Any organization that is not concerned about environmental liability risk, or that believes it may have adequate protection through general liability insurance policies, should take a moment to reconsider. Released in April by insurer ACE and law firm Clyde & Co., the white paper “Structuring Multinational Insurance Programs” found that, despite general agreement on the principle of “polluter pays,” there is little global consistency in environmental regulation. This is little wonder when there are now an estimated 17,000 or more separate regulations worldwide addressing air, water, land and soil contamination.
The report also found that there is “considerable confusion” as to whether or not-and to what extent-companies’ existing insurance programs cover environmental risks and clean-up costs, even though insurers apply pollution exclusions to their general liability policies in many countries.
More widely, insurers have found that the industries that are more susceptible to pollution incidents-heavy industry, oil and gas, mining, and chemical manufacturing, for example-are those that are more likely to seek specialized insurance products to ensure better cover. However, this leaves the majority of companies believing that they have a low risk of causing considerable environmental damage through their operations. As a result, they do not feel the need to buy additional cover to supplement general liability policies.
Any organization can unwittingly cause tremendous environmental damage to its surroundings through its operations, or even through the actions of third parties working on its behalf. Lowe’s Home Centers, for example, was forced to pay a $500,000 fine in April-the largest ever for violations of the EPA’s Lead Renovation, Repair and Painting rule-after failing to ensure that the contractors it hired took steps to minimize lead dust from home renovation work. In 2003, U.K.-based solvents manufacturer Bartoline was forced to pay £770,000 (almost $1.3 million) in cleanup costs after a fire brigade polluted two waterways while trying to put out a fire on the company’s premises.
The risks of inadequate insurance protection become frighteningly apparent when considering the costs of potential fines, remediation and compensation. Just look at oil giant BP. The U.S. Department of Justice handed the company criminal fines worth $4.5 billion for the 2010 Gulf oil spill, and effectively barred it from winning new contracts in the Gulf of Mexico because the company has failed to demonstrate that it is a “responsible” contractor.
In its 2013 fourth-quarter results, BP said its cleanup and compensation bill has so far reached $42.7 billion. The final figure could be far higher, however, as this tally does not take into account additional provisions for economic loss claims from other legal settlements. The company is also waiting for a U.S. court decision over whether it can be considered “grossly negligent” for the Deepwater Horizon accident. That could add another $20 billion in penalties under the Clean Water Act, which includes strict liability rules and tough enforcement mechanisms.
Regulation in North America
When it comes to environmental liability in the United States, strict enforcement and highly punitive fines and damage costs can act in tandem, particularly as most environmental laws impose strict liability. Take for example the Comprehensive Environmental Response, Compensation and Liability Act 1980, or Superfund, which deals with the cleanup of hazardous substances. The act imposes a strict liability scheme that makes one party potentially liable for the entire cost of the remediation even where multiple parties were involved. It also exposes directors to criminal prosecution and civil liabilities. The EPA is also aggressive in prosecuting directors and officers for pollution incidents, stating that it “emphasizes prosecution of individual defendants as high up the corporate hierarchy as the evidence permits.”
While any environmental cleanup can be costly, Richard Sheldon, environmental practice leader at Willis North America, believes that natural resource damages are the real “horror story” for companies.
“Companies have come to expect that any environmental cleanup is going to be expensive, but the take-up of environmental liability insurance in the United States has been improving,” Sheldon said. “The problem is whether companies are buying the appropriate limits of cover, particularly where natural resources such as rivers and coastlines are concerned.”
In these areas, losses are hard to quantify. “How can you put a price on the economic costs of the damage your operations have caused to a beach, or the impact a spill has had on a particular species?” he said. “It is very difficult to calculate, especially as it may take years to fully understand the extent of the damage, and even longer to remediate it. Companies can find that the legal expenses involved in determining the costs may actually outweigh the economic costs caused by the pollution.”
A recent case highlights some of these issues. In early April, energy company Anadarko Petroleum and its Kerr-McGee unit agreed to pay $5.15 billion to resolve environmental cleanup claims relating to its former paint materials maker Tronox. The settlement covers 2,000 sites nationwide, as well as claims for 8,000 people who said their exposure to Kerr-McGee’s wood treatment plants in Pennsylvania and New Jersey caused cancer and, in some cases, death. It is the largest environmental enforcement settlement to date by the Department of Justice. Preet Bharara, the U.S. attorney for Manhattan, was unequivocal about where liability lay: “If you are responsible for 85 years of poisoning the earth, you are responsible for cleaning it up.”
Canada also has harsh legislation in place that is being more actively enforced. Canada’s Environmental Protection Act (CEPA)-administered under the Environmental Enforcement Act-allows enforcement officers to enter premises, conduct tests, make arrests without warrant and seize any items or evidence related to an offense. Convictions or indictments can result in imprisonment for up to three years. Fines under the Environmental Violations Administrative Monetary Penalties Act can also be doubled for subsequent offenses.
Developing Countries Beef Up Environmental Enforcement
Companies should not make the mistake of thinking that developing countries do not have environmental
protection laws in place, or that enforcement is weak. For example, since 2008, Argentina has required companies whose operations pose an -environmental threat to buy impairment insurance (or other financial guarantee) to cover cleanup costs of pollution incidents. Non-compliance can lead to non-renewal of operating permits. Other countries in Latin America are also -taking a tougher enforcement approach, most -notably Brazil in the wake of Chevron’s 2011 oil spill.
Asian countries are also taking the issue more seriously. India has mandated the purchase of environmental impairment insurance since 1991 under its Public Liability Insurance Act, and criminal sanctions against directors and officers increasingly include heavy penalties for breach of environmental protection laws. In January 2013, China made environmental impairment insurance cover compulsory for companies operating in high environmental risk industries, such as mining, smelting, and chemicals and products manufacturing.
