Insure, and risk assess, for environmental protection

Written by: Dr Cliff Warman | Published:

While insurance offers a great degree of protection from the financial impact of an environmental incident, carrying out a risk assessment is also vital if companies want to protect both their balance sheet and public reputation. Dr Cliff Warman explains

Over a period of decades, regulatory frameworks have matured to minimise, as far as possible, the likelihood of significant environmental damage. The European Union’s Environmental Liability Directive (ELD), which was introduced in 2010, takes this governance one step further, requiring all necessary preventative measures be taken, should an imminent threat of environmental damage arise, and that environments are returned to baseline conditions if and when damage does occur.

Introducing the “polluter pays” principle, the ELD applies to any organisation operating within EU Member State and European Economic Area countries. Activities detailed under Annex III of the ELD, however, fall under a strict liability premise – proof of fault is not needed for any liabilities, costs, damages or losses arising from “pure ecological damage” to be applied.

Such activities include waste (including those companies in the domestic and industrial waste management sector and in waste treatment), the transport of hazardous materials, and operations with consent to discharge water.

Duties and liabilities

Environmental risks are inherent within the waste management sector. However, root cause, scale and impact are often underestimated, and it is important to look beyond a site’s physical boundaries and understand historical, existing, new, and indirect exposures – contamination arising from firewater run-off, for example, may not be an immediate consideration.

Where an imminent threat of significant environmental damage is identified, operators must immediately take all practicable steps necessary to prevent the environmental damage from occurring and notify the relevant authority, in most cases the Environment Agency, if such actions do not eliminate the threat.

If environmental damage has already occurred, further damage must be prevented and the relevant authority notified.

While the reputational implications of an environmental incident are something that the waste industry is all too aware of, management teams may still be unaware that they could be held personally liable and at risk of criminal prosecution: failure to notify an authority, or failure to comply with a remediation notice served by the authority, is a criminal offence under the ELD.

Potential coverage gaps

Today, there are a number of different insurance products available, including coverage extensions for general liability lines, through to broad environmental impairment programmes and contractors’ pollution liability policies. Pollution cover may be available under a standard public liability policy, but will be limited to incidents deemed “sudden and accidental”.

Coverage for ELD liabilities, including some forms of remedial work, is not typically available under standard general liability insurance policies.

Mind the gap

Potential coverage gaps can be extensive. Own-site clean-up costs will not be covered, for example, even with a regulatory clean-up and contamination cost extension; and class actions for odour and noise – which relate to changes in the law – mean that environmental and public liability policies need to be scrutinised to ensure appropriate cover, otherwise waste and waste management companies may only discover that their policies are not enough after the fact.

The UK does not require companies to use financial security and insurance measures to cover their potential ELD liability exposures.

However, the requirement to estimate both the potential costs of preventing and remediating significant environmental damage has led to the growth and development of specialist environmental impairment liability (EIL) insurance.

The advantages of dedicated EIL insurance can be extensive and may include: third-party bodily injury and property damage caused by gradual pollution; first-party business interruption, including extra expenses and emergency response costs; and on-site clean-up costs for sudden and accidental pollution.

Environmental damage

In line with increase in limits of liability, insurance premiums have increased for businesses with the potential for strict liability for environmental damage, averaging over €40,000 in 2014.

This is indicative of an increase in perceived risk to the sector.

However, only by assessing the environmental risks, determining appropriate environmental risk management solutions and identifying and negotiating appropriate environmental insurance solutions based on policy efficacy and value can waste companies be able to protect their balance sheet and reduce the total cost of the more significant environmental risk, both financially and reputationally.

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