A GUIDE TO Environmental Liability in Europe

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FC_SRELG11 1 15/04/2011 11:34 Untitled-2 1 14/04/2011 14:49 ENVIRONMENTAL GUIDE [ STRATEGIC RISK ]

FOREWORD 2 | Introduction The ELD brings consequences

ENVIRONMENTAL LIABILITY IS 4 | Germany nothing new in Europe. Yet A two-tier system makes life European risk managers still diffi cult for risk managers aren’t seeing the need to buy a standalone environmental 6 | France insurance product. Many are The Bouches-du-Rhône disaster happy to seek out extensions in illustrated the cost of pollution their general liability policies to cover risks introduced by the Environmental Liability Directive (ELD). 8 | United Kingdom A number of environmental disasters have occurred Firms are still burying their in Europe since the ELD passed into law. France’s head in the sand over the ELD Bouches-du-Rhône oil spill received a great deal of media attention, yet the take-up of environmental insurance 10 | Spain & Portugal products remains low. And in the case of the Hungarian Cover is mandatory but fi rms toxic spill, the government fears cracking down on the still lack awareness company involved for political and economic reasons. Neither incident has provided particularly accurate data for 12 | Eastern Europe what constitutes environmental liability or shown how The fall-out from the toxic spill regulators will approach the subject in a post-ELD world. So, as risk managers mull the consequences of a 14 | Scandinavia major incident, insurance could start to look like the right Why Scania won’t buy ELD cover option. But the decision might not be le in their hands for much longer. The European Commission is considering 16 | Resolving a claim introducing a Europe-wide mandatory fi nancial protection The environment’s true value scheme. Companies may have to buy insurance or fi nd another way of reserving cash to pay for the clean-up if 18 | Buying the right cover they cause damage to the environment. Assessing the impact of the ELD Nathan Skinner is editor of StrategicRISK 20 | Conclusion More data is needed before ELD take-up will increase

Editor Nathan Skinner Events logistics manager SPONSORED BY Editor-in-chief Sue Copeman Katherine Ball Market analyst Andrew Leslie Publisher William Sanders Group production editor Áine Kelly tel: +44 (0)20 7618 3452 Deputy chief sub-editor Laura Sharp Managing director Tim Whitehouse Business development manager Donna Penfold tel: +44 (0)20 7618 3426 Production designer Nikki Easton Group production manager To email anyone at Newsquest Tricia McBride Specialist Media Senior production controller please use the following: Gareth Kime fi rstname.surname@ Head of events Debbie Kidman newsquestspecialistmedia.com

Strategic RISK 1

01_03_IntroFword_SRELG11.indd 1 15/04/2011 10:36 ENVIRONMENTAL GUIDE [ INTRODUCTION ]

operators are required to take Do you know preventative measures in the event of an imminent threat of environmental the consequences of damage. This proactive approach contrasts with established environmental law, which is mainly concerned with environmental liability? repairing the damage a er the event.

Focusing on the fi nancial repercussions of Financial drivers pollution, the Environmental Liability There is still much uncertainty surrounding the operation and Directive brings much-needed clarity enforcement of the ELD, particularly in terms of fi nancial penalties for polluters. This is understandable given how ITHOUT QUESTION, THE wide-reaching it is geographically and W Environmental Liability Directive with respect to the liabilities created, so (ELD) is a signifi cant development in only time will tell as the law is allowed to environmental law, but we must be ‘bed in’ across the EU. mindful not to focus solely on this most One key driver behind enforcement recent legislation and ignore existing law, will be the resources available to the which is well regulated in many regulators. Unfortunately, tough economic territories. These laws still exist and will times see public bodies reducing staff still be enforced alongside the ELD, not numbers, which will only weaken their replaced by it. In some EU member states, ability to enforce new regulations. however, the position is very diff erent, as The economic climate may also be less well-developed environmental law responsible for government reluctance in means the ELD has meant a more enforcing environmental regulations too fundamental change. strictly. The need to help industry out of What the ELD does do well is focus recession means a heavy-handed far more attention on the consequences approach to enforcement may not be the of environmental damage, particularly right way to go at this time. with respect to natural habitats and Regardless of enforcement activity, protected species, which we may call changes in legislation are a positive ‘biodiversity’. Indeed, the introduction of driver in companies’ growing awareness complementary and compensatory of their environmental responsibilities, remediation costs is testament to this which is coupled with an increased focus core focus, and demonstrates how the on corporate responsibility across the fi nancial consequences of environmental board. Reputational risk is certainly a big damage for the polluter will be more part of this as customers, shareholders, severe under the new regime. The investors and other stakeholders will introduction of strict liability is another increasingly look at environmental important development, replacing the performance when making decisions. need to prove fault or negligence for While companies may be more aware many ‘regulated’ industry sectors. of environmental risk, recognition of the The ELD also looks closely at consequences – despite the legislative preventing incidents in the fi rst place, as drivers – is questionable. Many will

