At a glance
- It is expected that the new EU directive will result in even stronger enforcement laws around the protection of the environment
- Businesses with foothold in region urged to review exposures and consider whether potential risks are being actively managed
- There is room for interpretation in the directive and Zurich understands in depth the complex web of environmental regulations spanning different jurisdictions
The European Union is currently in the final stages of the prescribed review period for the Environmental Liability Directive (ELD). This much-anticipated report was originally due to be released in April of 2014 but due to late reporting by some member states and the recent European Parliamentary elections there will be a delay until later this year.
While the release date is uncertain, what is certain is that this review will deal with issues that are likely to result in even stronger enforcement laws around the protection of the environment. As such, businesses with a foothold in the region are being urged to review their exposures and consider whether potential risks are being actively managed.
The European Commission enacted the Environmental Liability Directive (ELD) just over 10 years ago with the goal of establishing the ‘polluter pays’ principle covering the cost of restoring damage caused by environmental accidents, including pollution of water and land, and damage to protected species and sensitive habitats, often referred to as biodiversity damage.
As required in Article 18 of the ELD, the European Commission will report to European Parliament on the experience gained in the application of the ELD in each of the member states. Thereafter, Brussels may look to implement changes after the initial transposition into national law of the ELD, which was adopted in 2004 and finally came into force in all member states by 2010. The original transposition ended up being something of a compromise by many member states – resulting in a patchwork of laws.
Sharpening of ELD powers?
Current proposals emanating from Brussels include a harmonisation of laws across member states, greater use and scope of ELD powers, and a general sharpening of the polluter pays principle that would place increased liabilities – or responsibility – on businesses.
UK ELD Facts by the numbers
- 19 cases reported, 8 – England, 8 Wales, 2 – Scotland 1, N. Ireland
- 12 are confirmed cases of environmental damage
- 7 cases were related to imminent threat to environmental damage
- 12 cases are closed, 7 are still open
- Other cases were considered but discounted for various reasons
For more information, read the full UK report.
As the ELD is a directive, member states had some freedom back in 2004 to provide certain limitations in liability. Operators whose business was captured within Annex III of the directive would be subject to strict liability for environmental damage caused by their operations.
Some member states allow certain defences that can alleviate responsibility or mitigate enforcement action. The defence options include where environmental damage has been caused despite the operator’s compliance with a permit and where environmental damage has been caused despite the operator using state-of-the-art techniques to mitigate such environmental damage.
There is room for interpretation in the directive with respect to the level of damage to the environment required to trigger using the ELD. Pre-existing national laws in many states made the EU edict hard to integrate and there has been little evidence so far of a willingness to enforce or comply with the ELD regime, although this could be because regulators are still coming to terms with the regulations and how they can be applied.
For instance, in the UK just 19 cases were reported under the ELD in the first three years after its adoption in 2009. Of these 12 cases were confirmed cases of environmental damage with 7 cases representing an imminent threat of environmental damage. By contrast, the Environment Agency reported 617 incidents alone in 2012 that had a serious impact on land or water in England and Wales.
All of which has left many businesses, notably ones that transcend borders, confused as to where they stand on environmental issues – especially as they could be subject to potential environmental liability under multiple legislative mechanisms, including the ELD.
“Larger risk-managed companies are aware of the ELD, although I think there is still a tremendous amount that needs to be done by various stakeholders to educate and inform non-risk managed corporates as well as small and medium sized enterprises,” said Christopher Robertson, Head of Environmental at Zurich Global Corporate.
Businesses can cause environmental damage in a number of ways, including from a malfunction of holding tanks on a property, to loading, unloading or to transportation of products or waste, a fire on a property, dust arising from construction work and poorly operating drains. Environmental damage can also result from the historical use of the site.
A lot of companies assume, mistakenly, that falling foul of environmental laws is the preserve of high-risk industries, such as those processing chemicals. In fact, damage to the local surroundings can be caused, quite simply, by a leaking heating oil pipe or the result of water run-off in the aftermath of a fire where the water used to extinguish flames goes into a third party site or nearby river. It is conceivable that this damage, seemingly however slight, can cost businesses upwards of a six-figure fine and much more in remediation and reputational costs.
Choosing the right cover
Although requirements vary between organisations, there are a number of things to consider when taking out cover against environmental liabilities.
A business needs to make sure an insurance partner, such as Zurich, understands in depth the complex web of regulations spanning different jurisdictions, that they can be flexible to a company’s growing and changing needs, and recognises the full extent of any potential liabilities.
“Zurich has developed a flexible policy that addresses key exposures including both tort and statutory environmental liabilities for bodily injury, property damage, clean-up costs, environmental damage costs and other extensions, such as loss prevention costs and crisis management,” said Christopher.
“And we’re building out our global network to respond to the needs of our customers both within Europe, North America and beyond given the changing environmental regulatory landscape.”
Another important issue surrounding ELD is determining what coverage is afforded under a public liability policy. Some extend cover for the certain liabilities imposed by the ELD, while others do not. Even with the inclusion of certain extensions for environmental losses, cover is typically limited to sudden or accidental losses and precludes damage to the insured’s own property.
It is thus important to understand the gaps and ensure that those gaps are mitigated through the purchase of coverage that is more suited to environmental exposures. In this way, the insured can secure coverage for clean-up on their premises, arising out of both sudden and gradual pollution events – and secure more comprehensive coverage for environmental damages as promulgated under the ELD, as well.
Zurich has developed a flexible policy that addresses key exposures including both tort and statutory environmental liabilities for bodily injury, property damage, clean-up costs, environmental damage costs and other extensions, such as loss prevention costs and crisis management
Christopher Robertson, Head of Environmental at Zurich Global Corporate
Potentially prohibitive costs
So although there have been a distinct lack of major ELD cases in Europe the costs of falling foul of an environmental regulation/obligation/responsibility can be prohibitive, as witnessed by the 2010 incident that saw a dam of mining waste burst at the Ajkai Timfoldgyar alumina plant in Hungary, killing seven people.
The case, which at the time was expected to be a major test case for the ELD, was finally prosecuted under Hungarian law, with the owner eventually fined €470 million to clean up the red sludge.
While that was a very public example of environmental damage, many cases do not make national headlines but are still significant and can have a material impact on a company’s bottom line and ability to continue operating.
It is particularly important then for companies within Europe and beyond to keep abreast of the ever-changing regulatory landscape and ensure that all measurable insurable risks are covered – especially as Brussels believes further legislation is necessary to achieve the aims of the ELD and enshrine its polluter pays principle.
“Zurich is here to work with its customers and brokers to help them understand the issues,” added Christopher. “While the frequency of claims is not high, when they happen it can cause a material impact to organisations, both large and small.
“Many firms may be used to the expensive premiums and relatively limited coverage of 10-15 years ago but the market is large, more responsive and more competitive than ever and it is continuing to evolve and respond to the changing landscape.”
For more information please speak with your local Zurich contact