Special Report: Environmental risk

You’d be forgiven for thinking that the terms of an EU directive would be the same in all 27 member states. But while a directive must be transposed into the national legal frameworks of every EU country, each one can also interpret the regulations more widely if necessary. This puts multinational companies in danger of misinterpreting their levels of risk and exposure by assuming that all regulatory authorities in the EU will act in the same way.

On 30 April 2004, the EU implemented the Environmental Liability Directive, whose primary objective is to hold companies financially responsible for preventing and remedying environmental damage caused by their operations.

It has two main components: the ‘precautionary principle’, which requires companies to take preventative measures when their activities pose an ‘imminent threat of environmental damage’; and the ‘polluter pays’ concept, which makes businesses legally and fi nancially accountable for environmental damage to water, air, land and protected animal species.

The directive has been applicable in EU member states since 2007, even in those countries, such as the UK, that were late in putting it into effect.

Experts agree that the terms of the directive are wide-ranging and can result in potentially ruinous costs for companies that fall foul of the regulations. Multinational organisations must ensure they do not simply comply with the directive itself, but with how it has been transposed into national legislation in each of the member states in which they operate.

Directive basics

A directive is usually a minimum standard that can be made more onerous by individual EU governments and can contain more stringent requirements than those set out in the directive. Organisations that believe they have a blanket policy that covers all their sites throughout the EU may be mistaken.

The directive has now been transposed into the national law of all 27 member states, each with its own variations. For example, the UK has extended damage to natural habitats as set out in the directive to include sites of special scientifi c interest.

There are other key issues that organisations should be aware of. Valerie Fogleman, a consultant at law fi rm Stevens & Bolton and professor of law at Cardiff University, says there are differences between member states as to the extent a polluter should pay for the damage it has caused.

“Most EU countries have transposed the directive to apply joint and several liability, whereby any person who caused the damage is liable for the entire costs of its remediation.

“This can obviously be problematic: if fi ve companies are liable for cleaning up a chemical spill and two of them subsequently go into liquidation, the remaining three are liable for the cost of remediating damage caused by the insolvent companies as well as damage caused by them,” she says.

“Conversely, some EU member states – such as Bulgaria, Denmark, France, Slovakia and Lithuania – have applied proportional liability, which means a company would only pay the cost of remediating its share of the total damage.

“This could mean, therefore, that one company could be held responsible for, say, 70% of the costs, while the other is held liable for 30%. If one of these companies was not suffi ciently fi nancially viable to pay the costs, or became insolvent, the member state may decide to pay the missing share of the costs,” Fogleman adds. “This is a potentially massive difference that companies need to be aware of.”

Insurance implications

Due to the extent of the risks involved – as well as the potentially massive clean-up costs – it is not surprising insurers are likely to set high premiums for some industries, while also scaling back on some areas of coverage.

According to a report released in November 2009 by the European Commission, Study on the implementation effectiveness of the Environmental Liability Directive (ELD) and related fi nancial security issues, some ‘high-risk’ companies – typically those identifi ed in Annex III of the directive, such as those that transport dangerous goods, manufacture pesticides, manage waste or require environmental permits – may fi nd it diffi cult to purchase comprehensive insurance cover.

The study also found that when policies do not provide cover for certain activities, the lack of cover is not necessarily explicitly excluded in the policy document. For example, insurers may decide not to issue ELD-related or other environmental insurance policies to specifi ed industrial sectors, such as waste handling.

The most frequent limitations named are the exclusion of gradual environmental damage, sub-limits or exclusions for compensatory remediation. Cover for environmental damage may also be restricted to damage from pollution events rather than also including non-pollution events. As cover may not be explicitly excluded, some companies are at risk of having policies that give them inadequate protection.

The directive specifi cally says that companies reliable for any environmental damage they cause, which is not limited to pollution. For example, building a car park on a fi eld where rare fl owers or wildlife thrived is not a pollution risk, but such damage is an environmental risk and therefore needs to be

remedied under the directive. Risk managers need to make sure that their insurance cover is not limited to just incidences of pollution events, but includes all incidences of environmental damage.

Gradual effect

Since the directive is still relatively new, there have been few landmark rulings. But a decision earlier this year concerning the contamination of Sicily’s coastline by a succession of petrochemical companies since the 1960s implies that companies can more readily be held liable for gradual pollution than was first thought.

On 9 March this year, in its fi rst rulings on the directive, the European Court of Justice (ECJ) concluded that a member state may establish a “weak causal link” between an operator’s activities and diffuse pollution – that is, pollution caused by many operators. A competent authority can then use that link to force companies to clean up the pollution they have caused.

In the case of Raffi nerie Mediterranee (ERG) SpA v Ministero dello Sviluppo economico, the ECJ ruled that a member state may establish a rebuttable presumption, if plausible evidence exists, to link an operator’s activities to diffuse pollution.

As Fogleman concludes: “The number of companies that may have avoided liability under the directive for multi-source pollution is substantially less than would have been the case if the ECJ had ruled that the causal link was strong.

The establishment of a weak causal link is especially relevant in cases of diffuse groundwater pollution due to the diffi culty in tracing individual chemicals to their source.”

The directive is unusual in that it prompts member states to take measures to encourage the development of appropriate fi nancial security instruments – surety bonds, trusts, letters of credit, escrow agreements, corporate guarantees, insurance policies and fi nancial tests to show evidence of the ability to self-insure – for businesses to use as guarantees to cover their liabilities.

The majority of the member states have made it an elective decision to provide a fi nancial mechanism for potential environmental liability, which has resulted in most deciding not to do so.

Financial guarantees

As for those countries that have, multinational companies need to be aware of provisions they should factor in when carrying out risk management on their sites to prove that they have appropriate fi nancial cover in place to offset any environmental damagethey may cause.

Bulgaria will introduce compulsory fi nancial security from January 2011, covering all operators under Annex III. The scheme will be introduced to all operators at the same time and will allow for insurance, pools, bank guarantees and fi nancial guarantees as proof of liability cover.

It is envisaged that an operator will have to have fi nancial security commensurate to the cost of potential remediation measures. A determination of fi nancial security that is ‘commensurate’ will be determined through risk assessment.

In the Czech Republic, meanwhile, fi nancial security for all Annex III operators will become compulsory from January 2013. Greece, Portugal, Slovakia and Romania have also introduced provisions for mandatory fi nancial security in their transpositions.

However, for some countries, such plans are on hold. Hungary has indefi nitely postponed the introduction of a mandatory fi nancial security scheme because of the economic crisis. Spain was expected to introduce a limited mandatory fi nancial security scheme from April 2010 but has delayed it.

The Spanish scheme will cover all operators in Annex III but it is not intended to cover all costs potentially arising from the law. The security provided by the guarantee covers the costs of primary remediation and a small percentage of prevention and avoidance costs.

The compulsory guarantee refers only to damage caused by “pollution”, despite the law being based on the concept of “damage to natural resources” irrespective of whether the damage is caused by pollution or not.

One environmental lawyer, who declined to be named, says companies need to check the details of mandatory fi nancial security schemes where they exist. “As always, the devil is in the detail,” he warns.

“Risk managers need to carry out thorough due diligence to see what their liabilities could be and to provide proof of being able to pay for any possible remediation costs.

“If some authorities just want proof that you can pay for pollution remediation costs, rather than all environmental damage costs that you could be entirely liable for, you may have a nasty surprise.” ¦