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01_03_IntroFword_SRELG11.indd 2 15/04/2011 10:36 associate such risks with large-scale pollution events, such as that which SUMMARY occurred in the Gulf of Mexico last year. The Environmental Liability Directive This focus on severity means businesses, regardless of type and size, • The ELD focuses on the consequences of environmental overlook their own environmental damage and recognises the need to expand existing laws. exposures, plus it must be remembered • Financial provision for environmental damage is a rapidly that fi nancial consequences for each developing requirement in the EU, and companies should company are relative. Indeed, the costs protect their business regardless of legal requirements. of remedying environmental damage • Demand for environmental insurance has risen in line with may easily be absorbed by one risk awareness. organisation, but could threaten • Economic conditions mean many organisations cannot the solvency of another. aff ord to assess environmental risks or take out insurance – but they cannot aff ord the uninsured losses either. Covering yourself One very important development championed by the ELD in particular is other EU territories, but of late has the concept of fi nancial provision for focused on ‘operational’ environmental environmental damage. While this risks: those that companies face as a initiative is still in its infancy across the result of their ongoing business activities. EU and has without doubt been slowed The goal here is that this type of by the current economic downturn, it is a insurance be considered in the same way signifi cant change and presents good as other lines, like public liability or opportunities for the insurance industry. property. Insurance is seen by many as the most There is room for development, but obvious and arguably effi cient solution to specialist insurers in this sector have satisfy fi nancial provision requirements. made signifi cant strides in making this Transferring the fi nancial type of insurance accessible and consequences of environmental risks to aff ordable for all organisations, the insurance market should be a key irrespective of size or industry sector. consideration for companies whether Certainly, environmental risk insurance legislation encourages it or not. While is not exclusively for large multinational many organisations are unlikely to act corporations; a wide range of entities unless forced to by legal or contractual from small family-run fi rms to global requirements, it is evident that as organisations have adopted this level of awareness of environmental risks has risk management. developed, so too has demand for Current economic conditions are environmental insurance solutions. making it diffi cult for many to assess Companies that appreciate the environmental risks or indeed purchase importance of such risks and the need to adaquate insurance protection, but manage them strategically also recognise companies must ask whether they are that environmental insurance can be an able to aff ord the consequences of effi cient and eff ective means to support uninsured environmental events. SR this strategy. The environmental insurance market Wayne Harrington is UK and Ireland is well established in the UK and many manager of environmental risk at ACE

Strategic RISK 3

01_03_IntroFword_SRELG11.indd 3 15/04/2011 10:36 ENVIRONMENTAL GUIDE [ GERMANY ]

In this environmental KEY ADDITIONAL state, the polluter LIABILITIES FROM THE ELD • Operators have to report any always pays pollution incident – it is a criminal off ence not to do so. But a ‘patchwork of regulation’ makes • Strict liability – fault or Germany a tough place for risk managers to negligence is not a prerequisite for enforcement action in some get to grips with environmental exposures industries. There is no limit on fi nancial liability. • Increased scope for claims NVIRONMENTAL LIABILITY IN – citizens or environmental KEY POINTS E Germany is split into three main groups can launch their own principles: claims against polluters. 01: Authorities can • The ‘precautionary principle’ is • More onerous remediation. intervene if they aimed at avoiding or minimising the There are three new types: believe there is a possibility of pollution in the fi rst – primary remediation: returning possibility of place. Authorities can intervene and the environment to a baseline pollution. regulate facilities even if they have condition a er pollution; 02: The polluter not yet polluted. – complimentary remediation: if must pay for all • The ‘polluter pays’ principle means baseline conditions can’t be clean-up costs. that anyone responsible for causing achieved then the polluter has 03: Environmental environmental harm will be liable to remediate, for example by protection is a for the clean-up costs. creating a new habitat; and subject at the • The ‘co-operation principle’ means – compensatory remediation: forefront of that environmental policy must be compensation for losses until public opinion. developed in close collaboration with the primary or complimentary 04: A duty to protect public and private organisations. remediation is completed. the public means German environmental law is mostly • Mandatory fi nancial security companies creating governed by federal acts. Administering – member states are developing environmental and enforcing the laws, however, is le to mechanism to ensure polluters hazards must take its 16 states. Important federal authorities have the capability to carry out reasonable include the Federal Ministry for the environmental remediation. precautions to Environment and the Federal prevent damage. Environment Agency. “While the Federal Ministry defi nes on their environmental exposures in the political agenda, the Environmental Germany. “Germany is one of the hardest Agency is in charge of environmental markets to fi nd environmental insurance research, planning and administration,” cover because there is a patchwork of Freshfi elds Bruckhaus Deringer partner regulation,” Ferma’s general secretary Wolf Friedrich Spieth explains. and environment expert, Pierre Sonigo, This two-tier system makes it says. “Cover is available, but generally diffi cult for risk managers to get a grasp insurers are very strict with their terms.”

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04_05_Germany_SRELG11.indd 4 15/04/2011 10:45 Added to this, and making the climate even more onerous for business, INSIGHT Germany is regarded by many as an Ferma says no to mandatory insurance ‘environmental state’, meaning that it considers environmental protection as ONE OF THE MAIN IMPACTS OF THE HUNGARIAN TOXIC one of its central tasks. sludge disaster and the Deepwater Horizon Gulf oil spill has “Public opinion in Germany is been to encourage the European Commission to reconsider its traditionally very sensitive to position on mandatory insurance protection for environmental environmental issues,” Freshfi elds liabilities. The Commission is currently considering a EU-wide Bruckhaus Deringer partner Michael compulsory scheme for all oil companies. Ramb says. The utmost care should be As it stands, fi nancial protection is compulsory in eight applied when dealing with these issues. European countries, but not all. Ferma, representing the interest of risk managers in Europe, is against the idea and any type of The nitty gritty mandatory insurance for large risks. “We do not think there As in most countries, the heavy should be mandatory insurance,” says chair of Ferma’s engineering and industrial companies environmental liability working group, Pierre Sonigo. (such as refi neries, chemical plants and “We feel there are suffi cient solutions for the oil industry in paper mills), which are more likely to the commercial insurance market so there is no need to make it harm the environment, are the subject of mandatory. As a principle, we are against mandatory insurance, special licensing requirements. because we think this increases prices and removes If a company is directly responsible competition. for pollution that causes danger to public Other options, such as self insurance, disappear for risk health and the environment, the managers if the government imposes mandatory insurance authorities can take action, including protection, says Sonigo. “The EU wants to add security by pursuing costs for remediation measures. creating guaranteed security schemes to pay for environmental Notably, Germany’s Federal Supreme damage, because it is the government that ultimately will have Court has eased the rules of evidence for to pay. But this is not the way to do it.” potential claimants and reversed the burden of proof. The courts have also applied the concept of a ‘duty to protect In 2007, Germany adopted legislation the public’ to environmental liability. Now, that implements the European anyone creating environmental hazards Environmental Liability Directive (ELD). has a duty to take reasonable precautions The law closely mirrors the wording of to prevent damage to third parties. the directive, which creates several new According to the Federal Water Act, liabilities (see box, le ). any person who introduces or discharges There are two important additional a substance into the water that changes provisions under the German laws. One its physical, chemical or biological is that it is the state’s discretion whether composition is liable if damage is caused. to allow an operator to avoid liability Certain acts of environmental for environmental damage by complying degradation are also regarded as criminal with the conditions of a permit. off ences, including air and water pollution The other is that non-governmental caused by noxious substances, waste organisations are entitled to claim disposal that endangers the environment, that remedial measures should be and the unauthorised operation of taken, even if they are not themselves environmentally dangerous installations. aff ected by it. SR