A landmark case from June 2012 highlighted just how tough the legislation can be. Twelve former directors and officers of aircraft parts manufacturer Northstar Aerospace had to personally fund $4.75 million in outstanding remediation costs after the company became insolvent. (The Ministry of the Environment had originally sought $15 million.) This was despite the fact that several directors had joined the board long after the pollution occurred and while it was already being cleaned up. Furthermore, they argued that it was not even clear if the pollution occurred after Northstar bought the land.
Nevertheless, such sanctions are a timely reminder that companies and boards should check their insurance arrangements and opt for specialized policies, if possible. Insurers have scaled back their exposure to pollution-related claims over the decades. According to Rodney Spurrell, manager of the environmental department at insurer Elliott Special Risks, “Since the late 1980s, brokers and insureds have only been able to find minor extensions in a liability policy to cover costs from a pollution loss. Typical commercial general liability (CGL) policies only address potential coverage for pollution by way of an attached exclusion: for example, the CGL will only pay damages, but not cleanup costs.”
“There is also no also gradual coverage from a CGL policy: it only responds to off-site losses and not on-site cleanup,” he said. “There is no coverage for noise, sensory or nuisance claims, and the hostile fire extension only applies to heat, smoke and fumes. When it comes to any pollution exclusions that get applied to a CGL policy, they are absolute with respect to the handling of wastes. General E&O, D&O and property policy wordings also tend to have absolute pollution exclusions. All of this means that organizations need to find specific pollution policies, and should not assume that pollution risks and remediation costs are covered in standard liability policies.”
The European Perspective
Europe has some of the toughest environmental rules in existence. The EU Environmental Liability Directive (ELD), the first EU “polluter pays” legislation, has been in force since 2007. Its primary objective is to hold companies financially responsible for preventing and remedying the environmental damage their operations cause to water, land, protected species and natural habitats. It even prompts member states to encourage the development of financial security instruments, such as bonds, trust funds, letters of credit, insurance policies and corporate guarantees, to give organizations the necessary financial security to cover the costs of any environmental damage they cause.
There are significant differences, however, among individual EU member states as to the extent an operator should pay for the damage from its operations. Most EU countries have transposed the directive to apply joint and several liability. But Denmark, Finland, France, Slovakia and Slovenia have applied proportionate liability, which means that a company would pay the cost of remediating its share of the total damage. As a result, the potential difference in remediation costs for companies operating in different countries could be ruinous.
Furthermore, the directive’s transposition into the law of the 28 member states has not created a level playing field across the EU. Last December, the European Commission, the EU’s executive arm, published a study that found that variations in how the directive has been incorporated into law has had a major impact on the way the rules are implemented and enforced. For example, Hungary and Poland have interpreted the directive widely, with more than 400 ELD incidents each, while countries such as France, Denmark, Ireland, the Czech Republic and Slovakia have yet to report a single ELD incident.
A European Court of Justice (ECJ) decision in March 2010 implies that companies can more readily be held liable for gradual pollution than was first thought. In Raffinerie Mediterranee (ERG) SpA v. Ministero dello Sviluppo economico, regarding the contamination of Augusta Harbour in Sicily by a succession of petrochemical companies since the 1960s, the ECJ ruled that a member state may presume through a “weak causal link” that an operator is liable for cleanup costs if the company cannot prove that the pollutant at the contaminated site is different than the pollutant held at its facilities.
“The number of companies that may have avoided liability under the directive for multi-source pollution is substantially less than would have been the case if the ECJ had ruled that the causal link was strong,” said Valerie Fogleman, a consultant at Stevens & Bolton LLP and professor of law at Cardiff University in Wales. “Organizations will therefore need to be aware that courts may be more prepared to hold them liable for gradual pollution.”
Insurance and risk management experts and legal professionals recommend that companies opt for specialized environmental liability insurance, with policies tailored to their particular levels of exposure. However, companies have the erroneous impression that their general liability policies will cover all remediation and damages should an event take place. A research paper released last year by the International Underwriting Association, titled “Environmental Loss Scenarios,” found that insurance cover for environmental losses is often incomplete or even non-existent without a dedicated environmental policy.
“While environmental liability insurance is generally available in Europe, it is mainly only the biggest companies that are buying it,” said Nicolas Autet, of counsel in the Paris office of law firm Gibson, Dunn & Crutcher. “Awareness of the extent of the risk and the associated costs tends to be low outside of major corporations, partly because the most well-known pollution cases have involved high-profile companies based in sectors that are more prone to spills and leaks, such as the chemical, oil and manufacturing industries.”
Companies in many member states have also neglected to consider that directors, officers and individuals can be held liable and prosecuted for certain types of damage caused to the environment under various legislation. Although individuals and companies cannot be prosecuted under the ELD itself for causing environmental damage, they can be held liable for remediating environmental damage if they are an “operator.”
Colin Read, an insurance law specialist at Pinsent Masons, said that traditional liability policies are “ill-equipped” to meet challenges posed by the legislation because the directive does not introduce a liability regime in the traditional sense. For example, while a standard public liability policy will cover the insured’s legal liability to pay damages to a third party for accidental injury, damage to property, nuisance or interference with some other right, “it will not normally cover the cost of cleanup operations the insured is statutorily obliged to pay.”
In both Europe and North America, it appears that the associated costs to companies for environmental damage are going up, while general liability policies are being more tightly written to shield insurers-rather than insureds-from pollution claims.
“A pollution incident can have a long-tail liability going on for decades, so insurers are not going to cover these risks in any general liability product to a great extent,” said one insurance expert. “Any company that thinks otherwise is going to be in for a real shock.”