Environmental Liability: Negotiating the pitfalls of the Liability directive

The decision by Slovakia that companies carrying out environmentally hazardous operations must have financial coverage for these liabilities is the latest example of inconsistent implementation of the EU Environmental Liability Directive (ELD). Such inconsistencies make life very complicated for risk managers of multi-national businesses to ensure they are managing risk appropriately. Tony Lennon of Chubb explains.

To date only a few EU countries have made it mandatory for industrial companies to have financial provisions to cover environmental risks, although the ELD has now been implemented in the national legislation of every EU member state. Slovakia is the latest EU nation to introduce such compulsory measures, which became effective from July 1 2012. The ELD was implemented in Slovak legislation back in September 2007, but companies were given until July of this year to prepare for the provision on financial coverage. Slovakia follows Greece, which transposed the ELD into Greek legislation in 2009, with compulsory financial provision required by May 2010.

Delayed implementation has been a feature of the ELD. The Directive was due to have been implemented in each member state by April 2007, but the first wave of implementation was not completed until well into 2009. In addition to the varying pace of implementation, the ELD provides opportunities for member states to place their own provisions into the local legislation and still comply with the minimum requirements contained within the Directive.

This flexibility has led to each member state implementing the Directive in a slightly different way, sometimes with a wider scope than required by the basic Directive. In England, for example, the ELD has been implemented to apply to damage to any Site of Special Scientific Interest (SSSI). The Directive, however, only considered Natura 2000 sites, which are a subset of English SSSIs.

The lack of uniformity is perhaps most significant when considering financial coverage for liabilities. Under Article 14 of the ELD, member states have a duty to “take measures to encourage the development of financial security instruments and markets.”

Most of the western member states, for example, were in the first tranche of countries that transposed the ELD provisions into their local legislation and, in the main, have remained silent on the development of financial provisions. Their argument has been that they would prefer to leave markets to develop suitable financial provisions to cover the responsibilities under the Directive.

The arguments in favour of compulsion, however, are strong. The ELD was designed to ensure that polluters ‘foot the bill’ for the environmental damage they cause and restore the damaged environment and habitat back to its previous condition – which can take a generation to achieve. These remediation requirements add dramatically to the clean-up costs, and often environmental remedial claims run into millions of euros.

Without financial security, the high costs can be crippling for a company. In the aftermath of the 2010 MAL Alumina toxic spill in Hungary, for example, it became evident that the company was illprepared both financially and practically for an environmental incident. MAL had to be nationalised and the Hungarian taxpayer is now bearing the financial burden.

With the current financial situation putting pressure on industrial and manufacturing companies, especially in Central and Eastern Europe, many are looking to reduce costs, and this can only add to the environmental risks. Sadly the Hungarian incident is unlikely to be a one-off event.

Where mandatory requirements have been introduced, the provision of coverage is still evolving. In Slovakia, insurance is considered likely to be the most suitable security measure, although bank guarantees are seen as providing sufficient financial coverage. The fact, however, that banks generally only issue such guarantees for a limited period of time may contradict the requirement to provide financial coverage for the entire period of operation. This shortcoming is also a feature of insurance to some extent, because while most environmental insurance policies can be issued for a number of years they do not cover the whole lifetime of an industrial plant.

Companies can also use cover instruments issued in another EU member state – although it is understood that a certificate has to be issued in the local language confirming that the financial coverage provides the minimum required coverage. In Greece provision can be either through insurance or other financial security measures. In addition to letters of credit and bank guarantees, corporate financial guarantees from parent of other affiliate companies can also be used.

In conclusion, the ELD has raised awareness about environmental damage, but there is little real evidence of its use throughout the EU. There have been few reported instances of ELD type environmental damage and even fewer instances where the full force of the ELD provisions has actually been applied. Some states have introduced compulsory financial provisions, while others have not. In this, and in other ways, the Directive has been implemented across the EU in an inconsistent way. All of these differences from one state to another make it very difficult for risk managers with operations in many member states to ensure that they have a risk management system that meets the objectives of each country’s version of the legislation.

The ELD has raised awareness about environmental damage, but there is little real evidence of its use throughout the EU

Tony Lennon is European Manager, Chubb Insurance Environmental Solutions