Environmental liability - Toxic sludge: No fudge over sludge


The recent high profile toxic sludge incident in Hungary has been described as a 'tragedy' by the country's government. Ralph Savage reports how experts from the rural insurance and legal communities and further afield are assessing the situation.

Full production restarted at the MAL Zrt aluminium processing plant in Ajka, Hungary, on 17 October — 13 days after a disaster that saw between 600 000m3 and 700 000m3 of toxic red aluminium sludge escape from one of its waste reservoirs when a dam wall failed and eight people were killed.

In the intervening period, the company issued official statements emphasising its wish to co-operate fully with the competent authorities in the clean up and also that its operations had been inspected and conformed with various regulations. MAL Zrt's press department received a number of enquiries for this article, but failed to respond by the time of going to press.

Its 'communiqués' have appeared on a regular basis, one assumes in response to the huge volume of media speculation around the event with TV, press and bloggers ruminating on the disaster in every conceivable way. However, the speculative aspects of this story offer context to some of the issues concerning environmentalists and will also interest the insurers and lawyers eyeing the exposures of industries across the European Union.

On 8 October, the WWF circulated photographs taken in June that suggested Deposit Pool #10 may have been leaking at that time; while two days earlier, news emerged that Allianz had underwritten the company's general liability policy for the plant, allegedly with a limit of only ‚Ǩ37 000 (£32 000) for any environmental third party liability. Allianz has since confirmed that its Hungarian subsidiary did write the policy, but has refused to detail the coverage limits.

MAL Zrt reacted with the following statement on 7 October: "Disaffirming certain press information, MAL Zrt deems it essential to announce that it has liability insurance both for the damages in its own assets and for impacts caused by environmental pollution."

Despite the protests, the National Inspectorate for Environment, Nature and Water — which is responsible for implementing the 2004 Environmental Liability Directive in Hungary, and is the 'competent authority' under European Commission regulations — placed MAL Zrt under state control on 12 October. In a further twist, three directors of the company have been questioned by the Hungarian National Bureau of Investigation. These include its managing director Zolt√°n Bakonyi — one of the country's richest men — who is suspected on criminal charges of public endangerment leading to mass fatalities and harming the environment.

The Hungarian Secretariat of Government Communications reported that, "Zolt√°n Bakonyi made a statement to the investigating authority, though he also protested both at being taken into custody and being identified as a suspect".

On the issue of nationalisation, Dr Zoltan Nasdady, attorney at law with the Budapest-based office of law firm Kanzlei Noerr & Partner, says encouragement of moral hazard by this state intervention is inconclusive: "Nationalisation is a wide term. The ownership of the company hasn't been taken over by the state; only the management for an interim period. This is based on laws that are implemented to avoid any further problems occurring in terms of damage to the environment."

Extent of the damage

The extent of the environmental damage caused by the spill is still unclear despite weeks having passed. Initial fears that the toxins — a mixture of residues from bauxite and sodium hydroxide solution — may enter the local river system have been confirmed. However, no deviations in the pH level of the mighty river Danube, which passes through seven neighbouring countries after Hungary before draining into the Black Sea, have been reported — indicating that the worst fears are still a matter of speculation.

The Hungarian interpretation of the 2004 ELD is literal by all accounts, with the country having far less existing environmental legislation to complicate things than is the case in the UK or other parts of Western Europe. "The party that caused the loss (pollution) is liable and this also extends to the owners and directors and officers of the company," says Dr Nasdady. "Should the company be dissolved, these persons remain liable unlimited, jointly and severally for reinstatement and compensation costs that have not been paid by the company."

Emotions run high on issues like this and Dr Nasdady admits that the Hungarian government could foot the bill for the pollution if the above routes to redress fail. Meanwhile, for those responsible for risk management at Hungary's biggest companies, the catastrophe has understandably created a surge of interest in potential environmental exposures.

Inadequate protection

Broker Aon had coincidentally scheduled an event just two weeks after the spill in Budapest to promote the value of environmental liability insurances. Here, speakers including Gabor Kovacs, property and liability director at insurer Chartis, highlighted that most insurance policies are not suitable to provide protection in the event of a complex environmental pollution.

He told an audience of 50 people from Hungary's manufacturing, transport and heavy industrial sectors: "This is particularly true when continuous pollution takes place and when loss or damage is caused to nature, to plants and animals. The view of Hungarian liability insurances looks quite sad; it shows that when companies have insurance, the limits of liability are very low, covers are narrow and in most cases only accidental loss or damage is covered. As long as nothing happens, companies pursue an ostrich policy."

Hungary's local market is reasonably sophisticated, with brokers like Aon, operating five offices across the country, which place primary business on the domestic market and excess lines across Europe. Alan Dobson, director at Questgates' environmental claims division, says that to the extent to which the Hungarian regulators use their powers under the ELD to force those responsible for the incident to pay, will be seen by the environmental insurance market as a barometer of how effective the directive is, presumably inducing a fear factor among risk managers. "This will directly impact any subsequent take up of cover in the market going forward to protect against incidents of this nature," he says.

