Contamination cover

According to the CBI, in the early 1990s contamination liabilities in the UK stood at £20bn. Changes in legislation, accounting and general business practices, as well as stricter enforcement, have meant that these liabilities are now more easily identified; polluters or landowners held responsible. Richard Davies, AIG Europe, on not crying over clean-up.

A number of legislative changes affecting environmental issues have been introduced throughout the 1990s, with the latest being the contaminated Land Regime, effective April 2000. These changes have pushed the issue of environmental liabilities to the forefront of companies' balance sheets and made them far more accountable for any contamination they cause or, more importantly, have inherited.

Fines up
Formed in 1995, the Environment Agency has steadily improved its enforcement. The average fine for a prosecuted business in 2000 was £8,532 (£6,800 in 1999). Total fines for companies in 2000 amounted to £2,585,308 (£1,628,352 in 1999). Fines, however, are just the tip of the iceberg. With the growing tendency to make the polluter pay, it is clean-up costs that go far beyond any fines given out.

Environmental liabilities can no longer be hidden or omitted from a company's balance sheet. Introduction of an accounting standard, FRS12 provisions, contingent liabilities and contingent assets, has meant that certain liabilities for managing contaminated land risks need to be fully recognised in financial accounts. FRS 12 introduces strict recognition criteria to present obligations as a result of past events. It eradicates the previous ability of a company to 'smooth' earnings from year to year by putting profit away into a provision in a good year before releasing it on a bad one. FRS 12 has now tightened up the procedure for charges against profits and records a liability in the company's balance sheet. It has also clarified the situations where no provision may be made, but disclosure of the item is still required as a contingent liability. As a result, environmental liabilities are highly visible in the balance sheet.

Traditional insurance covers came in the form of a Public Liability Policy (covering third party exposures) and a Property Policy (covering the company's own physical property). However, a 'pollution exclusion', based on the Association of British Insurer's wording, came into existence in the 1990s to cover only sudden and accidental pollution.

Specialist policies, usually referred to as Environmental Impairment Liability (EIL) policies, are specifically designed to cover a company's legal liabilities and provide compensation to third parties arising out of gradual pollution as well as meeting the mandatory clean-up costs for sudden and gradual pollution of the insured's own site and third party sites.

In addition, EIL policies are becoming increasingly common in merger and acquisition (M&A) deals as a negotiation tool. The venture capitalists, equity houses, debt providers and/or Newco can cap their environmental liabilities and thus be secure in the knowledge that they can make a clean exit after the business is sold.

Given that the cover provided is largely retrospective, i.e. for historic conditions, there is no reason why an insurance product cannot be taken out now for deals that have already been completed. Indeed, many of the policies placed are taken out by companies looking to tidy up their balance sheet and encapsulate all the potential liabilities using an EIL insurance solution. In this way, there are no loose ends or problematic inherited warranties or indemnities at any future divestment stage, and so the risk that environmental liabilities might present a deal-breaking scenario is removed.

In particular, policies are being taken out to back the terms and conditions of environmental warranties or indemnities. More often than not, the EIL cover is a mandatory requirement of banks or funders financing a transaction to secure interest in a deal.

Similarly, landlords looking to attract blue chip tenants on long-term leases will be required to not only exclude all liabilities associated with the pre-existing condition of a site, but to back up their warranty with an insurance product.

Pollution Legal Liability (PLL) can be packaged to cover the specific exposures of a transaction. Cover generally includes losses due to damage caused by sudden, accidental and gradual pollution on or emanating from a site and includes legal defence costs.

Clean-up Cost Cap (CCC), as its name implies, provides a mechanism for capping clean-up costs. It can provide cover against on-site known contamination costs exceeding estimates, for off-site clean-up required as a result of the known contamination, for additional unknown contamination discovered during the clean-up, and for statutory authority changes to requirements during the clean-up.

Contractors Pollution Liability (CPL) is designed to protect contractors, site owners and developers, by covering those pollution risks often excluded under general liability policies. Contractors can purchase contract-specific cover or blanket cover. Significantly, occurrence-based policies are available to give ongoing cover for gradual pollution conditions after the contract has been completed.

Changes in legislation and accounting practices and stricter enforcement all highlight the fact that companies need to identify, monitor and report all of their potential liabilities. The objective of any environmental insurance solution is to strengthen the company's balance sheet for its stakeholders and improve its attractiveness to potential buyers or investors.


| insurance


Click a keyword to see more stories on that topic, view related news, or find more related items.


You need to be logged in to make a comment. Don't have an account? Set one up right now in seconds!

© Faversham House Group Ltd 2001. edie news articles may be copied or forwarded for individual use only. No other reproduction or distribution is permitted without prior written consent.