Strategic RISK 5

04_05_Germany_SRELG11.indd 5 15/04/2011 10:45 ENVIRONMENTAL GUIDE [ FRANCE ]

The €20m environmental disaster that changed everything

French fi rms are not obligated to buy environmental insurance, but an oil spill was a painful illustration of how as liability increases, so must fi nancial cover

IFFERING APPROACHES ADOPTED operator to decide if it’s worth buying KEY POINTS D by each European country add insurance protection. complexity to the issue of environmental Recently, France set in motion an 01: Environmental liability and mean the risks vary across imperative that will have major law was already the continent, depending on where a implications, particularly for oil well established in company has facilities. companies transporting fuel via pipelines. France pre-ELD. In addition, it is the responsibility of 02: The Bouches- the enforcement authorities to determine The Bouches-du-Rhône disaster du-Rhône oil spill how much a company will have to pay to In August 2009, the French government led to changes in remediate the environmental damage declared an environmental disaster in the scope of the caused by pollution. This means identical one of Europe’s most beautiful nature directive. pollution incidents could be treated very reserves a er oil spilled from an 03: There is steady diff erently, depending on the country underground pipeline in the southern growth in specifi c and its enforcement approach. region of Bouches-du-Rhône. More than insurance cover but French environmental law was well 4,000 cubic metres of crude oil spilled take-up remains low. established before the Environmental over fi ve acres of agricultural land. 04: Firms should Liability Directive (ELD) came along. The pipeline, operated by the South take advantage of France transposed the directive in August European Pipeline Company, reportedly cheap cover as 2008. Unlike in other parts of Europe, carried 23 million metric tonnes of crude regulators ramp up there is no legal obligation for companies oil per year to refi neries and enforcement eff orts. to buy fi nancial security against petrochemical plants in France, Germany environmental risks. It’s still up to the and Switzerland. The clean-up costs were

A question of liability: an oil spill in Bouches-du-Rhône covered over fi ve acres of one of Europe’s most beautiful nature reserves Scania

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06_07_France_SRELG11 6 15/04/2011 10:49 around €20m, according to reports. In this case, the French courts ruled INSIGHT that the operator was not bound by strict Insuring against the ELD liability. As a result of the incident, however, a change in French law means ELD-RELATED LIABILITY IS A NEW TYPE OF LIABILITY AND IT that heavy industrial activities will in cannot be adequately covered by standard general third-party future fall under a regime of strict liability. or property insurance, Willis has warned. That means the burden of proof falls on A report by the broker states that some general liability the operator to show that it is not liable insurers have developed new wordings to extend the coverage for the incident. to include certain ELD liabilities. Brokers and insurers generally “The French regulator intervened accept that the most comprehensive ELD cover is only quickly,” says Dorothee Prunier from ACE’s available through the specialist environmental market. environmental practice. “But in this case “Environmental cover is quite cheap,” chairman of Ferma’s the loss did not enter within the ELD’s environmental working group Pierre Sonigo says. “Getting an strict liability regime, which means that extension for ELD risks is generally pretty easy.” the regulator has to prove negligence Environmental insurance provides cover for prevention which makes the procedure longer.” and remediation costs as defi ned under the ELD. This is not limited to sudden or accidental and off site clean-up only, but Penetration remains low includes gradual pollution and other forms of damage to the The incident provides insurers and risk environment. “It is much better to have a standalone managers with an illustration of the likely environmental insurance policy,” Sonigo adds. costs associated with environmental “Most large companies or sophisticated buyers have a pollution. “I think most of the costs in this standalone environmental policy. And most companies try to case were because the pipeline was in a get hold of a global programme.” remote place, so it was diffi cult for the operator to get access to the site to do a clean-up,” Prunier comments. pollution cases under the ELD is up and Large companies are beginning to that clean-up costs could be 40 times realise that the ELD has upped their higher under the new directive. environmental exposure and therefore The environmental insurance market their insurance needs, she adds. This is is expected to grow by 15%-25% per year, contributing to steady growth in the from a current estimated turnover of environmental insurance market. €40m. And competition is driving Overall, however, the take-up of insurance prices down. “It is easy to fi nd specifi c environmental insurance reasonable cover at a good price,” products by France’s industrial says Ferma’s environmental expert companies remains low. Medium-sized Pierre Sonigo. businesses in particular usually refrain The regulatory authorities in France, from buying a specialist environmental as in many other parts of the world, are policy. Estimates suggest there are under-resourced and therefore fi nd it around 10,000 policies in France. With tough to enforce environmental laws around two million industrial companies everywhere and all the time. But insurers in France, this suggests that penetration warn that the French authorities are remains low. looking to beef up their enforcement In response to this, insurers point to eff orts. Now is the time for companies to evidence that suggests the frequency of make sure they’re fully covered. SR

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06_07_France_SRELG11 7 15/04/2011 14:53 ENVIRONMENTAL GUIDE [ UNITED KINGDOM ]

EU directive leaves you to count the cost of pollution on your property

But many UK businesses are underprepared and underinsured for the extra liabilities they face a er introduction of new environmental legislation

