Despite it providing the potential for conflict, Mike Marston asks why brokers have failed to fully understand the implications of the Environmental Damage (Prevention and Remediation) Regulations 2009.
Many brokers have failed to grasp the impact of the Environmental Damage (Prevention and Remediation) Regulations 2009, which could not only leave their clients uninsured but also leave the broker liable to claims under their professional indemnity insurance.
As Post highlighted in October 2009, there is the potential for conflict between property owners, their insurers and the regulators over who may be responsible for the clean up of contamination beyond that covered by traditional insurance policies.
The introduction of the new regulations last year has made the understanding of environmental damage risk, for both broker and client, a higher priority than ever before. Brokers need to be aware of the changes that have taken place in the legislation. As environmental damage is deemed to fall under criminal rather than civil law, that exposes clients to the potential of heavy fines or imprisonment, and brokers to action from clients for failing to advise that cover for environmental liabilities is limited under standard policies.
Experience suggests that since the legislation came into force last year, too few brokers have really grasped what the impact of the legislation is. It is now incumbent on the broker to ensure their client understands the limitations of the environmental liabilities in a standard policy and, if necessary, to ensure they have highlighted where an environmental impairment policy would be applicable.
Emphasis on brokers
The legislation has placed an emphasis on brokers to make sure that they are offering the best and most accurate advice to clients and, in doing so, ensuring their clients are protecting themselves against the new legislation.
If the broker does not inform its client that the standard cover is inadequate then it could well open itself up to a PI claim should an incident occur and the client believes, until then, that they were covered under the standard policy.
For the broker to understand the exact nature of the policy cover means not only being protected against a possible PI claim but it also opens up a new business opportunity with the sale of an impairment policy.
Brokers also need to look at their clients' properties in a different way. Whereas everyone is used to looking at premises in terms of risk of fire, flood or vandalism it is now necessary to look beyond that. They should be considering to what extent an incident could affect the surrounding environment. For instance, are any chemicals stored on site that could leak and have the potential to cause damage?
The most susceptible to the changes in legislation are companies that have a nationwide network of outlets. While it is easy to consider the key risks in inner city areas where theft and fire might be the overriding concerns, it is those sites previously considered to be low-risk, likely to be in rural locations or near a site of special scientific interest, where real concern exists that environmental liability could arise.
The question to ask clients is whether they have a plan in place that can be implemented should an incident occur, such as the leakage of a chemical. Is there a spill-kit easily to hand, for example, to minimise the impact? Do they know what the run-off area is likely to be and could it affect adjacent habitats? Being able to respond quickly when an incident happens will help to reduce environmental damage and help in mitigation in any future legal action.
Under the new legislation, a standard policy no longer provides sufficient cover for environmental damage. It really is the responsibility of the broker to highlight these issues and, if necessary, recommend to their client that they seek the advice of a risk manager.
One current case highlights just how easy it is for clients to be caught in a place where they are liable for ongoing costs, which could have been avoided by simply understanding what they were covered for.
The failure of an oil storage tank led to contamination of adjacent agricultural land and local water courses. The Environment Agency became involved and discussed potential methods of remediation. When the area was surveyed it was found to be home to a colony of great crested newts. This fact meant that Natural England, the regulator with responsibility for ensuring the natural environment is protected and improved, became involved.
It required a newt population survey to be carried out, and then a licence was needed before any work could be undertaken that might disturb the newts. It takes a minimum of three months to obtain the licence but, due to the newt breeding season, once the licence is granted it will be too late to do anything this year. In the meantime, work is restricted to that which simply stops the contamination spreading. The additional cost due to the new legislation so far is more than £10 000 — and the longer the delay in being able to take action, the more the costs will rise.
Feeling the impact
This is the type of incident that could happen to any company and, obviously, it is the smaller companies that would feel the impact more. So it is vitally important that brokers make their clients aware of the issues and the fact that reliance on a standard policy will leave them exposed to onerous liabilities as well as extensive costs in the event of environmental damage.
One interesting quirk of the new legislation is that remediation might not take place where the incident occurs. If the damage means that remediation cannot return the area to the pre-incident condition, a location that requires similar action — which could be on the other side of the country — becomes the responsibility of the polluter.
What all of this proves is that if the broker takes the time to make the client more aware of the risks they face, then the broker is providing a service which should protect them against professional indemnity claims, while being an effective way of winning new business.
Are brokers waking up to the issue of environmental liability?
Mike Marston is the principal specialist of environmental solutions at Cunningham Lindsey
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