Broker survey reveals European risk managers lulled into false sense of security over environmental risk

European risk managers have been warned not to ignore environmental risk as new legislation could hold companies liable for unprecedented clean up costs and restoration of environmental damage.

The warning comes from global broker Aon as findings from its annual risk survey reveal that Environmental risk ranked lower as a concern in Europe than any other region—despite the introduction of the EU Environmental Liability Directive (ELD).

The call to arms comes ahead of the Federation of European Risk Management Associations (FERMA) conference in Prague.

Simon Johnson, Aon’s environmental director for UK and EMEA, said: ‘There is a common misconception that the ELD is just about ongoing operational pollution issues. The reality is the ELD significantly increases liability in the EU for operators that cause environmental damage, regardless of how that damage is caused. The fact that environmental risk ranked 32 as a concern in the survey is worrying because risk managers are seemingly lulled into a false sense of security, believing they have no exposure or their pollution strategies are under control.’

He added: ‘This ignores exposure to the impact an unpredictable one-off event on the environment could have on the balance sheet. It’s about preparing for the low frequency, high severity event by having insurance in place that covers all the risks, damages and losses that could occur.’

Case study

Riverside factory pollution

A riverside factory operation catches fire due to an electrical fault. The debris from the fire spreads to the river and poisons the local fish supply damaging the aquatic environment. The ELD, which became law in 2007 across the EU, requires companies that cause environmental damage to restore the environment to its previous condition. In this case, the operator of the facility would have to pay for the clean up of the area and restoration of the damage caused including replenishing the fish stocks and re-establishing the aquatic environment. This represents a potential and significant gap for European companies and subsidiaries under their existing general liability policies. In response to the legislation, the insurance market offers environmental liability programmes and cover for such damages, costs and losses.

While there is a minimum legal transposition of the ELD, some countries have taken this further by introducing compulsory financial security arrangements for the riskiest operators in industries such as chemical production and waste management. Spain has set the precedent and the Czech Republic is set to follow in 2012.

Simon Johnson, Aon’s environmental director for UK and EMEA, said: “Risk managers need to review the ELD and their operations in relation to their insurance programmes as there will be gaps. US companies with European subsidiaries are becoming increasingly aware of their potential exposures and in turn we’ve seen a higher take up for environmental liability insurance. We’re encouraging European risk managers to adopt a similar strategy in protecting against uninsured environmental damage.”

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