HE ENVIRONMENTAL LIABILITY and many are simply waiting for KEY POINTS T Directive (ELD) has added a something to happen.” He says this is a substantial layer of liability in the UK, dangerous attitude that leaves businesses 01: The ELD means says Stephen Shergold, an environmental exposed to substantial uninsured costs businesses can now lawyer with SNR Denton. Before the ELD, and reputational damage. be held responsible people were only concerned with “We are still fi ghting to fi nd an for complementary traditional remediation costs, such as adequate frequency of losses to be and compensatory removal of the pollution. Now able to build up a good database and remediation complementary and compensatory understand the exposure,” Sonigo says. costs arising from remediation costs can be levied as well. “It’s always diffi cult to understand if the pollution. Those costs will depend on how damage would be under the ELD or 02: Little is known the regulator chooses to enforce existing environmental regulations. about how the ELD compensatory and complementary Many regulators are sticking to existing will work, so the measures, says Shergold. environmental regulations, rather than risks are being There are examples of regulatory enforcing the ELD, because that’s what ignored by many. authorities using the ELD to prosecute they know.” 03: Businesses are companies rather than using traditional being urged to forms of environmental regulations, Financial fears make sure their because they consider it a simpler method. Polestar Company group risk manager insurance covers the The Environment Agency, the UK’s Gary Marshall says that in constrained new liabilities. environmental enforcer, is currently times some companies may not buy pursuing United Utilities for environmental insurance to cover the compensatory remediation a er serious new liabilities. “There is a very developed water pollution in July 2009, which sophisticated market for environmental caused the death of 6,000 fi sh at Three insurance but it is an extra cost that Pools Waterway in Southport. This is in people may not be prepared to bear at the addition to the €26,000 fi ne it also moment, even though the legislation has imposed on United and is intended to extended the scope of our liability,” he says. return the habitat to “the same level of UK businesses are “dangerously natural resource or service as would have exposed” to the possibility of heavy fi nes existed if the damage had not occurred”. under the ELD, according to Aon. UK But this is one of the few test cases businesses are typically unaware of the working its way through the courts. consequences of the ELD, which holds Ferma general secretary Pierre Sonigo them fi nancially liable for damage to the says: “Companies and their risk managers environment caused by activities on their remain unsure of how the ELD will work property, even if the damage occurred

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08_09_UK_SRELG11 8 15/04/2011 12:22 because of the activities of former owners. This means that nearly every property FOCUS ON owner in Britain needs to be aware of Where is fi nancial protection mandatory? the environmental history of their property as well as the consequences of current operations. BELGIUM GERMANY CZECH SLOVAKIA Not Not REPUBLIC Due to be “UK businesses are potentially mandatory, mandatory. Due to introduced sleepwalking into a real crisis if but fi nancial Operators of commence in 2012 they continue to ignore the very real securities may certain in 2013 for threat that environmental risks pose be required hazardous listed once activities permitted to their balance sheets,” says Aon Risk environmental are required activities Solutions’ environmental director for the damage has to hold UK, Europe, Middle East and Africa, occurred environmental Simon Johnson. insurance “EU and UK regulation is increasingly placing the blame for damage to the environment at the feet of land owners, so it is vital they are aware of the history and issues involving their property.”

Priority change HUNGARY BULGARIA Currently, environmental liability is not Introduced Due to a day-to-day concern for businesses, adds 1 January commence 2010 in 2011 Shergold. That’s because it’s still a challenge to get a handle on what the consequences will be. “The extent of the new liabilities and the circumstances PORTUGAL SPAIN ROMANIA GREECE in which they will be applied are still Introduced Delayed until Introduced Introduced poorly understood,” he says. 1 January May 2011 1 January 1 May 2010. 2010. because 2010. Currently Biodiversity That is not to say that organisations Proof of the industries need only in force also protected aren’t aware of the risk within their insurance to additional time for shipment by national business. They are, for example, considering the authorities to complete of waste laws the proximity of their operations to sites is required their risk assessments to of special scientifi c interest or natural determine importance, says Shergold. their fi nancial Beyond that, the need to ensure guarantee that their insurance policies will cover amounts Source: Willis liabilities, such as those arising from the ELD for example, may not be so well understood. “A lot of businesses have extended CURRENTLY EIGHT MEMBER STATES IN EUROPE their general liability policies to cover have already introduced mandatory fi nancial provisions for sudden and accidental events,” Shergold the ELD. These are: Bulgaria, Czech Republic, Greece, Hungary, says. “But there’s no certainty over Portugal, Romania, Slovakia and Spain. The Commission is whether those policies will respond to the mulling a EU-wide compulsory scheme. new types of remediation measures.” SR

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08_09_UK_SRELG11 9 15/04/2011 12:22 ENVIRONMENTAL GUIDE [ SPAIN & PORTUGAL ]

The rules may be stringent but have companies been too slow to react?

It may be mandatory for Spanish companies most stringent approach to the to cover themselves against environmental implementation of the ELD. damage, but a lack of awareness lingers No protection over the risks and cover available Despite this, a survey of over 700 Spanish companies conducted by TNS Global Market Research and sponsored by ACE N SPAIN, A DAM BREACH AT THE Iberia revealed a signifi cant lack of KEY POINTS I Boliden mine near Seville in April awareness of environmental legislation 1998 led to one of the most harmful and the risks aff ecting businesses. 01: Spain has environmental incidents in the history The research, published in August adopted the of the country. The rupture released 2011, also found a lack of knowledge most stringent around fi ve million cubic metres of toxic about the insurance protection available approach in Europe slurry, containing lethal levels of lead and to protect against these risks. The to the ELD. heavy metals. 02: There is still a The accident devastated the lack of awareness local environment, contaminating a FOCUS ON ASSESSING from companies 40km stretch of two local rivers as well EXPOSURE TO THE ELD about the legislation as vast swathes of the surrounding and the protection farmland. OFFICIALLY, IT IS MANDATORY TO available to them. In total, almost 40 tonnes of fi sh get fi nancial security against 03: A third of study were killed, and around 5,000 geese environmental risks in Spain. But respondents said and 20,000 water birds seriously operators are still waiting for more they would not harmed. Remedial activities required information about what exactly they protect themselves the excavation of 12 million tonnes need to buy to meet the legal against a possible of contaminated soil and resulted in requirements. The Spanish regulators accident. a total economic loss in the region have not yet defi ned what companies 04: Spanish of €400m. need to buy or established any companies’ general The disaster was particularly specifi c wordings or limits. business policies do damaging because the Doñana “Spain is working on a way to not cover them National Park is one of Europe’s most assess insurance limits per location against all important natural sites of biodiversity, depending on the exposure and requirements of thanks to its lagoons, marshland and the sensitivity of the environment,” environmental scrubland. It is also an important resting continental Europe manager of liability. place for migratory birds, and the environmental risk for ACE, Dorothée accident occurred in the middle of Prunier, says. nesting season. Businesses with operations in Perhaps because the Boliden incident Spain, as well as other regulatory still looms so large in the Spanish bodies, eagerly await the fi ndings. collective memory, Spain has adopted the

