Preventing pollution

In the last 20 years, environmental liability has risen rapidly up the corporate risk agenda. It isn’t just the large multinationals that are exposed to unlimited fines, heavy clean-up costs and potential compensation payments. Middle-market businesses too should consider the need to manage this risk.

With incidents like the BP oil spill hitting the headlines and reports of multibillion-pound compensation claims, you might be forgiven for thinking that pollution is primarily a problem for the ‘big boys’. But there are plenty of incidents that may not make the national press of smaller companies falling foul of environmental regulations. And the increased amount of environmental regulation that has taken place in recent years makes it much more likely that you could experience a claim.

For many years, all companies have faced liability for ‘nuisance’ under civil law. But the regime became much tougher with the introduction of EU directives, now incorporated in UK law in the Environmental Protection Act, as well as more recent supplementary regulations introduced two years ago.

In addition, there are specific rules relating to perceived high-risk businesses. Without going into the legislation in detail, the key points to remember are:

• The polluter pays. If your business has caused the damage, you are responsible for the costs of remedying it, with very few exceptions.
• If there is a risk of environmental damage from your business activities you must prevent this damage (or further damage if the problem already exists) from occurring.
• Tell the appropriate authority (the Environment Agency, in England) of any risk or damage and follow instructions on prevention and/or remediation.
• Directors may be held personally liable for offences caused with their consent, connivance or neglect.

The implications of causing environmental damage are not just financial. An incident can also damage your reputation, affecting customers’ view of your business and their willingness to deal with you. Some large companies will scrutinise your environmental management policy before doing business with you.

Transferring the risk

There is a common mistaken belief that a public liability insurance policy will cover environmental risks. Unfortunately, this is far from the case. Your public liability insurance provides compensation for your legal liability for third-party property damage or bodily injury. It will also contain an exclusion relating to gradual pollution and restricting cover to sudden accidental and unexpected incidents only.

Even if you have an unexpected incident, your public liability policy will not cover you for any fines relating to environmental liabilities. It won’t pay for remediation costs where you’re required to clean up contamination, as no third-party compensation is involved. Similarly, if you voluntarily agree to pay for clean-up costs, in the absence of legal liability your public liability policy won’t indemnify you.

Some insurers have stepped in, with environmental impairment liability policies offering a range of covers. Environmental impairment liability insurance can cover both on- and off -site risks. It can include:

third-party liability; on-site clean-up costs; off -site clean-up costs; the costs of business interruption should you need to close a site during clean-up; and third-party business interruption costs, as well as legal defence costs. In addition, any day-to-day exposure aside, if you are embarking on a construction project or a transaction such as a merger or acquisition, you need to take any actual or potential environmental liability exposures into account.

If you’re buying a site that has been contaminated but is now cleaned up to current standards, don’t be complacent. Rigorous legislative requirements may mean that further work is needed. If the seller is out of the picture, you may end up with the cost.

Similarly, if you’re merging, acquiring or even divesting, there may be environmental issues relating to the business concerned. Appropriate insurance can oil the wheels of the deal by providing cover should any business providing warranties or indemnities not be around in a few years’ time.