How to: Understand the ELD

Following the adoption of the environmental liability directive (ELD) in 2004, the story of its implementation by EU member states has been one of delay and procrastination. Only four countries met the 2007 transposition deadline, leading the Commission to open infringement cases against the remaining 23 member states. After 23 letters of formal notice, 16 reasoned opinions and nine court applications, seven member states were condemned by the European Court of Justice for failure to transpose the ELD on time (these being Finland, France, Luxemburg, Slovenia, Greece, Austria and the UK). However, to date the ELD has been transposed by all member states, with the last piece of legislation due to be passed in the Austrian region of Salzburg by the end of April 2010.

Late transposition occurred for a number of reasons. First, most countries had existing legislation covering liabilities for pollution, which proved difficult to incorporate into new texts. Secondly, the introduction of measures dealing with damages to protected habitats was very demanding. Thirdly, in planning national laws and modes of implementation, some countries lacked the capacity to deal with complicated technical or legal aspects relating to exemptions, baseline liability, interim damages and the use of economic tools. Finally, the complexity of the directive meant that the need for public consultation was greater than previously experienced, leading to the frequent extension of deadlines.

One negative result of the delay has been that many smaller operators remain largely unaware of the ELD and its related liabilities. Even if operators are aware of the directive, they are generally not of the opinion that their environmental risks have changed as a result of its implementation and have consequently not changed their practices.

Latest cases

A recent European Commission study into ELD Implementation Efficiency and Related Financial Security Issues reported that only a limited number of ELD cases have so far been identified. Due to the small number of cases reported, the study focused on those that occurred prior to the ELD transposition deadline, but which could have been ELD cases if they had occurred after that date, as well as cases that could potentially have fallen under the ELD but that, for one reason or another, ultimately didn’t.

Preliminary analysis revealed two main trends: one, that the ELD can have an important triggering effect on other environmental legislation and, two, that it has the potential to miss out on cases of significant environmental damage if these are not caused by activities covered under annex III of the directive. The lack of cases means that an assessment of the effectiveness of the directive in terms of actual remediation measures that are taking (or have taken) place is not yet possible.

“We have not seen bad examples of implementation, but we have seen cases not being treated as ELD and treated under other pollution legislation for various reasons,” one Commission official says. “But in general progress [has been] made, even if it is a bit slow.”

Insurance market solutions

Last year’s study gave a positive assessment of the ELD-related insurance market and generally described it as a growing and competitive market, providing good cover for most liabilities under the directive. At this point, further growth of the market is hindered by the lack of interest from operators in this type of product rather than high premiums or the uninsurability of certain liabilities.

“The insurance market is moving. There are a lot of specific products in the EU market already and some companies even provide cover for businesses carrying out operations in more than one country,” a Commission official says. “The financial crisis had a dramatic effect on the ELD product building effort, so we have seen some drawbacks, but I expect that this is already reversing. Insurers have mentioned that this year they have seen a 25% increase in policy sales and much more interest.”

Products covering the full scope of liabilities under the ELD are not generally available. Of those currently on the market, the most frequently named limitations are the exclusion of gradual environmental damage, sub-limits or exclusions for compensatory remediation, and the limitation of cover for environmental damage to damage from ‘pollution’ events. However, as the market gains experience with ELD-related claims, it is anticipated that these limitations will disappear.

Activities most frequently mentioned as not covered include GMO sites, waste management and disposal sites, extractive activities, the use of chemical and other hazardous products in the agricultural sector, and nuclear activities.

“The insurance market has developed several products to help businesses meet their ELD obligations. Most common are third-party liability insurance products with at least partial coverage of ELD liabilities. However, alternative financial security products should still be further developed or better advertised,” the European Commission Environment Directorate’s legal and policy officer, Hans Lopatta, says.

“The biggest problem may be the underdeveloped awareness by operators of their ELD liabilities and the available financial security products and markets. Therefore, awareness raising, with operators but also with brokers, and improving communication between operators, insurance companies and competent authorities are the challenges and the main tasks to be taken up in the near future to improve ELD implementation.

“Developing guidance on the most important challenges and problems, such as economic evaluation of damage, remediation methods and techniques, in particular regarding complementary remediation and compensatory remediation, could also help to improve implementation.”