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10_11_SpainPort_SRELG11 10 15/04/2011 12:24 showed that over half of the businesses did not have specifi c environmental TYPES OF PROTECTION cover. But, more alarmingly, over 30% said they would not take any action to protect themselves against a possible environmental accident. Companies said their public liability What is the most popular form of and general business insurance policies environmental risk protection? provided them with suffi cient environmental risk protection. But ACE Iberia said that these products do not conform to the requirements of Insurance environmental liability. 43% Best intentions The research also revealed that levels Technical reserving 5% of awareness of the Environmental Liability Directive (ELD) were low, with 65% of respondents saying they were Collateral unaware that the Spanish government 2% could make it obligatory for them to have a fund, collateral or insurance to cover IN A SURVEY, SPANISH COMPANIES PLACED INSURANCE AS their business against possible the most likely form of environmental risk protection they environmental damage. would consider (43.1%). This was far ahead of other forms “Spanish companies are highly including technical reserving (4.8%) and collateral (2.4%). dedicated to the environment and Source: TNS study, sponsored by ACE Iberia are conscious of their role. But there is a major lack of awareness about current environmental legislation, and companies would like more LATEST information,” TNS research director New soil pollution directive Mariola Alfonso says. “There are two sides to this situation THE EUROPEAN COMMISSION IS WORKING ON A NEW because in spite of the clear lack of directive – the Soil Management Ordinance – to complement awareness, there is also a positive the ELD and to defi ne how regulators should test the quality of attitude towards improvement, soil. The objective is to introduce a more systematic method for demonstrated by the fact that one-third testing soil contamination. of the companies said they would be “This could have a signifi cant impact in some countries, prepared to invest to protect the such as Eastern Europe, because these places do not have environment.” strong regulations for soil pollution,” ACE environmental Respondents placed insurance as practice’s Dorothee Prunier says. “If the directive establishes a the most likely form of environmental new way of testing soil contamination, then it could have a risk protection they would consider big eff ect on the local regulatory environment.” (see chart) – signifi cantly ahead of other Consequently, operators may be required to clean up forms, including technical reserving and more frequently. collateral. SR

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10_11_SpainPort_SRELG11 11 15/04/2011 10:51 ENVIRONMENTAL GUIDE [ EASTERN EUROPE ]

The Hungarian toxic spill has brought the ELD into sharp focus

Risk management can not be taken lightly, and even those taking precautions can fall foul of accidents, proving adequate insurance is vital

NVIRONMENTAL LIABILITY IN over surrounding towns, contaminating KEY POINTS E Eastern Europe is “a bit of a mess”, rivers and killing seven people. says Ferma environmental working group A dam wall at the Ajka Timföldgyár 01: Insurers are not chairman Pierre Sonigo. Insurers are aluminium processing plant, owned by touching risks in avoiding the risks there, he says, because MAL Hungarian Aluminium Production Eastern Europe due there are a host of facilities with poor and Trade Company, was breached on to low environmental safety records and environmental issues. 4 October 2010, unleashing a two-metre standards. European insurance association, the wave of red sludge that aff ected 16 square 02: Environmental CEA, says that environmental liability is miles of land. Hungary’s government liability is gaining an emerging issue in Eastern Europe and declared a state of emergency. Experts prominence in light is likely to receive renewed attention have placed the cost of clean-up at of the ELD. following the recent toxic spill in around €20m (offi cial fi gures are yet to be 03: Inadequate Hungary, which has been described as released). insurance can result Europe’s worst environmental disaster. At the time of the spill, Aon warned in serious costs to The accident happened in the town that the Environmental Liability the business at fault. of Ajka where more than 700,000 million Directive (ELD) would “bare its teeth” cubic metres of industrial waste fl ooded and that the environmental disaster in

MILESTONES

July 1976: Toxic chemical release in Seveso suburb Toulouse, France, moves emphasis away from ‘risk of Milan, Italy. management’ to ‘risk mitigation’ and paves the way 1982: First Seveso Directive, enforcing the ‘need to for a new dangerous chemicals regulation. know’ principle whereby residents should be January 2002: Commission tables a proposal for a informed of local environmental risks. Directive on Environmental Liability. April 1998: Dam containing toxic waste bursts at April 2007: Deadline for member states to Aznalcoâllar in southern Spain. implement the Environmental Liability Directive. December 1999: Total Erika tanker sinks off the October 2010: A fl ood of toxic red sludge is coast of Brittany, France, spilling 20,000 tonnes of oil. accidentally released from an aluminum processing January 2000: Europe publishes working paper on plant in Hungary. It is the largest environmental the Prevention and Restoration of Signifi cant disaster in Europe since the passing of the ELD. Environmental Damage. October 2010: Commission advises against September 2001: Fertiliser plant explosion in compulsory liability scheme.

