Clarifying the issues

With the Department for Environment, Food and Rural Affairs remaining tight-lipped about industry feedback on its Environmental Liability Directive, Veronica Cowan investigates the issues still clouded in confusion

What do the British Marine Federation, the Wildfowl and Wetlands Trust, the Gin and Vodka Association and several hundred local authorities have in common? They all feature among the 997 organisations that have provided input for the Department for Environment, Food and Rural Affairs' consultation on implementing the Environmental Liability Directive. The consultation closed on 28 February, but a spokeswoman for Defra refuses to comment on the size or nature of the response, simply remarking: "I can't say as the responses are still being analysed."

Defra may not want to reveal the outcome, but it will have to tell the Environment, Food and Rural Affairs Committee, which has fuelled interest in the way Defra is handling the directive's implementation by announcing a new style of inquiry (see box p28). And the committee is not interested in recycled comment - submissions must be original, and not previously published or circulated elsewhere, so that it starts with a clean sheet.

The ELD's incorporation into UK national law has been a cloud on the horizon for some time, but don't expect the fog to clear by the 30 April deadline, as Defra looks set to miss the implementation target. "We won't hit that date," confirms its spokeswoman. "It is not ideal that it will not be in, but it is more important to get it right than to get it out quick."

Hopefully the European Commission takes a similarly phlegmatic view. If a member state fails to implement a directive properly within the timescale set out, the EC can take action against that state for the infringement. "We are looking towards the summer for the draft regulations, and are working with the Commission to make sure it minimises issues around the transposition," reports Defra's spokeswoman.

Defra has already been criticised for delaying consultation and giving the ELD little profile, although some insurers are careful not to criticise the government department. Phil Bell, Royal and Sun Alliance's group casualty director, comments: "I suppose people with a specific interest in the environment might be critical, but insurers are not as we have been kept in the loop, and most countries are missing the deadline."

Playing the game

That is hardly a recommendation for not complying with European law, and Italy, Lithuania, Spain and Austria are ahead of the game, although Italy's position is not totally clear. Tony Lennon, European manager for Chubb Environmental Solutions, explains: "These countries perceive the ELD in a positive way, while, in the UK, it is seen as negative."

He believes the government could do more to raise awareness, and is critical of its refusal to consider the use of any financial provision, even to the extent of requiring operators to assess their potential liability and how they might finance meeting it. "Defra should force them to show financial provision to comply with its obligations by 2010," he says.

Mr Lennon adds that a recent review revealed that only 14% of small to medium-sized enterprises could mention relevant environmental legislation.

Mr Bell does not believe Defra is playing down the significance of the ELD, although Robert Martin, director of environmental consulting and solutions at Aon, takes a different view: "In discussions with Defra, both the British Insurance Brokers' Association and Aon asked to be notified about when the regional meetings on the first round of consultations were to be held, so they could encourage participation. This was not done, resulting in poor attendance." He claims that this supports the argument that Defra was aiming to keep the consultation low key, especially since the consultation period spanned the Christmas holidays.

However, the mist appears to have cleared in terms of getting the message through about insurance implications, if the Willis environmental report - published on 23 March - is anything to go by. This found environmental insurers reporting an increase of up to 100% in the number of policies placed in 2006 compared to the previous year. Mergers and acquisitions remain a major driver for the uptake of specific environmental impairment insurance, but there has also been a large increase in uptake for operational risks, especially among SMEs.

In addition, the haze of uncertainty around what is and is not covered by existing environmental cover has been cleared up - to a degree - by Bartoline v Royal and Sun Alliance (2006). The judge found in favour of the insurer's repudiation of liability in respect of statutory clean-up costs by the Environment Agency, after foam and chemical pollutants entered two water courses following a fire.

The judge concluded that Bartoline's liability to reimburse the EA was not capable of being a "legal liability for damages" within the meaning of the public liability policy in question. A liability to reimburse or compensate another party arising from statute, rather than in consequence of a tortious act, is a debt. Although an unpaid debt is capable of becoming a claim for damages, this was not the situation here.

Dominic Thomas, partner at Davies Lavery, comments: "The case underlined what we thought to be the position - that, under a PL policy, there has to be a quantified claim for a wrong sustained." He adds that the result would be the same after the ELD comes in, given that it empowers relevant authorities to remediate and claim the costs from a polluter.

In this scenario, notes Mr Thomas, the fact that most PL policies exclude historic contamination almost becomes irrelevant, since the ELD is not about historic contamination. However, Bartoline confirms that third-party clean-up costs imposed or carried out by a public authority are not contemplated by this particular PL policy wording. He says the case is "clarification as to why public liability policies don't apply, and will help people to accept they need a bolt-on to such a policy".

Bartoline has been appealed and - failing a policy decision by the appellate court - it is unlikely to be reversed, says Mr Thomas. It should give a boost to the sale of specific environmental policies, if only because it spells out the limitations of PL policies with regard to environmental exposures.

That said, PL policies differ in terms of the language used, and Paul Taverner, partner at Bevan Brittan, says he has "heard, anecdotally, that some insurers are saying they would have accepted the clean-up costs under the wording of their PL policies".