True nature of exposures

Simon Johnson, Aon Risk Solutions' environmental director for the UK, Europe, Middle East and Africa, adds that data that can show industry the true nature of its exposures under the ELD is required. "A French government report produced in April used real events in that country and showed what the cost to business owners was under the old regime and what it would be now," he says.

Indeed, Report 19 by the Commissariat General au Development Durable, a division of the French Ministry of Ecology, Energy and Sustainable Development detailed how on 6 August 1996, a fire at small manufacturer resulted in the discharge of 450m3 of water, which polluted three local rivers. By applying the methods of equivalence, it estimated a total cost of restoration under the ELD would have amounted to approximately €4m, against just over €10 000 before.

And yet the European Commission appears nonplussed by its regulations so far. It announced on 12 October that there was still insufficient data to draw reliable conclusions on the effectiveness of the ELD and, secondly, that a lack of practical experience in the application of the ELD meant that no justification could be given for imposing mandatory financial security.

Nevertheless, Dr Nasdady is confident that Hungary's newly elected government under Prime Minister Victor Orban will encourage the 'polluter pays' principle. "The previous government already drafted the rules on environmental liability and financial security, and this is a sign that everything is in place even if the new administration has not implemented it [financial security] so far. Yes, we believe the government is serious about using the ELD."

The pressure on Hungary to meet its obli- gations under environmental law and to appear eco-friendly to the watching world is palpable. One expert points out that the non-fault liability aspect of the ELD means it exists more as a cost recovery tool following clean-up and could take second place to other litigation.

Robin Slabbink, a specialist environmental lawyer at Belgian firm LDR was involved in the drafting of the ELD onto that country's statute book. "I have the impression the ELD is not yet well known," he says. "In Belgium, for example, a water pollution incident happened and the authorities started a juridical procedure based on fault liability. Afterwards, they can recover the costs on the operator based on the ELD."

Another major concern following the MAL Zrt incident is the potential for cross border pollution. As yet the Danube has not suffered from the deluge of red sludge, but cross-border incidents have occurred previously, with neighbouring Romania a notable culprit. The Baia Mare incident in 2000 involved a spill of 100 000 tonnes of cyanide-laced waters from a gold mine reservoir leading to a massive kill-off of fish in a local river that flowed into Hungary.

ELD article 15 carries provisions concerning "co-operation between member states" for a clean-up, but this incident saw wider discussion and the creation of the Kiev Liability Protocol. This agreement on civil liability and compensation for damage caused by the transboundary effects of industrial accidents sets out a framework for the polluter pays principle beyond the boundaries of the EU.

Ironically, of the 56 countries — including the UK, US, EU states and many more —that debated the protocol in 2003, only one — Hungary — has ratified it. "Litigation with non-EU countries, based on fault, is possible," says Mr Slabbink ominously.

There is no doubt that the Hungarian authorities have so far demonstrated an open and transparent approach to dealing with the incident at MAL Zrt. This is illustrated by its development of the redsludge.bm.hu website, which is published in English and provides detailed updates on the containment and restoration project, as well as details of the bank account for the disaster relief fund that had generated around £400 000 in donations at the time of going to press.

Such an approach is apparently necessary if it wants to counter the inevitable scepticism that it will face. "This is the only incident of significance reported in the Western press," says Mr Dobson. "The plant in Hungary appears to represent just one of many poorly maintained mining waste stock piles believed to be present in Eastern Europe."

"I suspect this will go down as another very unfortunate incident in this particular industry and location, probably operating — with the best will in the world — to some outmoded Soviet technology that hadn't been brought up to standard," adds Tony Lennon, European manager of Chubb Environmental Solutions.

Challenging markets

It is pretty clear, however, that MAL Zrt will face a significant uninsured liability in relation to the ELD if Hungary's authorities live up to their promise and impose polluter pays. As Dr Nasdady points out, Hungarian law allows the competent authorities to pursue its directors for the costs of cleaning up after the disaster and this raises an interesting question regarding the status of industries in the Eastern Bloc, where ownership may be in the hands of individuals — oligarchs, to coin a phrase.

Robin Lince, a senior associate at law firm Reynolds Porter Chamberlain, considers the implications: "Non-EU and Eastern Bloc countries are interesting and potentially challenging markets where influence of oligarchs is more pronounced, particularly in countries such as Russia and the Ukraine. Whether or not claimants can, in principle, pursue wealthy individuals who have the ultimate control of enterprises depends on the extent to which local law allows claimants to pursue claims not just against the company concerned but its directors and/or shareholders — for example, where there is evidence of misconduct; and the local political environment.

"However, most of these countries recognise the corporate veil and do not allow claims to be made against the shareholder, no matter how powerful. In practice, if the company does not have the assets or insurance to meet liabilities, political pressure might be placed on wealthy owners — depending, of course, on the prevailing political climate."

The current Hungarian administration is well known for whipping up negative sentiment against the super rich, so there is some confidence in the possibility of a major pursuit of Messrs Bakonyi et al. However, it does seem unlikely that oligarchs will one day be offered insurance to protect their personal exposure as the controlling shareholder of a company.

Putting all speculation aside, a gap in exposure appears to be widening for these old industries amid scepticism about how capable countries like Hungary are at both mitigating risk and holding their corporate citizens to account. Environmental insurers are likely to dabble in these markets with increasing care from now on.

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