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


  • Water Resources Act 1991

    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


  • Environment Act 1995 ­ New Contaminated Land Regime

    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.

  • Integrated Pollution Prevention and Control (IPPC)

    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.

  • Rigorous Enforcement: The Environment Agency (EA)

    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

    in fines.

    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.

    Increased risk

    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.

    Land ownership

    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.

    Traditional insurance

    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.

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