New liabilities

On March 1 the UK’s Environment Agency and local authorities were handed new powers to punish companies that pollute and cause damage to the natural environment.

The new powers require organisations to prevent or remedy harm to natural resources. The aim is to prevent environmental damage by forcing the polluter to pay for prevention and remediation costs.

The laws—called the Environmental Damage (Prevention and Remediation) Regulations 2009—are a transposition of the European Environmental Liability Directive (ELD). The UK, which failed to meet the original transposition deadline, now joins other European states, including Spain, Germany, France and Italy, who have passed the legislation.

The regulations require action in response to damage to species and habitats, damage to water and risks to human health from contamination of land. The marine environment is protected by different laws. And the rules do not apply to emissions or incidents that took place before March 1.

The Department for the Environment, Food and Rural Affairs stressed the regulations were an effort to ensure action is taken to put damage right rather than to penalise those responsible. However the liabilities which the laws create could impose huge cleanup costs on polluters.

The problem arises around a new approach to remediating environmental damage. The law requires that measures are taken to return the environment to the condition it was in before the pollution occurred. If that is not possible, if a particular indigenous species has been wiped out altogether for instance, the law says the polluter has to ‘make amends’. Exactly what constitutes making amends is not yet clear. How does a regulator quantify the intrinsic value of a species that has been wiped off the face of the earth for ever? Even so, the polluter may be required to pay the cleanup costs claimed by the enforcing authority in relation to the environmental damage. Companies that have operations in sensitive ecosystems, areas of high biodiversity or near sites of special scientific interest are at greatest risk.

Considering the costs that the new liabilities imply, companies might want to audit their sites to make sure they are carrying out sufficient safety and risk mitigation activities. However, if during its investigation a company uncovers environmental damage, or the threat of damage, it is required by law to disclose that to the authorities. Previously operators only had to disclose environmental damage if there was a specific requirement in an environmental permit, explained Angela Mouton, environmental lawyer with Lovells. For that reason, and because there are plenty of other things to be worried about at the moment besides the environment, the new law is unlikely to prompt a flurry of environmental audits around the UK.

But ‘innocence may not be a defence,’ said Caroline May, head of the environment, planning and health and safety practice at Norton Rose LLP. ‘It will be essential for business plans to include environmental assessments and for the scope and content of compliance audits to be reviewed.’

‘The environmental audit will be a critical consideration in the context of pre-acquisition environmental due diligence,’ added Mouton.

Some environmental insurers sell products designed to cover the new liabilities, but the ambiguity over the type of remediation means it is hard for them to cover the costs with complete certainty. ‘Commentators are already suggesting that the ELD is not presently adequately provided for under general liability insurance coverage or specialist environmental impairment liability coverage,’ said Michael Salau, an environmental partner with Berrymans Lace Mawer.

‘Insurance and risk managers should be reviewing their policy coverage to ensure that they have adequate cover. It may be that consideration should be given to purchasing a stand alone environmental liability directive solution to provide for the extended liabilities under the directive,’ he added.

In some jurisdictions the transposition authorities have included a mandatory requirement for operators to buy financial security for environmental liabilities. But in the UK the emphasis is on ‘proactively putting in place appropriate pollution prevention measures to reduce risks to the environment’.

‘Those running businesses and other operations can reduce the likelihood of ever being caught by the regulations‘ requirements by minimising risks to natural resources,’ said the law.

'The new law is likely to heighten the onus to monitor activity that can cause environmental damage and may impact pollution insurance premiums,' noted Mehran Massih, environmental counsel, Shearman & Sterling.

Risk managers will need to consider whether their current insurance policies cover the increased risk of environmental liability. ‘Claims by the regulator, losses arising from gradual pollution and those relating to compensatory remediation are generally excluded from Public Liability insurance,’ noted Mouton.

The case of Bartoline Limited v Royal & Sun Alliance Insurance demonstrated the limitations of public liability policies in the context of environmental damage. In light of this case and new regulations in Europe the insurance industry has begun to respond with specialist environmental insurance.

‘To address these issues [the insurance industry] will require some certainty as to how the authorities will apply a value to a damaged environmental resource, the level of remediation that authorities will require, and the likelihood of successful appeals against notices of liability for remediation,’ added Mouton.