Cleaning up after ourselves

No company operating, or with subsidiaries, in Europe, can afford to ignore the European Union (EU) Directive on environmental liability (2004/35/FC) now ratified and incorporated into the legislation of all 27 member states. The directive establishes a common, Europe-wide framework for liability, and seeks to prevent and remedy damage to biodiversity: animals, plants, natural habitats and water resources, and damage affecting the land. If you cause environmental damage, often regardless of fault, you will have to pay – and not just for the clean-up, but to repair, reinstate and monitor the environmental status quo as well.

Background

The EU has always taken seriously its role as the ultimate protector of the rich and diverse natural environment of Europe, adopting a substantial range of measures aimed at improving environmental quality, while nurturing a high a standard of living. The European Commission (EC) has worked determinedly to ensure that national environmental, legal and regulatory authorities develop enforcement structures and best practices, and that EU environmental legislation is implemented in full, correctly and on time. France, for example, received a fine for late ratification of the environmental liability directive.

It is up to companies to ensure that they are aware of the exact liabilities that apply wherever they do business. ACE has evidence that many companies are still unaware of the extent and complexity of these potential liabilities and their new responsibilities as operators. The Directive was designed to complement existing national legislation and international conventions, with options available. Consequently, it has affected the legislative landscape of each Member State in a different way. In many countries, particularly in Eastern Europe, there have been major changes. In Italy, by contrast, the impact has not been as high, because the country already had similar environmental laws. In Germany, many environmental regulations are applied at federal state (Länder) level, rather than from Berlin, and therefore differ within the country. So, while the directive has created a more homogenous approach across Europe, significant differences remain in its precise local application. The directive does not apply retrospectively before 30 April 2007. However, any damage that occurs now, and is not immediately noticed, will incur a liability to whoever caused it for 30 years.

Beyond the polluter pays

During the 1990s, the EU took inspiration from the latest developments in the US and put the ‘polluter pays’ principle firmly at the heart of the European directive. But the EU wanted to go further than just putting a price on environmental damage. A holistic approach developed, founded on a philosophy of maintaining a overall balance in the environment across Europe. The fundamental principle would be to ensure that the polluter not only repaired any damage, but also implemented measures that would maintain the existing global biodiversity of the environment, keeping the polluter involved and substantially increasing the potential liability.

In the case of severe pollution damage that could not be repaired on site (for example a local eco system that had completely broken down, or a protected species that was wiped out), the polluter would have to make an equivalent contribution to restore and improve a damaged environmental situation at another site. In one of the first cases to which the Directive was applied, the developers of a golf club in the Czech Republic dried out a pond which had been the habitat of a protected species of frog. As the damage could never again be repaired on that site, the company responsible had to make an equivalent contribution on another pond: effectively they had to perform the water clean-up elsewhere.

Establishing liability

According to the EU, “For liability to be effective, polluters must be clearly identifiable. This means that potential polluters must know that they can be held financially liable; only this will induce them to be careful” (Memo/07/157). Based on the polluter pays principle, according to the directive, a link must always be established between any environmental damage and its source. It is up to the local environmental agency to prove the link and to instruct the operator to quantify the damage and to propose remedial actions. These public authorities play an increasingly important role following the directive. It is their duty to identify liable polluters and to ensure that they undertake or finance the necessary preventative and remedial measures. Public interest groups, such as non-governmental organisations, may also require public authorities to act and to challenge decisions in court, and expectations are that they will be active in revealing situations that could be considered as environmental damage.

The directive provides for two distinct, complementary liability regimes. The first applies to operators who professionally conduct risky or potentially risky activities such as industrial and agricultural activities requiring permits under the 1996 Integrated Pollution Prevention and Control Directive (IPPC), waste management operations, the release of pollutants into water or into the air, the production, storage, use and release of dangerous chemicals, and the transport, use and release of genetically modified organisms. For these companies, with very few specified exceptions, fault plays little role: any organisation proved to be the source of the pollution, is liable, whether or not all statutory safety and risk protection regulations were followed. The only reasonable defences a polluter may invoke include environmental damage caused by force majeure, such as storms and armed conflict. Maritime oil disasters and nuclear accidents remain covered by international liability regimes, rather than the directive.

