ELD to account

With UK regulations that enact the Environmental Liability Directive finally coming into force next month, Sarah Hills investigates the key questions of awareness and compliance

From 1 March 2009, the Environmental Liability Directive will finally be transposed into UK law. But while the insurance industry has waited nearly two years for its actual implementation after the European Union deadline for transposition passed, there are still concerns surrounding the preparedness of brokers and businesses.

Now the process is finally underway with the Environmental Damage (Prevention and Remediation) Regulations 2009 set to come into force next month. An in-depth guidance document, short guide to the regulations, impact assessment, a note on the transposition and an FAQ section are now available on the Department for Environment Food and Rural Affairs' website. However, preparedness is not the only concern - there is also the question of awareness in the broking sector, as well as among UK businesses. So is a month sufficient time for UK firms to prepare and ensure they are compliant?

According to Cliff Warman, EMEA environmental practice leader at Marsh, the environmental impairment liability insurance market can cover these types of environmental exposures and indeed has developed to specifically cover the new risks and liabilities arising under the ELD. "Most insureds who do not hold specialist EIL insurance will rely on their public liability insurance to provide cover for risks associated with sudden and accidental environmental pollution causing damage to third-party property or bodily injury. These insureds are, therefore, unlikely to be covered for the wider risks and liabilities associated with the implementation of the ELD."

Mr Warman adds that issues of environmental damage without a pollution trigger; impacts to unowned property, such as rivers and nature reserves; and the enhanced definition of remediation, which now includes complementary and compensatory remediation; are only covered by specialist environmental insurance.

The ELD is aimed at preventing significant environmental damage by forcing businesses that pollute to pay for the cost of prevention and remediation. When they come into effect, the new regulations will have far-reaching effects and could have an impact on every business capable of causing pollution or any form of environmental damage. Georgina Crowhurst, solicitor at Clyde & Co, says that under the current law, if someone causes water damage (such as polluting a river) they will be required to clean it up, or pay for the cost of doing so, but the ELD imposes an additional liability so that the person causing damage will have to pay compensation to the state for the period the river was damaged before its clean-up.

"The amount of compensation is very high - £100,000 per km per year for conservation and £20,000 per km per year for 'good status' rivers," she explains. "So if you pollute one kilometre of a good status river, and then it takes six months to clean it up and restore the river to its good status, you will have to pay the state compensation of £10,000 in addition to the clean-up costs you will incur."

Ms Crowhurst adds that if a company causes river pollution that kills fish, it may be required to stock a similar river with fish, or to add in extra fish into the river over and above the baseline, to compensate for what was lost for a period.

The main issues arise where operational facilities are located close to or adjacent to a sensitive environmental receptor such as a river, a coastline or a nature reserve. So with the potential cost involved in damaging the environment, it is surprising the ELD has not caused more of a stir among UK businesses. Arguably the wider liabilities flowing from the ELD require niche, specialist cover, but in the current economic climate, environmental liability protection is in danger of being viewed even more as a 'nice to have' rather than a 'must have'.

Product accessibility

Wayne Harrington, UK environmental risk manager at Ace Europe, says that while that attitude may be true now, in time such protection will be regarded as significant as directors' and officers' liability cover, for example. "As with any specialist insurance line, EIL is seen as specialist, but the same can be said for D&O when it was first developed. Plenty of customers buy that now, whereas up to 10 years ago it was not seen as a mainstream product."

Mr Harrington adds that there is also a misunderstanding surrounding the legislation that already exists; for example, some argue that the threshold for land damage under the ELD is, in effect, the same as that under the existing contaminated land regime flowing from the Environmental Protection Act 1990. "Clients are sensitive about premium spend in the current climate," he says. "Coupled with the hardening insurance market, it is difficult to sell specialist cover. However, there has been an effort over the last 24 to 36 months to develop product accessibility to a wide range of clients. There is a perception that environmental insurance is expensive and hard to access, and while that has been historically true, it is not the case anymore. We have developed simple, affordable products to be cost-effective for not only large clients but also SMEs. The market has done its job and there is now a reliance on brokers to educate clients on their responsibility for environmental damage."

Alternatively, it may take a high-profile case, in which a business falls foul of the new legal requirements, to encourage others to invest in insurance - in the same way that the Bartoline case proved that a public liability policy does not provide ample coverage for environmental damage (see box, page 27).

Alan Dobson, main board director of Questgates' environmental division, adds: "Because of a lack of understanding and education in both the broker industry and for the companies these regulations will affect, there may be a temptation for businesses to keep their policies which cover existing legislation, believing that this will also cover them for liabilities arising under the ELD. As a defence for these businesses, the UK has a huge array of environmental regimes that already deals with contaminated land and waste, and most will not be aware of Bartoline."

Fines payable

There have already been examples of ELD-type claims in the UK. For example, a Gwent brewery was fined £30,000 in November 2008 after yeast extract leaked into a nearby Site of Special Scientific Interest; while in South Wales, Bio Tech Oil was fined a total of £19,000 in fines and ordered to pay around £1880 after three charges of emitting a noxious substance - glycerine - into the River Sirhowy in June 2007. However, large-scale fines for environmental damage have been rare outside the US in the past.

