Companies must prepare for increased liabilities for environmental damage, which could result in huge costs, according to Chubb Insurance.

The Environmental Liability Directive (ELD) reinforces the ‘polluter pays' principle and is intended to act as a strong incentive for operators to avoid causing environmental damage.

The Directive includes new and unprecedented remediation requirements and financial liabilities if an operator causes environmental damage to protected habitats and species.

Tony Lennon, European Manager of Environmental Solutions at Chubb Europe said: “Most companies have very limited understanding of their present environmental liabilities let alone the increased ones they will face once the ELD becomes UK law.”

The Directive is due to become UK law on 30 April 2007. But it looks increasingly likely that the UK will miss this deadline and the UK government could face legal action from the European Commission for failing to implement by the required deadline, said Chubb.

Any delay in implementation does not, however, necessarily remove the liabilities on individual companies should they cause damage to the environment.

Whilst existing liability regimes provide compensation to individuals or companies who suffer damage as a result of pollution incidents, they offer less comprehensive compensation for damage to the environment, according to Chubb.

At present, polluters cannot generally be required to compensate for damage to the un-owned environment that cannot be mitigated or damage to species that live in the damaged environment. This will change with the introduction of the ELD, Chubb said.

Lennon added: “Companies must be prepared. They should look internally at their risks and look externally at the environment they operate in. I would urge them to identify the potential areas of liability and to assess the potential financial consequences of causing environmental damage. It is then up to the business to decide how to mitigate these financial risks.”