The second liability regime applies to all other professional activities. An operator will only be held liable if at fault or negligent, and has caused damage to species and natural habitats protected at EU level under the 1992 Habitats and 1979 Birds Directives.

A case illustrating the potential severity of no-fault under the first liability regime occurred in February 2010 when an act of sabotage at an Italian oil depot caused a spill of an estimated 2.5m litres of oil into a tributary of the Po, Italy’s longest river. Environmentalists quickly reported that several water and bird species were at risk and severe ecological damage to vegetation and fauna. Communities along the river requested emergency funds from regional government to help with containment. The effects will last long after the clean-up, as the Po valley is the most important agricultural region in Italy, and the river is used extensively for irrigation. If the regulator concludes the sabotage was not terrorism (force majeure) or the operator failed in prevention and keeping the site secure, it will be liable for all costs and a financial involvement in the environment, potentially, many years into the future.

Quantifying cost

There are still relatively few incidents on which to assess the potential exposure and financial liability a company may face. The above case illustrates the potential magnitude of an environmental disaster which would cripple a company if it failed to make adequate financial or insurance provision. In August 2009, a pipeline ruptured in a protected natural area of France. By 2010 costs already ran into millions of euros and continue to rise. It is important to note that liability does not end with the clean-up. These disasters have a potential long tail: monitoring of the damaged area may be required long into the future as the environmental agency seeks to establish that the environment is indeed recovering.

The directive was designed to complement civil law and does not envisage compensation to members of the public. Though its prime purpose is to prevent and remedy environmental damage, it contributes to protecting human health through prevention of environmental damage and de-pollution of contaminated sites. If members of the public or their goods and property are affected, they may sue as normal under national civil liability laws. This means an operator may face two separate claims for compensation: from the regulator and through the civil courts.

Making financial provision

Operators are not explicitly required to take out insurance under the directive, a major topic of debate during its evolution. Some member states recognised that there may be alternative ways to build financial reserves, and suitable insurance products were scarce before the directive changed the liability landscape. Since 2007, ACE has been actively developing insurance products that respond to the differing requirements of the directive in each country. The EC will report on the availability of insurance in 2010, and recommend any amendments to the directive. Meanwhile, member states are responding in different ways to the need for operators to make financial provision. On 1 January 2010, the Portuguese government instructed all IPPC operators to put in place appropriate reserves, (specified by themselves), within the month, or organise insurance cover. In Spain, all IPPC operators must carry out a risk assessment of potential environmental liability by April 2010.

What can you do now?

All companies operating in Europe are potentially affected. An environmental disaster can also have a severe negative impact on a brand. First and foremost, every operator must become aware of how the directive applies to them everywhere they do business, bearing in mind differences between, and within, member states. Contact local environmental regulators and do research on the landscape where you are based, or do business. There are databases on the existing quality of soil across Europe, protected species and habitat inventories (eg www.natura.org) and specific Directives for water which relate to the environmental directive. Follow best practice: ensure you are compliant with regulations, and carry out an environmental audit. Implement an environmental management system such as ISO 14 001, EMAS based on the continuous improvement process: plan, do, check, act. Keep informed of industry best practice and new technologies or products to reduce as far as possible the global impact of your operations. Be aware of local environmental and special interest groups and communicate. If you are following industry best practice guidelines, then an open-door policy can reap rewards.

Make financial provision. Talk to your insurance company or broker about the best way to structure this, given the potential high sums and uncertainty around liability limits. Transfer some of your risk to the insurance market. Insurers such as ACE have developed environmental audit and survey expertise and created bespoke insurance solutions for this new, evolving area. Ensure that your insurance provider is a truly global partner because of the international complexity of the legislation. The landscape is constantly changing: new environmental disasters are being reported weekly, and a new directive is planned for 2014.