Europe: what a liability

Europe was great as long as it went only as far as Calais. However, things are different now and Europe, it seems, is present in every corner of UK life. Nowhere is this more so than in the field of legislation with a flow of European directives, from which member states must derive their national law in the area in question.

And it is with environmental legislation that we are most likely to associate European law. Perhaps because the directives, when they first appear, can have lead times measured in years or perhaps because the environment is still regarded by many 'feet planted firmly on the ground' UK SMEs as a cranky topic, there is a growing danger that UK SMEs will be caught out by a growing raft of environmental legislation based on EU directives.

All of this presents an opportunity for regional brokers to play to the strength of their relationship of trust with commercial clients, but do they know enough about the potential environmental exposures their clients may face and the subject itself to be of help and, if not, what would be their incentive to find out more?

But first of all, what is the legislation we are discussing here, who does it affect and when will it affect them?

Environmental impact

Although the area of emissions legislation is the one that seems to make most headlines, it is not the only body of environmental legislation.

There are laws governing the environmental impact aspects of most areas of business activity including food processing and packaging.

But, potentially the most onerous EU-inspired environment legislation is based on the EU's Environmental Liability Directive which passed into EU law in 2004 and is due to be implemented in the UK by 2007.

As the Federation of Small Businesses (FSB) explains, this law "makes companies that cause environmental damage financially responsible for restoring and preventing that damage and goes further in its inclusion of biodiversity damage".

While environmental damage may be easier to identify and quantify, there are concerns that 'biodiversity damage' is a wide term that will allow all sorts of pressure groups and interest groups to create definitions that suit their own objectives and so, among other things, the FSB is currently pressing for some tighter wording here.

While this particular piece of legislation does not seem fit into the current UK government's penchant for retro-active law, Karl Russek, senior vice president for environmental risk with Ace European Group explains that EU laws will have a greater impact.

"As (EU) regulations become enshrined into national law, this will often have additional effects (when coupled) with already comprehensive UK environmental laws. This will make the final outcomes unpredictable and has considerable potential for (the law of) unintended consequences (to have an impact)."

Evolutionary process

The Environmental Liability Directive is also, as Russek explains, a further step in an evolutionary process which must lead to increased scrutiny and attention to corporate activity and legacies of that activity. The legislation will affect all businesses which either have or acquire land that is in need of remediation which probably includes most so called 'brownfield' sites.

As Lucy Butler, who handles EU issues at the ABI, explains: "This is most relevant when a land deal or a merger or acquisition deal puts a business in a position where it has potential liabilities (that may need to be insured)."

This could be as simple as buying a company that has, somewhere in its property portfolio some contaminated land or, in its history, a process that once contaminated land which has since been abandoned but not treated with remediation measures.

The cost of remediation can be high, especially if the land owner loses control of the task to a local authority (provided for in the legislation) because they tend to use expensive services and, of course, will put all of the costs they incur right back on the land owner's doorstep. It is worth considering protection against any such risk arising in the future.

As is often the case, the weight of this legislation and any liabilities that it creates are expected to fall disproportionately on SMEs. This will in part be because, as Peter Staddon, head of technical services at Biba, puts it: "SMEs are usually in the front line and so suffer the largest proportionate liability." And, as Russek explains: "Because they often lack the dedicated resources to pro-actively manage these risks or the financial resources to respond to a claim or incident."

Alarmingly, a 2003 SME environment survey conducted for NetRegs found that only 28% of businesses questioned in the food and drink sector had introduced practical measures to reduce harm to the environment such as carrying out an environmental assessment or appointing an environmental officer.

Since failing to comply with environmental legislation can result in fines or even the prosecution of directors, this is not one to be taken lightly.

While this area is going to require some specialist knowledge, that will not exclude regional brokers from the market and it certainly should not deter them from discussing this area with clients. Most views are that to leave this out of a client conversation could constitute an omission of service.

That said, insurance for environmental risk will not be compulsory and the ABI is not expecting any sort of bonanza with an estimated market of £50m to £70m premiums per annum compared with, say, the £1.5bn annual premium employer's liability market.

So what can brokers do to help? As Staddon says: "This market is a true example of what brokers are all about."

This means larger and more complex risks may well need some specialist solutions to be devised but, for most SMEs, product upgrades should be sufficient to meet potential environmental risk. And clients will need someone to explain it all to them. Either way, the matter falls squarely into the area of client relationships and trust.

For learning purposes there will be the specialist providers and the specialists in regular providers and, of course, the trade press.

The market seems more than capable of dealing with this development as it has dealt with many previous changes and this seems to be a market made for brokers.