Reflections on liability
Whilst environmental liabilities shot up the corporate agenda during the 1990s, some progressive insurers were, at the same time, developing some equally progressive solutions. Neil Davis, AIG Europe, explains.
Tougher legislation, more rigorous enforcement and stricter reporting
standards have boosted the importance of green issues to Britain’s
businesses. These factors have combined to present far greater risks, not
only to present-day industries handling potential contaminants but also to
companies that have owned or occupied land in the past. Whilst environmental
liabilities shot up the corporate agenda during the 1990s, some progressive
insurers were, at the same time, developing some equally progressive
This imposed criminal liability on those who caused or knowingly permitted
contamination of controlled waters. The Act was strengthened by the
Environment Act 1995, which allows the Environment Agency to compel
polluters of controlled waters to prevent and remediate the situation
The new contaminated land regime is due to come into force in April 2000.
This regime imposes retroactive liabilities and addresses the environmental
legacy of past activity. The Act establishes the principle of ‘the polluter
pays’ anyone who has caused pollution, or who knowingly permits it to
continue, is liable under the legislation and will be financially
responsible for its clean-up.
IPPC will mean that a far greater number of installations will come under
the control of the Environment Agency. It will also ensure that once a
facility under the control of the Agency has ceased operations, it must be
returned to its pre-existing condition.
Formed from the Environment Act 1995, the Agency has steadily improved its
performance over the regulation of industry, and is taking a stricter line
on enforcement. For example, in 1998 the EA issued 312 enforcement notices
and prohibition notices and undertook 744 prosecutions resulting in over £2m
It is not just the fines that companies may have to pay. The growing
tendency to get the polluter to pay means the clean-up costs will far
outstrip any fines given out. This is the message delivered by the
impending introduction of the Environment Act 1995.
Recent reported examples include:
- An oil leak from the British Energy Dungeness Nuclear Power Station
resulted in a fine of £70,000 plus costs of £11,500. Additionally, it
cost £1.5m to clean up the underlying aquifer
- An oil leak from an underground storage tank (UST) resulted in a fine of
£13,500 and costs of £0.5m to remove and replace the UST and clean up the
Strict reporting standards
The third major change is new financial reporting standards which impact on
the way environmental liabilities are accounted for in a company’s financial
statements. FRS12, which introduces strict recognition criteria relating to
present obligations as a result of past events, dictates the way in which
provisions and contingencies must be handled for all company financial years
ending on or after 23 March 1999.
FRS12 addresses the tendency for companies to use large, vague, general
provisions as a mechanism to smooth earnings from year to year, by tucking
profit away into a provision in a good year and then releasing it back again
in a bad year. FRS12 tightens up the procedure for making a charge against
profits and recording a liability in the company’s balance sheet. FRS12
also clarifies situations where no provision may be made, but disclosure of
the item is nevertheless required as a contingent liability.
This means that for the first time, separate detailed disclosure of each
class of provision and contingent liability will be required. This will
make both actual and potential environmental problems of a company much more
visible to both the investing community and the general public at large.
This year alone has seen the introduction of two significant pieces of
legislation which affect how a company operates in regard to its
environmental responsibilities. The new Groundwater Regulations (which
prevent the release of certain substances into groundwater) and the
Anti-Pollution Works Regulations (allowing the Agency to serve a work notice
requiring the appropriate person to prevent or remove/remedy pollution),
place a significant burden on a company¹s activities.
It is not just legislation driving companies’ actions and exposures to the
environment. Increased public accountability to neighbouring areas,
financiers and shareholders mean that companies have to be a lot more aware
of their liabilities. Environmental, Health and Safety management programmes
are starting to become common place, along with a growing number of
companies applying for environmental standards such as EMAS and ISO 14001.
All point to that fact that companies must identify, monitor and report all
of their potential environmental liabilities.
On top of all this lies the
threat that if an accidental event does occur, the resulting clean-up costs
could be catastrophic for some companies.
The risk involved in owning land has significantly increased with the
imminent introduction of the New Contaminated Land regime. The Act
introduces a tier system for those liable for contamination, whereby, if it
is not possible to trace the original polluter (it may no longer exist) the
present or future owner may be liable. Pollution can also migrate from a
site from outside and, if the source cannot be traced, responsibility for
the clean-up of the pollution may fall to the occupant/owner of the affected
site. This means there is a distinct possibility of having to pay to clean
up someone else’s mess.