David Simpson, vice-president of environmental at XL Insurance, also stresses that Bartoline was on one type of wording, and each case will turn on the precise wording of the indemnity clause in the policy concerned.

Warning to insureds

Mr Martin sees the "debate on this technical nicety" as a distraction from the important issue - that Bartoline highlights the fact that the policyholder believed there was cover under the clause and it was found that there was not. "Rather than being drawn into the specifics, this should be viewed as a warning to insureds not to rely on pollution clauses in non-environmental-specific policies for specific pollution cover," he says.

For her part, Valerie Fogleman, a consultant at law firm Lovells, believes it is time to introduce absolute pollution exclusions in PL policies, so firms know where they are and understand that they have to cover environmental liabilities by a bespoke environmental policy.

As to the other implications of the UK missing the deadline for implementing the ELD - notwithstanding that directives do not automatically become part of the domestic law but require implementation by legislation - an individual can rely on a directive against a body that carries out a public service under the control of the state or that has, for that purpose, special powers.

In certain circumstances, someone who cannot exercise that right, but is adversely affected by the non-implementation, may have an alternative right of redress, known as a 'Francovich' claim against the state for compensation. This is to discourage member states from delaying implementation of directives, although such claims are rarely made. The 'direct effect' principle means an individual can rely on a directive to claim rights in a national court when the directive itself has not been implemented, or not implemented properly, into national law.

However, Ms Fogleman does not believe it applies in this case. Instead, she claims that article 17 of the ELD provides that it shall not apply to damage caused by an emission, event or incident that took place before 30 April 2007, or subsequent to that date when it derives from a specific activity that took place, and which finished before the said date.

She says: "I would argue that this language strongly implies that an operator who causes environmental damage after 30 April 2007 will be liable under the ELD. In other words, the operator will be liable for remediating the damage (including the interim costs for the loss of the damaged natural resource to the public, and other natural resources from the date of the damage until its full restoration) regardless of whether a member state has enacted domestic legislation to transpose the ELD at the time of the damage."

Remediation

As to the ELD itself, one provision relates to compensatory remediation for lost ecological function if primary remediation is not possible. This could entail restoring a damaged natural resource at another site, which will be almost impossible to insure, according to Mike Marston, principal environmental specialist at Cunningham Lindsey. "With alternative remediation, insurers would not know where it will be, and there could be logistical problems if it is far away. It is not clear who selects the alternative site, and ecology differs in different parts of the country," he says.

However, Mr Simpson sees compensatory remediation as potentially insurable, and draws on XL's experience in the US: "Because there are no prescriptive rules for this, it is difficult to get a sense of how it will pan out, but if clients have an insurance issue, XL will try to cover it."

He also disagrees with Aon's suggestion that an environmental equivalent of Pool Re should be considered (Post, 1 February, p1): "We don't need a Pool Re as there is a specialist insurance market that is robust."

On the issue of compulsion, Mr Bell does not believe there is sufficient capacity yet to give the necessary competition: "We are a long way from a proper market. These are niche products, but there will only be competition when environmental cover is mainstream."

Operators will certainly have to take their environmental responsibilities seriously or face fines of up to £1.5m - and directors could face up to 10 years in jail - under the latest European proposals for a directive on environmental crime (see box p27). This requires member states to criminalise a variety of environmental breaches.

Mr Martin concludes: "The press coverage on the ELD should be viewed by industry and commerce as a wake-up call to adopt environmental risk management as a core element of their corporate governance procedures now - before the avalanche overwhelms them."

DIRECTIVE ON ENVIRONMENTAL CRIME

The definition of environmental crimes varies in each member state and, in many, the sanctions are inadequate. The proposed directive aims to ensure a consistent minimum level of protection of the environment under criminal law throughout the European Union.

Offences will include emission of hazardous substances and illegal discharge, transport or storage of waste resulting in substantial damage to air, soil, water, animals or plants; and operation of a plant in which a dangerous activity is carried out or dangerous substances are stored.

Member states will be required to apply effective, proportionate and dissuasive criminal sanctions against all individuals committing these offences, including company directors, with company fines and jail terms for directors where death or serious injury results from intentional or serious negligent conduct. Member states will be required to ensure a range of activities - such as unlawful trade in endangered species or in ozone-depleting substances already prohibited by EU or national legislation - are considered criminal offences when committed intentionally or with serious negligence.


IMPLEMENTATION OF THE ENVIRONMENTAL LIABILITY DIRECTIVE

The cross-party Environment, Food and Rural Affairs Committee's new style of inquiry into the implementation of the Environmental Liability Directive, announced on 22 March and chaired by Michael Jack MP (Conservative), will consider:

- Defra's consultations since it was adopted in 2004; with whom, and whether it has listened to consultees' views;

- Why Defra has taken so long to consult formally on the ELD;

- Whether any important questions were omitted from the formal consultation;

- What discretion member states have in implementation of the ELD;

- Which other member states will be imposing strict liability to a wider range of activities than Defra is;

- Why the government is proposing to limit the scope of the ELD to EU-protected biodiversity, and which Sites of Special Scientific Interest would be affected;

- Timescale for implementation;

- Submissions of no more than 1000 words - which had to be sent in by 17 April.

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