New laws will make companies liable for environmental damage. Insurers and brokers should be ready.

The environmental liability market is a sleeping giant about to wake up. As soon as the Environmental Liability Directive (ELD) comes into force in the UK, probably towards the end of this year, there will be a whole new market there for the taking – but are insurers and brokers ready?

The ELD itself is set to revolutionise the way in which environmental damage is dealt with in the UK. Under the directive, the law will hold those who have caused environmental damage financially liable for repairing that damage. Not only that, but for certain industries, companies will be held liable for damage even if they have not committed any fault. Where there is the potential for environmental damage, companies are obliged to take preventative measures.

The directive has already passed into law, though the UK government has yet to enforce it. It should have been implemented here in April 2007, but now the end of this year is being scheduled as the earliest date. It is unknown whether the legislation will be backdated.

There is further uncertainty over the final form of the ELD, with Europe’s 27 member states being given the option to implement more stringent measures than the agreed minimum. In the UK, the Department of Environment, Food and Agriculture (Defra) has just brought a second consultation period to a close, leaving the industry unsure as to what, exactly, it needs to be preparing for.

“There are a lot of unanswered questions that need resolving before the major insurers will want to dip their toes into the water,” says Biba technical services manager Steve Foulsham.

“We have been waiting for the government to decide how the ELD is going to be implemented in the UK. Until things have been clarified, it’s always a bit difficult. Now we are getting towards that stage and between now and the end of the year, brokers need to be giving this credence in their renewal discussions.”

RSA group casualty director Phil Bell says: “It’s a limbo situation.” He adds that the lack of clarity on what kind of liability regime (proportionate or joint and several) will be implemented is also hampering the development of the market.

“At the moment it is possible to take a view on individual risks in terms of activity, but you can’t decide how far the liability will extend.” Consequently, claims could be enormous, even if the claimant is only responsible for part of the damage. This in turn makes premium levels difficult to calculate.

But the enforcement of the ELD in other European countries, and its impending introduction here, is already having an impact. XL senior underwriter, environmental, Robert Potter says there has been a noticeable increase in the number of environmental liability policies being written.

The obligation contained in the legislation to report all contaminations to the relevant authorities has raised awareness of environmental incidents and begun to change the culture of thought surrounding environmental liability cover, he says.

“There are no experts, no existing data, and no real products on which to base experience.

Phil Bell, RSA

“The market is certainly much smaller than it should be. There’s a lot of room for growth, and the ELD could trigger that,” adds Potter. How big it gets depends on the smaller and mid market commercial risks. “Are they just going to add something on to their liability policies, or are they going to get specialised cover?” Claims in this could become some of the most lengthy and complex in the business, warns Potter, possibly impacting on the uptake of cover.

Extent of cover

Foulsham warns that many of the potential claims coming under the ELD would fall outside the scope of standard liability policies. He cites the recent case of Bartoline v RSA, which hinged on whether clean-up costs for pollution to a watercourse were covered by the company’s public liability policy. It was eventually settled out of court, leaving the question open.

“It does leave a big question mark over the extent of environmental cover under a standard public liability policy. With the ELD coming on the back of that, there’s a much greater exposure going forward, particularly with some production areas. The only way of covering that would be to not rely on a standard policy, but to go one step further,” says Foulsham.

There are further opportunities to come, with the prospect of environmental liability cover being made compulsory in 2010, when the European Commission (EC) considers the situation again. Currently, operators are not required to take out financial security products in relation to the ELD, but in 2010, the EC expects markets for such products to have emerged, making the possibility of compulsory cover more realistic.

At the moment, there are a very limited number of environmental liability products available. “There are no experts, no existing data, and no real products on which to base experience,” says RSA’s Bell.

Davies Lavery partner Dominic Thomas says: “Insurers have not traditionally written into the environmental liability market in this country and are proving reluctant to dip their toes into the water. The writing is on the wall as to what the ELD is likely to be. The exposures are sufficiently well known to develop covers now, but there seems to be a shortage of companies developing them.”

But as well as the lack of experience, insurers are worried that they will not have control over determining claims. Government bodies and local authorities will have the power to determine liability, and decide when the environmental damage has been sufficiently rectified.

In addition, the ELD gives power to pressure groups to force the authorities to investigate claims of environmental damage, an additional concern for insurers and clients alike. “No one is sure how far they will flex their muscles,” says Potter.

But despite all these concerns, the new environmental liability is not going to go away. In fact, the market will only get bigger. Brokers and insurers would be wise to get in early.

What the directive means for businesses

The Environmental Liability Directive (ELD) came into force on 30 April 2007, although it is yet to be implemented in the UK, and enshrines the polluter pays principle into law.
The aim of the ELD is to hold those who have caused environmental damage financially liable for rectifying the damage. It also holds those whose activities have caused an imminent threat of environmental damage responsible for taking preventative actions. It covers water and land damage, as well as damage to protected species and natural habitats.
It also introduces two different forms of liability. The first applies to companies which conduct potentially risky activities, such as industrial businesses. Under this strict liability, an operator can be held liable for damage even if it is not at fault.
The second is fault-based liability, which applies to all professional activities where an operator will be held financially liable only if it is at fault. There is no financial limit on the amount companies may be required to pay under either form of liability.
Under the ELD all operators are required to notify the enforcing authority of the damage and take immediate steps to prevent damage. It is the role of the enforcing authority to establish if it is environmental damage, and to identify who is at fault, and decide on what remedial measures need to be taken.
Public interest groups, such as environmental charities, can petition the enforcing authority to investigate cases of environmental damage and, if the authority refuses, have the right to challenge this in the courts.
It is expected to be implemented in the UK by the end of the year, more than a year and a half after the ELD came into force.