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12_13_EastEuro_SRELG11.indd 12 15/04/2011 10:55 Hungary should serve as a warning fault if they do not have suitable about the strength of new environmental insurance coverage in place.” liability laws. The Hungarian government has expressed regret over the deaths and ELD has strong teeth environmental damage caused by the The broker used the incident to spill, but it will be aware of the political draw attention to new ELD liabilities and fi nancial consequences of any action and the benefi t of insurance. Aon Risk it takes. MAL can expect heavy fi nes but it Solutions’ environmental director for is in the interest of the government to the UK, Europe, Middle East and Africa, keep the company viable. If it goes Simon Johnson, commented: “While bankrupt, it is the government that most companies are good corporate will be le with the very heavy costs citizens and take risk management of clean-up, and it would also lead to with regards to the environment considerable job losses. extremely seriously, occasionally While the Hungarian government accidents or incidents beyond anyone’s balances the need for strong punitive control can happen. action against political and cost “Under the ELD, which has some considerations, MAL and similar plants, extremely strong teeth, it is entirely both in Hungary and central and eastern possible that an accident such as the Europe generally, remain a “toxic tragedy in Hungary could ultimately lead time bomb”, according to Hungarian to the total collapse of the company at Greenpeace campaigner Balázs Tömöri. SR

EU MARKETS Environmental liability insurance

BASIC Belgium Hungary GOOD Bulgaria Ireland France ADVANCED Cyprus Malta Italy Germany Czech Republic Poland Netherlands Denmark UK Sweden Estonia

GENERALLY SPEAKING, INSURERS HAVE RESPONDED POSITIVELY TO THE LIABILITIES CREATED UNDER THE EU Environmental Liability Directive. Most insurers say there is good cover available for ELD risks, although insurers will never cover 100% of ELD-related liabilities for all activities. On the other hand, risk managers tend to show less interest in buying cover for ELD liabilities, and this lack of interest is increased by the slowdown in the economy. The chart shows how European countries assess their ELD insurance market. France, Germany, Italy and Spain have a long-standing culture of environmental protection laws and, thus, have a rather mature insurance market designed to address environmental liability claims. Countries such as the UK, however, have less of an environmental liability culture and therefore fewer environmental liability insurance products. As for Eastern European countries, many are still developing a liability culture in general, meaning that the environmental liability insurance market is just emerging. Source: European Commission study on the implementation eff ectiveness of the ELD, November 2009

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12_13_EastEuro_SRELG11.indd 13 15/04/2011 10:56 ENVIRONMENTAL GUIDE [ SCANDINAVIA ]

The company that believes prevention is better than to insure

KEY POINTS CASE STUDY Scania is in no rush to buy specifi c environmental insurance 01: Scania consciously chooses NOT ALL COMPANIES CHOOSE TO BUY With the environmental audit, we look at to extend the a dedicated environmental insurance 20 categories and compare the protection coverage of its policy. In Scandinavia, the insurance measures with the Scania Group-wide general liability manager for truck, bus and engine standard. If it’s good, the facility gets a policy rather than maker Scania decided to seek an blue mark and if it’s bad they get a red one. buy a specifi c policy. alternative form of insurance protection. Management can quickly see that if there’s 02: It conducts “We don’t buy a specifi c a lot of blue, then we are doing well.” environmental environmental insurance policy,” This risk scorecard approach is audits on its Scania corporate insurance manager popular with many large companies with production sites to Martin Sijmons says. “We prefer to sophisticated risk management procedures. try to prevent extend the coverage of our general Another reason Scania doesn’t buy a pollution issues. liability policy to include sudden and standalone environmental policy is 03: Insurance accidental pollution.” because Sijmons believes there’s a dearth manager Sijmons He says the emphasis is on risk of expertise in some parts of the market. believes brokers lack avoidance rather than risk transfer. “We the expertise to have discussed internally the benefi ts of understand Scania’s a standalone environmental insurance exposures. policy, but ultimately we would like to ‘No one that I have spoken prevent rather than insure. That means to so far has been able to making sure that we handle things properly. We don’t use any prohibited put a fi nancial fi gure on the chemicals and we make sure our people worst-case environmental are protected properly.” As an engineering and exposure for us’ manufacturing company, Scania is Martin Sijmons Scania prone to a host of environmental risks, such as pollution from one of its many “I don’t think brokers are properly staff ed workshops or production sites. “We have on environmental insurance issues. No one three production sites in Sweden and 70 that I have spoken to has been able to put garage workshops,” Sijmons says. a fi nancial fi gure on the worst-case He describes the environmental environmental exposure for us.” assessment process. “We make our But being able to identify the own audits of the production units but worst-case environmental exposure for there are a lot of workshop sites, so the his company would help demonstrate intention is to do spot checks on those. the value of purchasing insurance

14 StrategicRISK

14_15_Scandin_SRELG11.indd 14 15/04/2011 10:56 protection, he adds. “If I can identify the exposure, then I can identify the correct level of insurance. But at the moment that’s diffi cult to do with environmental liability.” For the time being at least, Sijmons doesn’t think the products exist that can match his company’s unique requirements. “We haven’t looked at environmental insurance products because, in my opinion, the insurance is quite expensive and the breadth of cover is quite low. “At the moment, the risk is on our balance sheet and we are one or two years away from looking for a specifi c environmental insurance solution.” Building on the environmental work he has already done and as part of his Not for us: Scania has not yet purchased specifi c risk assessment, Sijmons plans to map environmental insurance out where Scania’s Swedish facilities are for its Swedish exposures in relation to sites of specifi c scientifi c or Scania natural importance. The risk is greatest close to these sites, he says. But in other countries, where the environmental risk profi le diff ers, ENVIRONMENTAL INSURANCE UPTAKE Sijmons is forced to adopt an alternative approach. “We are looking at A EUROPEAN COMMISSION STUDY ON THE environmental liability policies in some implementation of the ELD in 2009 said that, rather than of the other jurisdictions, like Spain, there being “a problem in obtaining insurance for ELD where the risk is more onerous. We liabilities”, there is a general lack of operator interest in have to abide by the law so we have purchasing ELD-related cover. The study said operators are to buy environmental cover there. But either unaware of the ELD or do not consider that it applies to the ELD has not had much of an impact them. Insurers suggest greater media coverage of signifi cant in Sweden.” SR environmental damage may be needed to increase uptake.

Strategic RISK 15

14_15_Scandin_SRELG11.indd 15 15/04/2011 12:24 ENVIRONMENTAL GUIDE [ RESOLVING A CLAIM ]

How do you start to put a price on the environment?

