The Environmental Liability Directive takes effect in the UK at the end of April and companies will have to face new responsibilities, but what is the insurance industry doing to help? Andrew Holt reports

Debate and discussion on the European Environmental Liability Directive is likely to hot up as the directive's enforcement date of

30 April approaches. It therefore comes as no surprise that that the claim is being made that insurers need to develop new types of cover in response to the directive.

The call from the Federation of European Risk Management Associations (Ferma) appeals to insurers to be less "risk averse" and develop products that will allow businesses to protect themselves against new exposures to liability for environmental impairment.

Ferma's Pierre Sonigo says that existing insurance wordings are limited and will exclude the new liabilities, and claiming the insurance industry seems reluctant to offer new products.

"At the moment, insurers are risk averse when it comes to environmental liability. They should be more proactive in providing products now that the directive is being transposed into national law. Our companies need to take risks to survive; insurers should do so, too," Sonigo says.

One of the issues is that the directive establishes the environment as a legal entity for the first time. National governments will have the responsibility to bring claims against polluters on behalf of the environment, and damages will not be in the form of financial payments, but as restitution of the environment to its state before the pollution occurred. Insurance policies as they are now would not respond to a claim of this type.

"I understand where Ferma is coming from because the market needs a prod," says Karl Russek, senior vice president of Ace environmental risk.

But he adds: "There are products out there however. We are not the only ones. And without pointing the finger at any one part of the market, it is true to say that it is vitally important to undergo an education process, so brokers, carriers and risk mangers all know about the products and issues. We are still some way off this."

But who is to pay for such education? Should the industry's trade bodies and associations be doing more to educate the market about environmental liability? There appears to be no definitive answer to the education gap at the current time.

Ace European Group has tried to bridge the product gap by offering an extensive environmental liability cover as part of its existing liability and commercial package insurance programmes.

"Environmental liability remains an uninsured risk that brokers can and should be addressing with their clients now," says Russek.

That begs the question why have brokers not been employing more specialists, given insurers' and risk managers' belief that there is vast untapped need, for risk-financed solutions.

Educating clients
Bob Martin, director in the risk management solutions department at Aon, says: "Quite simply there has been a lack of concern from potential insureds. In the past, some brokers have tried to gear up to educate their clients and prospective clients to their real, potential and perceived finance exposures that may exist from environmental risks that entities may, often unknowingly, have. But this did not result in the demand for solutions, including insurance products, that they anticipated would be forthcoming."

So like Ferma members, brokers are finding the market is not coming up with the products. "Many brokers curtailed their investment in staff in the area of environmental liabilities as they concluded that in the short term their better option was to invest in other areas of their business," says Martin.

"It takes a brave director to invest in an area where his company is not making a profit."

So for the broker, the key factor is the lack of supply and demand, for this type of product. "The environmental insurance market is reactive," adds Martin. "It will produce products in response to demand. In the past when it tried to anticipate demand it got it wrong and many environmental insurers in the US and UK went out of business. Insurers will not be going there again, and it is unreasonable to expect them to do so. So the key is demand."

Why then are potential insureds not buying environmental insurance? One reason could be that many risk managers are former brokers and as a consequence were not trained to address environmental risks. "And with many under continuous pressure to reduce their employers' spend on insurance, their motivation to find a new area to use their budget on is not there. Particularly as there is no demand from the board room for them to do so," says Martin.

The latter point here is surely crucial. Why do so few board of directors insist on environmental risk management not being embedded within their standard risk management procedures?

As when abolishing the need for the mandatory operating and financial review, which would have necessitated disclosures on financial risks, Chancellor Gordon Brown said that such matters would in any case form part of any good system of corporate governance.

Surely directors understand that they can carry a personal liability for environmental issues in addition to that of the entity that employs them, and beyond the scope of any directors' and officers' cover?

And key from a UK government perspective is that Defra is coming to the end of its short consultation period on the Liability Directive which began in November last year.

In its consultation document, Defra states that: "The directive contains a number of discretions and choices for member states on which decisions have to be taken. Additionally, its provisions overlap with existing UK environmental protection legislation in a complex way.

"It is therefore necessary to consider how to manage this interface, particularly having regard to the government's policy on implementing EU legislation, better regulation objectives and environmental protection."

The bizarre thing here is that the Defra consultation paper appears to break Cabinet Office guidelines that consultations should be at least 12 weeks, as this consultation is 11.

But how many individuals and companies have become involved in the Defra consultation? This is the one opportunity for UK companies to put their environmental risk views forward.

Unquantified contamination
Stretching out the blame game beyond just the boardroom, what of the advisers to the board? How can auditors say accounts show a true and fair view when property assets may be impaired by unquantified contamination or material off-balance sheet environmental liabilities?

Why do solicitors not consider advising their clients to consider environmental insurance to protect them from potential exposures in all property transactions?

What of the regulators and standard-setters? Shouldn't they be ensuring that risk assessment and evaluation is undertaken and results brought to the attention of stakeholders?

And what of liability policy wordings? Are they not a problem in themselves with their frequent ambiguities? And should brokers highlight the gaps in some liability policy cover?

It shows that when the blame game starts, it is difficult to know where the buck finally stops on this risk.

One thing is for sure, with the avalanche of new laws, the past is hardly a good indicator to predict future actions by regulators, parties to contracts with environmental aspects, or third parties making claims for bodily injury/ illness and property/asset damage.

Martin warns: "Do we really have to have a major claim against a company perhaps resulting in a financial failure, and the imprisonment of directors and officers, before we heed the message? The blame is a shared blame, but the buck stops in the boardroom." IT