ‘almost prohibitive.’

Environmental insurance bought in the UK tends to be ‘deal making,’ says Dominic Thomas, partner in environmental liability at Davies Lavery solicitors. ‘Where a company that is buying another purchases insurance to give itself peace of mind in case it is also acquiring sites which are contaminated.’ Firms tend not to buy annual recurring environmental policies in addition to their existing liability covers. ‘Environmental liability insurance in the UK is expensive and it’s difficult to assess what the exposure might be - but that’s not the problem as I see it.

Insurers are willing to provide the products, but there is a market that is currently not interested in acquiring that cover.’ It is a situation which is not mirrored inGermany, where the Government has taken the lead.

In Germany the ELD was transposed into national law last year. The new law, called the Umweltschadensgesetz, was enacted as of 14 November 2007. The Association of German Insurers (GDV) developed a standard policy wording in the early stages of the application of the national liability law. It took the GDV, working in cooperation with environmental experts in the German market, three and a half years to develop the unbinding model wording.

The wording has helped to develop an insurance market for the new type of liability, explains Nils Hellberg, head of liability and credit insurance for the German Insurance Association. ‘Hardly a single insurer had the expertise to create an appropriate product single-handedly, because the liability for biodiversity damages is completely unknown and several cornerstones of the ELD in respect to the German transposition law are still unclear.’

‘This wording has been adopted by practically all insurers writing industrial business and is generally offered to all industrial and commercial clients who have already bought it to a considerable extent,’ says Günter Schlicht, managing director of the German risk management association, DVS (Deutscher Versicherungs-Schutzverband e.V). ‘The cover is limited to sudden and accidental events for the time being. We do hope, however, and expect from insurers that they will gradually extend the cover in correspondence with the customers’ needs,’ he adds.

Germany has a very competitive market, with around 150 liability insurers, which could explain why it expended the effort to help form a market and to help individual insurance companies launch products to cover the new environmental liabilities.

Quantifying the risk is a difficult task in the early stages of the application of the national law, says Hellberg. To date there have not been any major claims under the ELD in Germany and very little statistical data exists, so each insurer is left the challenge of calculating the level of premiums on its own. Another country where the law is currently in force is Spain. The transposition law was published in October 2007 and entered into force the next day.

In November, a Spanish insurance pool proposed new policies adapted to the law. There are around 19 indigenous insurers who are members of the pool. ‘Other international companies have standalone ELD products based on the American model,’ comments José Luis de Heras Herráiz of the Pool Español de Riesgos Medioambientales.

It is understandable why insurers may want to tread carefully in this area, as most do not have the full spectrum of experience or dedicated underwriting capability. But there can be no doubt that the environmental arena represents a huge opportunity for the insurance market to develop new products and solutions. To date, most products have been restricted to a relatively small number of carriers offering a range of specialist covers. Nevertheless, there appears to be an argument for the broader market to develop their offerings. Adds Thomas: ‘If insurers have to be prepared to provide that cover businesses have to be prepared to buy it.’

The implementation of the ELD will certainly create a number of uncertainties for firms and their risk managers. Ultimately, it is hoped, the ELD will clarify and reduce doubt by establishing a clear framework for how environmental damage will be handled. The UK’s enforcement authority, for example, currently offers a set of prosecution guidelines and a booklet about when they will and will not be taking action. With operators under more mandatory reporting requirements and potentially stricter remediation rules, the need for better handling of environmental issues has never been greater.


Most large pollution incidents arise at sea, which is covered by its own pollution regime consisting of various
treaties governing protection of the aquatic environment.
One of the worst environmental disasters to happen at sea involved French oil company Total’s aging oil
tanker Erika. In December 1999, Erika sank in rough seas off the coast of France, spilling around 30,000
tonnes of oil into the ocean and initiating one of the largest environmental cleanups in living memory.
Recently, a Paris criminal court imposed on Total a €375,000 fine and ordered it to pay almost €200m in
civil compensation after being found guilty of recklessness in its vessel inspection and vetting procedure.

The court established that the sinking was caused by corrosion of the ship’s structures and that this corrosion
resulted from gross negligence.

Like many others in the dirty industries, Total is now investing heavily in cleaning up its image.

On 8 February 2007 it announced the launch of a €60m CO2 capture and storage (CCS) pilot project in the
Lacq basin in southwest France. The overall aim of the project is to test the industrial-scale feasibility of an
integrated CCS chain.

Commenting on the project, Jean-Michel Gires, executive vice president, sustainable development and
environment, for Total, says: ‘We want to promote a better understanding of climate change mechanisms
and use our industrial competencies to develop potential solutions.’

As part of the initiative, Total sent an airship expedition to the Arctic to measure the ice thickness. It also
decided to launch projects that would help its customers reduce their emissions – modest steps have been
taken in offering new products and services as well as encouraging fuel efficiency from customers.

‘What we don’t know today is if everything that is being developed is up to the challenge we face,’ says
Gires, who hopes that data from Lacq and other pilot projects around the world will combine to improve
CO2 capture and storage systems and help reduce global carbon emissions.