Changes in both regulation and legislation within the EU and elsewhere are forcing businesses to take responsibility for the impact that their operations have on the environment, with stricter penalties for “polluters” who are either innocently involved or who simply choose to ignore the issue.

The implementation of the Environmental Liability Directive (ELD) in the UK in 2009 is likely to have a significant impact on companies that cause damage to the environment. In addition to encompassing and consolidating much of the current legislation surrounding traditional environmental remediation, the directive also introduces new concepts such as complementary and compensatory remediation.

Organisations must not only clean up the pollution they cause, but will also have to rehabilitate a site back to its original baseline condition.  If that is impossible, or it may take a long time to complete, an organisation can additionally be obliged to compensate for blighting the area.

So, for example, if chemicals released from a firm’s site resulted in a nearby river being polluted causing the death of large numbers of fish, the firm not only may be required to clean up the spill but also to restock the river. But if the river could not be fully restored back to its baseline condition, the firm may be made to enhance a river nearby to complement the rehabilitation work at the polluted site and compensate for the time that the polluted river cannot be used or enjoyed.

The real impact of the regulations is not yet known, but, it is generally accepted that compensation awards will increase significantly, leaving many organisations financially exposed.

Who is at risk?

Environmental risk is often associated with large scale disasters or hazardous industries like chemicals, metals & waste. In reality, most companies have some level of exposure. Any business can find itself exposed to environmental liability from either on-going operations or activities on their property in the past. These days few firms are exempt from environmental issues and responsibilities.

Your business is at risk, for example:-

• If you own or operate or buy or sell a property
• If you redevelop ‘brownfield’ land
• If you use or produce potentially contaminative materials
• If you create waste (solid, liquid or gaseous)

Seemingly innocuous materials such as water, which could be emitted at the wrong temperature, or whey, a waste product of cheese production, can have an adverse impact on fish and wildlife downstream.

Why existing Public Liability and Property Damage Policies are not sufficient

Many organisations think they are already covered for environmental liability within existing insurance policies. However there are significant gaps in these covers.

The extent of pollution coverage under traditional Property Damage (‘PD’) and Public Liability (‘PL’) policies is a source of significant uncertainty and debate, particularly when an incident occurs.

Property Damage Policies
As first-party clean-up costs are a key consideration, many clients would assume their PD policies would provide a good level of pollution coverage.  However, in reality, they are limited in scope. Indeed, for a PD policy to respond:

1. Any pollution conditions covered must result from an insured peril (fire, flood etc)
2. The pollution must be sudden and accidental in nature
3. Debris removal coverage may exclude contaminated soil
4. Business Interruption coverage is also only triggered following an insured peril.

Unfortunately, most pollution conditions, which result in a regulatory action by the Local Authority or Environment Agency, are simply discovered on the insured’s property, adjacent land, or in nearby watercourses.  They have therefore not resulted from an insured peril. A significant proportion would have occurred gradually and own site clean-up will usually involve removal of contaminated soil often at considerable (uninsured) expense.

Public Liability Policies
Since the early 1990s, PL policies have tended to limit pollution coverage to sudden, identified, unintended and unexpected incidents, so called "sudden and accidental" (‘S&A’) pollution.

Disputes have therefore centred on whether the pollution has a sudden and accidental cause or has in fact occurred gradually.  There are no hard and fast rules here, with individual cases often settled through litigation, where coverage is disputed. So, it appears to be fairly common knowledge that PL policies will not respond to claims for third-party property damage, bodily injury, nuisance, trespass and obstruction arising out of gradual pollution incidents.

However, this focus on gradual liability, fails to acknowledge the other significant gap in coverage – the costs incurred by the insured where they are forced to clean-up pollution on their own property. Such first-party clean-up costs may be imposed by regulatory authorities following a pollution incident, whether it is sudden and accidental or gradual.  PL policies will exclude damage to own property, so would not respond to this.

Recent Insurance Court Case

Even where the pollution cause is sudden and accidental, the picture may not be clear following a recent UK court case.

In 2003 Bartoline Ltd, a company involved in the manufacture and packing of solvents and adhesives, suffered a fire at their UK site.  In putting out the blaze a significant volume of contaminated fire-fighting foam washed into adjacent watercourses.  The Environment Agency (EA) responded, undertaking immediate remedial works on the rivers.  They issued an invoice to Bartoline for the costs of these works in addition to a remediation notice that required clean-up of their own site.

Bartoline made a claim under their PL policy, written by Royal & Sun Alliance (RSA) expecting that the damage to adjacent property would be covered.  However, RSA disputed the claim, arguing that the PL policy was intended to cover 'liability for damages' and this relates to tort liabilities pursued through the civil courts by individuals, who must be in some way compensated for their loss.  This is in contrast to statutory liabilities, where the insured is indebted to a regulatory authority or required to act following receipt of a formal notice.  This is still a legal liability, but under a set of laws for which PL insurance is allegedly not intended to respond.

The court agreed with the argument presented by RSA’s legal counsel, so Bartoline were uninsured for their loss.  The case was sent to appeal and was ultimately settled out of court. Details of the settlement remain confidential. It is unfortunate there has been no final judgement in court that would establish a legal precedent in UK law. Without this, it still means that there is significant uncertainty surrounding similar claims in future, as no binding precedent has been set.

TIC have a solution 

Previously, Environmental Insurance has been complex, expensive and offered limited cover – this is no longer the case. 

To obtain a quote or further information please contact us at one of our offices opposite - or if you prefer

Article courtesy of Gallagher Environmental & BIBA (British Insurance Brokers Association).