Green gauge

On 29 February 2008 the Department for Environment, Food and Rural Affairs (Defra) released its consultation paper on the draft regulations and guidance for implementation of the Environmental Liability Directive. It is the second consultation, the first having taken place between December 2006 and January 2007.

The consultation period ends on 27 May 2008. However, the directive was supposed to have been implemented by 30 April 2007 and a Parliamentary inquiry is underway to establish why it has taken so long. The European Commission is also apparently considering action against the UK and other states that have failed to implement it.

The directive aims to make those that damage the environment legally and financially responsible for the damage. In other words, the polluter pays. Liability will extend beyond the traditional boundaries of damage to land or watercourses to include damage to habitats and species. This is a novel concept and a polluter will be required to return the environment to its condition prior to the contamination, which is likely to mean far higher costs over a much greater period than under existing legislation. Implementation of the directive across Europe is generally rather more advanced, as is the provision of environmental insurance to cover it. By February 2008 the directive had been transposed into law, in whole or in part, by Belgium, Cyprus, Estonia, Germany, Hungary, Italy, Latvia, Lithuania, Poland, Romania, Slovakia, Spain and Sweden. In Spain, France, Italy and the Netherlands, environmental liability pools have been in operation for decades, responding to environmental remediation and related costs. Their aim is not only to provide specialist environmental insurance, but to enhance environmental risk awareness and improvement. The structure of the pools spread the risk by developing the insurance policies to be used by all members and ensure that all members are liable for any risk insured by any of them.

Spain has also introduced compulsory financial guarantees for certain categories of company to cover for damage to the environment. Chief among these is environmental insurance. Other countries are following the same route, despite the Commission deciding to postpone a decision on compulsory guarantees Europe- wide until 2010. It is unlikely that the Government in this country will be able or willing to take any earlier decision.

In Hungary there already exists one of the strictest environmental liability regimes in Europe, which goes well beyond the requirements of the directive. Environmental liabilities extend to the directors and officers of operators as well as those shareholders who may have had a hand in polluting. This does, of course, highlight one of the biggest problems for environmental insurers, which will face difficulties in providing pan-European cover where there are significant variations in insureds’ exposure. This is exacerbated where a country has different enforcement regimes. Austria, for instance, regulates environmental issues at a local, rather than at a national, level.

In this country, according to broker Willis, in 2004 premium income spent on environmental insurance was only £60m, compared with £5.7bn spent on general liability insurances in the same period. The position has not changed significantly since. This is surprising, given the fact that there has been extensive legislation in place in the UK for a number of years for pollution or contamination of land or water. The contaminated land regime, for instance, was introduced retrospectively under the Environmental Protection Act 1990 and requires enforcing authorities (local authorities or the Environment Agency) to identify and ensure remediation of contaminated land within their regions. The regime has been bedevilled with problems that have slowed the process – not least a lack of funds – but the liabilities for those responsible will not go away. The authorities have statutory obligations to enforce, and in time those obstacles will be overcome.

Part of the problem may be a misconception that companies’ standard public liability insurance will respond to the exposure. That is unlikely to be the case, as the recent decision in Bartoline v Royal & SunAlliance (2006) underlined. The case held that remediation costs owed to the Environment Agency and costs incurred in complying with statutory notices were outside the scope of standard public liability insurance. Bartoline may be a wake-up call for businesses in this country, and will hopefully encourage wider consideration of the need for specialist cover.

While the only things certain in life are death and taxes, greater concentration of environmental responsibilities now comes a close third, even if the UK Government, industry and insurance market are lagging behind most of their European counterparts. They may reflect a wider failure to get our environmental house in order. But the legislation will be enacted and the liabilities will arise, and the sooner we all prepare for it, the easier it will be to cope.

Dominic Thomas is a partner and head of environmental liability at Davies Lavery