The Hungarian pollution disaster highlights the problem of quantifying damage to the environment – a er all, you can not manage what you do not measure

OLLOWING A PROLONGED PERIOD requirement to defi ne, as accurately and KEY POINTS F of heavy rain, the retaining wall of a comprehensively as possible, the quality substantial waste sludge lagoon at an and natural status of the ecology and 01: A baseline of aluminium production plant in Hungary habitats that existed around the site prior environmental suff ered a catastrophic failure. The to the environmental damage event. quality should be resultant escape of large volumes of toxic agreed with the and corrosive liquid waste caused death Restoration required regulator before a and injury to inhabitants in the nearby Once a baseline of environmental quality pollution event. towns and signifi cant amounts of has been established, the extent of 02: If no agreement property damage. The sludge engulfed remediation, restoration and exists, the regulator large expanses of farmland and open compensation needed to return the may speculate as to ground, polluting substantial tracts of ecosystems to their pre-damage event the environmental land and the local river system. status will be defi ned. Where no accurate quality. The ensuing contamination is description of the baseline prior to the 03: Estimating believed to have extended over an area of event is available, the regulator may infer the scale of some 40 square km, with adverse a scope of restoration required based on a environmental ecological eff ects on natural habitats and speculative view of the environmental liabilities will take within a number of interconnecting quality prior to the event. the form of a rivers, including the Danube. It would have been preferable, maximum probable Hungary’s environment minister therefore, to establish, document and loss estimate. described the spill as an “ecological agree a baseline of environmental disaster” and the predicted cost of quality with the regulator prior to any clean-up is estimated to be in the region environmental damage event occurring. of €20m, with the necessary remediation Eff ectively defi ning the baseline would works to take more than a year. have involved an economic evaluation of The environmental regulator is likely the natural environment surrounding, to deploy the EU’s Environmental and in close proximity to, the site of Liability Directive (ELD) as the primary operation and including a detailed piece of legislation to ensure that descriptive account of the ecology and clean-up and restoration of the habitats that existed naturally. environment is achieved, which would Estimating the potential scale of lead to the operator being fully culpable environmental liabilities that can be under the ‘polluter pays’ principle. associated with a pollution and On the understanding that ‘you environmental damage event of this cannot manage what you do not nature will usually take the form of a measure’, there will be an initial maximum probable loss estimate. This

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16_20_Resolving_SRELG11.indd 16 15/04/2011 10:58 will include an estimate of the extent of ecology and habitat destruction and TOP TIPS the possibility of wider environmental Quantifying the environmental risks damage that will inform the decision- making process in respect of issues such • Establish the environmental baseline for each site of as the appropriate limit of indemnity to operation. This should include a detailed description of the be gained should environmental species, habitats and ecology that exists, and a statement insurance be considered necessary. on the potential sensitivity of ecosystems to pollution and The maximum probable loss environmental damage. estimates should be based on scientifi c • Conduct a maximum probable loss analysis for each site of evidence concerning the species, operation to identify and quantify the potential for ecosystems and habitats at risk and the environmental liabilities associated with realistic loss potential loss scenarios envisaged. scenarios that could cause environmental damage. The ‘value’ of the environment can be • Establish site-specifi c contingency plans and emergency defi ned by quantifying the value of the response procedures to ensure that requirements to resource the environment provides. prevent signifi cant environmental damage from occurring Resource equivalency can be employed are eff ectively managed. that takes account of the direct value • Review requirements of fi nancial security and (wood, agriculture, food, water and so on) environmental insurance associated with the potential to and the indirect value (walking, leisure, cause environmental damage at individual sites of and public open space) of the environment operation, based on nature and scale of activity. as provided by the ecology and habitats.

Standardised risk assessment and restocking of species, communities, The implementation of the ELD in certain habitats and ecosystems may not be EU countries includes a requirement for possible on a like-for-like basis. operators of high-risk activities to hold Requirements for actual remediation fi nancial security, the quantum of which and the technical intricacies of how this may be predicated upon a standardised would be done will depend largely on the risk assessment procedure describing the requirements for complementary and potential liability as defi ned for specifi c compensatory remediation and the types of operation and scale of primary remediation or clean-up commercial activity. requirements. It will be important also to set It is likely the polluter will need to be the potential limit of indemnity on a responsive to the demands of the site-specifi c assessment of the maximum environmental regulator in terms of the probable loss, and not simply based upon type and amount of remediation a generic environmental risk table. required. A company is unlikely to be in Defi ning the requirements for control of the loss at this stage as the remediation should also take into account scope of remediation needs to be agreed the demands for complementary and with the regulator and, as such, the cost compensatory remediation, which of the loss could be uncertain, unless an research has shown could increase the agreed baseline has been established. SR primary remediation estimate by up to 40 times. Consideration should also be Cliff Warman is Marsh’s Environmental given to the fact that precise replacement Practice leader for the EMEA region

Strategic RISK 17

16_20_Resolving_SRELG11.indd 17 15/04/2011 10:58 ENVIRONMENTAL GUIDE [ BUYING THE RIGHT COVER ]

EU’s environmental regime should get companies running for cover

Now that the Environmental Liability Directive is in full force, many fi rms could fi nd their current insurance cover seriously wanting

