Time to clean up your cover

The EU Environmental Liability Directive 2007 – which has been transposed into law across the 27 member states – holds companies fi nancially responsible for preventing environmental harm to water, air, land and protected animal species, and to remedy the damage if disaster strikes.

This goes as far as paying to establish a new site if the area has been irreparably damaged owing to a company’s operations or recklessness. Companies also have a positive duty to notify the authorities of any actual or threatened pollution.

There are defences available – the damage was caused by a third party; the operator was complying with a compulsory order or with an offi cial permit; the activity was not considered likely to cause environmental damage according to the scientific knowledge at the time – but most companies accept that their fi nancial health relies on sound risk management and risk awareness. It also depends on comprehensive insurance cover.

Yet experts argue that many companies may be at risk because they misguidedly believe their public liability policies will cover all remediation and damages costs should an event take place.

Some organisations are under the impression that the directive largely does not apply to them because they are not involved in ‘high-risk’ industries such as transport or manufacturing pesticides or chemicals. As a result, insurance brokers and lawyers believe companies need to review the legislation, and re-examine their risks and controls.

Johnston Park McAndrew insurance broker Dale Collett says: “A common perception is that it is only those businesses involved in heavy industry – such as petrochemical, manufacturing and waste management – that need to protect themselves against the threat of pollution. But if you have an offi ce on a brownfi eld site, you could be responsible for any clean-up costs caused by a previous owner or occupier if they cannot be tracked down.”

Long-term risk

Collett adds that although public liability insurance does protect against one-off accidents, repeat or gradual pollution is not covered. And the protection such insurance provides is becoming increasingly limited for instances involving environmental damage.

He warns that the higher fi nes for legislation breaches imposed by enforcement agencies such as the UK’s Environment Agency mean that the risk of exposure to signifi cant costs is increasing for all businesses – even those involved in the professional service sector.

Law firm Pinsent Masons insurance law specialist Colin Read says: “Traditional liability policies are ill-equipped to meet the challenges posed by the new legislation because the directive does not introduce aliability regime in the traditional sense.

“A standard public liability policy, for instance, will cover the insured’s legal liability to pay damages to a third party for accidental injury, damage to property, nuisance or interference with some other right. It will not normally cover the cost of clean-up operations that the insured is statutorily obliged to pay.” Lawyers point to a ruling from 2006 that highlights the problem. In 2003, UK-based solvents manufacturer Bartoline had a fi re at its east Yorkshire premises, which led to fi re-fighting foam and chemicals polluting two nearby watercourses. The Environment Agency billed the company for the subsequent clean-up, while

Bartoline tried to recoup the costs – around £770,000 (€935,000) – from its insurer, Royal & Sun Alliance (RSA), which rejected the claim. At the crux of the case was the defi nition of “damages”. The High Court ruled that a public liability policy covering legal liability for damages did not cover liability to repay clean-up costs incurred by the Environment Agency exercising its statutory powers, or the insured’s own costs in complying with the agency’s work notices. Consequently, Bartoline was responsiblefor the remediation costs.

Valerie Fogleman, a consultant at law fi rm Stevens & Bolton and professor of law at Cardiff University, says: “Public liability policies may cover some of the liabilities under the 2009 Regulations, provided that the incidents causing environmental damage are sudden, unintended and unexpected.”

But she adds: “It is highly unlikely that a court would consider that a public liability policy provides cover for all such liabilities, or liabilities under other environmental legislation, and may consider that it does not provide cover for any of them. Although the wording of some public liability policies may cover risks under environmental legislation, it is unlikely that most will do so.

“Endorsements designed to provide cover for statutory liabilities – known as Bartoline endorsements – are virtually all highly restrictive in scope. Insureds are thus faced with substantial environmental risks that are not insured under their public liability policies.”

Bespoke policies

Insurance, risk management experts and lawyers instead recommend that companies opt for specialist environmental liability insurance and ensure the policy is tailored to their particular needs and levels of exposure.

Chairman of Airmic’s manufacturing special interest group Gary Marshall says: “It makes good sense to buy a specialist environmental liability policy. It provides much greater protection than a public liability policy and will fi ll in any gaps in coverage.

“Some companies have understandably tried to cut back on their insurance spend in the wake of the fi nancial crisis by purchasing endorsements – essentially coverage extensions – to add to their public liability policies. But these will not cover all the environmental risks, and most focus on pollution cover, which is only part of what the directive is about.

“There are a number of non-pollution risks – such as fi re – that these policies will not cover, which can also be cripplingly expensive to remedy. Companies need to review their potential exposure to risk before they simply cut their insurance spend.”

Directors beware

Technical director at environmental due diligence consultancy Renaissance Regeneration, Angus Middleton, says another issue that companies may have neglected to consider is that directors, offi cers and individuals can be held liable and prosecuted for any damage caused to the environment or failure to comply with the legislation – even though the directive makes no reference to any criminal prosecution for a company or individual’s failure to comply.

“Individuals and companies cannot be prosecuted under the Environmental Liability Directive,” Middleton says. “But, as the requirements of the directive are transposed into national legislation and can be covered by perhaps a dozen other laws, companies and their offi cers can be prosecuted for failure to comply with the directive under related legislation.

“Traditional directors’ and offi cers’ policies may not cover all aspects of environmental damage and remediation. In short, directors need to be aware of this,” he says.

Middleton says companies should carry out a full risk management review and proper environmental due diligence before buying any insurance cover.

“If you understand what risks you face, then you understand what risks you need to cover and what the extent of that coverage should be.

“Too many organisations simply buy policies without any serious attempt to tailor them to their specifi c needs,” he adds. “This can often mean that directors think their organisation is insured against certain risks when in fact they are not.” ¦