Ms Crowhurst says the Environment Agency is also not expecting many cases once the regulations have come into force. "The Environment Agency (of England and Wales) thinks that out of the 4000 incidents of land and water damage it investigates each year, there will be between five and 15 candidates for liability under the ELD. And out of those candidates, the EA believes there will be a maximum of two fully fledged cases under the ELD every year."

However, she expects there to be a handful of civil claims brought under the regulations later this year. "The EA has admitted the impact of the ELD and the new regulations will be 'dramatic in specific cases' in England and Wales, which will increase demand for environmental insurance."

With this in mind, a mere month after a two-year build-up does not seem ample time for UK businesses to prepare and ensure they are compliant. Mr Warman comments: "The ELD is not a retroactive piece of legislation, and as such only operational risks will be covered. The legislation may impose liabilities for environmental damage caused after the formalisation of the directive itself, which was in April 2007, although the intention is for it to cover on-going operational environmental risk issues and not historic pollution." He says there is not likely to be a requirement for UK businesses to hold financial security specifically for the new liabilities immediately or in the foreseeable future, so businesses in the UK will not need to buy insurance to be compliant.

Business awareness

Awareness of the ELD is generally better within firms where the potential for environmental damage is considered to be relatively high. It is safe to say that businesses located close to SSSIs should seriously consider undertaking an assessment of the likelihood and scale of environmental damage that could be caused. And any company that operates pollution prevention and control permits automatically falls under the scope of Annex III, which means the government will place strict liability for remediation of damage to activities under the ELD.

The UK's four key insurers for specialist environmental cover - AIG, Chubb, XL and Ace - are all adamant that the standard liability policies on offer will not cover businesses for liabilities arising under the ELD. And other general insurers seem keen to get in on the act, having developed products to respond to the gaps in PL insurance and cater to the directive; for example, last November saw Axa introduce its Ecosphere policy to cater for the ELD.

However, Mr Warman argues that coverage will likely remain specialist. "The ELD extends the area of potential liability outside of property damage and bodily injury into areas of environmental damage and potentially to non pollution-related risks, where environmental damage is caused by issues other than chemical pollution," he explains. "As such, it is likely that environmental insurance will become a more specialist area and although additional insurers continue to enter the market, the coverage is likely to remain specialist."

Although the policy wordings of each EIL insurer varies, the intention is to provide cover for losses arising from regulatory action taken in accordance with the ELD, including primary, complementary and compensatory remediation. Like it or not, the ELD will be UK law and businesses will be held accountable by the regulator to pay for and clean up pollution.

Tony Lennon, European manager of environmental solutions at Chubb, warns that the waste industry is already heavily regulated on land contamination, but there are still around two incidents a week in this sector. "The industry also has to take into account the role of non-governmental organisations. With a strong and vigilant NGO presence monitoring environmental damage, these organisations have a right to bring legal proceedings for review of the legality of public authorities' decisions, acts and failure to act under the ELD.

"They could raise the stakes and make the regulator take more of a direct interest. Those that have been dulling down the message of environmental damage have been underselling the potential of costly remediation," says Mr Lennon.

CASE STUDY: BARTOLINE

Bartoline, a chemicals manufacturer based in Yorkshire, suffered a major fire in May 2003. The firefighters' foam and other chemicals washed off the site into local watercourses, causing pollution which the UK's Environment Agency subsequently dealt with.

Bartoline was obliged to pay more than £770,000 in clean-up costs, which the company sought to recover from its public liability insurance. RSA argued successfully in court that these costs were outside the scope of its public liability cover.

WHEN REGULATIONS TAKE EFFECT

The ELD will be brought into force through separate regulations for England and Wales, Northern Ireland and Scotland. The governments in these countries are at different stages in making their regulations.

ENGLAND AND WALES

- A consultation on the draft ELD regulations for England and Wales closed for responses on 27 May 2008.

- An overview of the ELD and information on the progress of the proposed regulations for England and Wales are available on the Defra website.

- Defra - Environmental Liability Directive 2004/35/EC

- The government in England intends to make final the regulations, called the Environmental Damage (Prevention and Remediation) Regulations 2009, effective as of 1 March 2009.

- The Welsh Assembly government will be making broadly similar regulations for Wales, expected to come into force a month or two after the regulations in England.

- In England and Wales, the ELD competent authority will be the Environment Agency.

NORTHERN IRELAND

- The Department of the Environment Northern Ireland aims to launch a public consultation on the content of the regulations around February 2009. The consultation will include options on how the ELD will be enforced.

- The regulations will be called the Environmental Liability (Prevention and Remediation) (Northern Ireland) Regulations 2009 and are expected to come into operation in summer/autumn 2009.

- These new regulations will also bring land contamination law into force for the first time in Northern Ireland.

SCOTLAND

- A second public consultation on ELD regulations for Scotland closed in August 2008.

- The consultation document contains a copy of the regulations, which will be called the Environmental Damage (Prevention and Remediation) (Scotland) Regulations. They are likely to come into force in early 2009.

- The consultation document also includes a 'quick guide' to the proposed roles, obligations and procedures supporting the regulations.

- Scottish Government: Environmental Liability (Prevention and Remediation) (Scotland) Regulations 2008: A Quick Guide: In Scotland, the main ELD competent authorities will be:

- Scottish Natural Heritage for protected species or natural habitats other than in the marine environment.

- SEPA for water (up to three nautical miles offshore) and land within permitted sites.

- Scottish Ministers for protected species or natural habitats in the marine environment. (www.defra.com).

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