AST YEAR, WE TOOK A FIRST LOOK environmental damage is signifi cant, KEY POINTS L at the EU Environmental Liability ranging from the tragic release in Directive (2004/53/EC) (ELD) and the western Hungary of red sludge waste 01: The EU implications it would have on the risks from an aluminium works and the oil Environmental that companies faced, their exposure to pipeline failure in Bouches-du-Rhône in Liability Directive liability and what questions they needed southern France, to more modest yet is now in force to ask in respect of their insurance and locally signifi cant releases into rivers, across Europe. any environmental cover. such as the Three Pools Waterway 02: Some countries A year on, it is time to assess the incident in Southport in the UK. have bolted on impact of the directive and to ask: what The EU, in its update report on the additional fi nancial should companies be doing to manage, ELD, estimates that around 50 cases to requirements. control and transfer this risk. date have been, or are being, dealt with 03: Research The ELD was implemented on 30 under the Directive. This will continue to suggests that April 2007, at which time all countries rise as the regulations begin to take eff ect. traditional insurance were supposed to have transposed it into The broad yet non-homogeneous programmes fall national law. In reality, this position was transposition across the EU into national short of providing not fully achieved until 2010. To that law means that multinational companies adequate cover extent our experience is still developing. have to be aware and keep abreast of for environmental It is worth reiterating some key these local diff erences. Many countries damage. points about the ELD: have gone beyond the statutory • It covers damage to the environment, minimum transposition, for example by habitats and biodiversity, however extending the defi nition of protected that occurs, including pollution, but species, or the type of operations that not exclusively from pollution have strict liability and allowable incidents. defences – permit defence, state-of-the- • Incidents that cause damage can be art defence, both or none. sudden and accidental, gradual or even a combination of the two, there Financial security is no distinction made. A number of countries have also put in • The operator is the principal liable place legal requirements for operations person and that person can have that fall within the strict liability regime strict liability where the operations to demonstrate fi nancial security fall within those described in Annex that would be able to recompense for III of the ELD. damage under the ELD if the operator Over the past 12 to 18 months, there could not pay. To date, Portugal and have been a number of incidents where recently Bulgaria have enforced such

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16_20_Resolving_SRELG11.indd 18 15/04/2011 10:58 schemes, and others, including Spain, Greece, Hungary, the Czech Republic, SUMMARY Romania and Slovenia, are yet to enforce Key considerations in buying environmental their respective commitments. Where law insurance for multinational programmes and environmental insurance is available, it is o en the preferred option. • Clear objectives – demonstrate fi nancial security, The International Underwriting cover uninsured exposures. Association of London in its report • Programme structure and design – master, freedom of Environmental Risks: Insured or not? services, local and so on. concluded that when it comes to • Insurer should have experience in European and environmental liability risks, standard or international programmes and the ability to create and traditional programmes fall short of support the right structure. providing comprehensive cover. Indeed, • Commitment of the insurer to environmental business the gap is widening with regulations such as environmental damage and therefore claims may take as the ELD extending further several years to resolve. environmental liabilities and risks. • Coverage should include non-pollution environmental damage, imminent threat, business activities on third-party Costs under ELD properties, and transport. This is demonstrated in a study by • Access to and scope of the insurers’ expert loss control and the French Ministère de l’Écologie, de claims mitigation services. l’Énergie, du Développement Durable et de la Mer published in April 2010, which took specifi c events in the past damage, gradual pollution, own site and assessed the costs under the new clean-up costs and regulatory actions. ELD regime. The ELD presents a liability and The report concluded that costs were exposure to new types of damage across estimated to be around 40 times the the EU. Costs are likely to be higher and regulatory costs originally incurred by potentially signifi cant. Claims on the companies in the late 1990s. This environmental insurance policies covering trend, in very broad terms, is supported these risks are already beginning to by North American experience with come through, so the risk is real. natural resource damage. Unless a specifi c environmental The factors above have all combined insurance policy with coverage for these to provide added impetus for companies damages is part of the insurance with multinational exposures across programme then full coverage is highly Europe and wider to consider not only unlikely and companies risk a signifi cant if they are compliant with any local uninsured loss. requirement to demonstrate fi nancial Finally, although the ELD is European security, but more importantly, if they regulation, the pressures for regulations have any potentially uninsured that protect the environment are global exposures. and many countries have, or are in the Most environmental insurers now process of, developing some form of provide broad cover that includes the liability for environmental damage. SR key elements that may not be covered or fully insured under traditional Simon Johnson is director of Aon’s programmes, including environmental Environmental Services Group

Strategic RISK 19

16_20_Resolving_SRELG11.indd 19 15/04/2011 10:58 ENVIRONMENTAL GUIDE [ CONCLUSION ] Will it take many more environmental disasters before opinions change?

A lack of data is blamed for the low take-up of ELD insurance, but unless demand increases and brings in more statistics, the issue will only continue

N RESPONSE TO A EUROPEAN environmental damage is what’s needed I Commission paper on the to increase uptake. But the truth is that implementation of the Environmental media coverage of a single loss event Liability Directive (ELD), the CEA, Europe’s won’t make any diff erence to the insurance association, had the following diffi culties insurers have in developing to say: “The insurance industry will ELD insurance. Several losses would be continue to deliver creative and necessary for insurers to gain the innovative products for ELD liabilities, relevant data in order to build adequate but considering the newness and capacity and price products appropriately. complexity of the ELD, in conjunction with the current lack of operator demand, its ability to do so is best ensured within The truth is that media the context of a voluntary market.” It shows that the insurance industry coverage of a single loss is against any mandatory rules dictating event won’t make any that companies purchase fi nancial provisions to pay for environmental diff erence to the diffi culties damage. This is a view shared by Ferma, that insurers already have in which informs StrategicRISK that it opposes any mandatory insurance rules. developing ELD insurance Even with some European markets imposing compulsory schemes, the Meanwhile, a lack of strong demand uptake of ELD-specifi c insurance across for ELD insurance prolongs the problem, the continent remains low. This guide has as it results in a lack of statistical data, explored the reasons for the slow growth which means insurers have trouble in the environmental insurance market, assessing the risks properly. which includes a lack of relevant data to The Commission says some insurers predict future claims and reluctance by that have developed ELD policies may some regulatory authorities to bring decide that it’s no longer commercially claims under the new regime. viable to continue to do so, as there’s so Some buyers remain convinced that little demand for them. The insurance extending their general or public liability industry, however, considers this a policies is the appropriate response. It will pessimistic view. Insurers will continue to take time to convince them otherwise. provide ELD-related products as long as Insurers suggest that extensive they have suffi cient experience and media coverage of a case of signifi cant expertise to do so at a sustainable level. SR

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16_20_Resolving_SRELG11.indd 20 15/04/2011 10:58 This special report has been Wayne Harrington, UK and Ireland manager of environmental risk, ACE produced with input from: [email protected]

Dorothée Prunier, continental Europe manager of environmental risk, ACE [email protected]

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