Considering that the UK has the longest industrial history in the world,
Corporate Britain could be in for a potentially bumpy ride. The Environment
Industries Commission estimates that there are more than 50,000 contaminated
sites in the UK, constituting a clean-up cost of between £10-30bn. Modern
day phenomena such as the rapid increase in mergers and acquisitions and
increasing development of brownfield sites for residential housing, add to
the numbers of land transactions and increase the likelihood of discovering
and transferring environmental exposures.
Today’s companies face a multitude of risks, some of which may be too great
to bear by individual operators who often look to insurance to carry such
risks on their behalf. In terms of environmental liabilities, two principal
polices could be effected: a Public Liability Policy, (covering third party
exposures, in particular off-site risks) and a Property Policy (covering the
company’s own physical property).
Both of these policies offer very limited contamination cover. This is
because since the 1990s a general pollution exclusion wording has been added
so that only sudden and accidental pollution incidents are covered. Most
companies’ exclusions are based on the Association of British Insurers
wording, which ‘excludes all liability in respect of pollution or
contamination other than caused by a sudden identifiable unintended and
unexpected incident which takes place in its entirety at a specific time and
place’. Such exclusions have yet to be seriously challenged within a British
court of law, which means that, at best, in the absence of clear precedent,
there is no legal certainty as to what is or is not covered under such a
A hypothetical example: A chemical company is involved in the manufacture of
paints. The process involves the storage of raw materials and end products.
This means that a number of above ground and underground storage tanks are
located on-site. The company has been in operation for 15 years, and has
previously had no known problems in regard to environmental contamination.
However, a complaint is received by the company from nearby properties
claiming that they are suffering from strange odours in their basements.
From subsequent investigations, the odour is identified as coming from a
chemical stored in bulk on the company’s site. Regulatory authorities are
involved and the company is ordered to investigate the leakage. The
investigation has shown the release was neither sudden nor identifiable, in
that the exact start date could not be identified and the extent of the
contamination indicated that it must have arisen over a number of months.
The release has contaminated the underlying aquifer, and has moved downgradient to contaminate the basements of third party properties.
The company has several potential liability exposures clean-up, property
damage and business interuption which may not be addressed by traditional
Public Liability and Property Damage policies because, on-site, there is no
link to a named peril, and off-site there is likely to be no coverage
Environmental insurance policies have, however, been introduced in the UK to
fill the gaps that exist in insurance coverage for companies’ on-going
operations and the risks involved in owning or transferring land. Specialist
environmental impairment liability (EIL) policies are designed to:
- Meet the mandatory clean-up costs for sudden and gradual pollution of the
Insured’s own site and third party sites
- Provide compensation to third parties arising out of sudden and gradual
- Cover a company’s legal liabilities.
Pollution legal liability
PLL is designed to cover the ongoing operational risks of a company and the
environmental risks of owning land. It is a highly flexible product that can
be adapted to cover any insured from an office block owner to a
petro-chemical refinery. PLL is highly flexible, covering a large number of
environmental liabilities which companies may find themselves facing:
liabilities that may be past (historic contamination of land), present (from
a companies ongoing operations) or future (such as changing legislation).
Taking the earlier example of the leaking storage tanks, a suitably
constructed PLL product could cover, in addition to those already mentioned,
losses due to damage caused by sudden, accidental and gradual pollution,
legal defence costs, with the named insured including directors and
officers. Options are also available for third party bodily injury and
property damage, non-owned sites and transportation coverages. The policy
also allows for changes in legislation over the policy period.
The past decade has seen a whole raft of new initiatives, legislation and
changing perceptions in regard to the environment. These trends show no sign
of stopping. It is therefore vital that companies come to terms with their
potential environmental exposures and identify the gaps which may exist in
their current insurance coverages.
Environmental insurance is a dedicated product designed to meet the needs
and requirements of any company in regards to their growing environmental
exposures. EIL can be used to:
- Create a cost effective remediation strategy
- Assist the sale and transfer of land
- Help enhance the value of sites
- Cover historical exposures to contaminated land
- Cover the gap that exists in existing insurance policies for on-going
The fluid state of legislation, the increasing determination of enforcement
agencies and the intense public interest in green issues all suggest that
future environmental obligations on industry can only get more onerous.
Fortunately, the availability of increasingly sophisticated and flexible EIL
products means that businesses of all sizes and in all sectors can protect
themselves against their past, present and future environmental liabilities
whatever these environmental exposure may be.