The laws of the land

The much awaited European Commission proposal for a Directive on environmental liability has, to date, been nearly a decade in the making. Whilst it is not anticipated that it will become law before 2006, the Proposed Directive published on January 23, 2002 and subsequent amendments are causing much speculation as to how European companies will be affected. When finally adopted, Member States will have two years to implement it into domestic law.

To date, there have been around 200 pieces of European environmental legislation to control and limit pollution, largely through the use of minimum standards. This legislation has been criticised on the grounds that it is piecemeal in nature, dealing with particular environmental issues rather than an integrated approach. It is also difficult to implement these laws across all Member States. In theory, the new directive should address these problems since it affects all current 15 European Union Member States.

According to the European Environment Agency, there are approximately 1.5M potentially contaminated sites across Europe. However, only some regions have made efforts to identify these, with the official number determined as contaminated standing at 300,000. With government policies encouraging the reuse of brownfield all over Europe, the number of transactions year on year involving brownfield is increasing sharply. In the UK alone it is estimated that 3,000 brownfield transactions take place annually. Brownfield land can be broadly defined as land that has previously been developed which therefore means it could also be contaminated through its former use.

The proposed directive states that EU action is needed to address environmental damage and the loss of biodiversity throughout the EU. It is generally considered that liability rules are essential to prevent further contamination and damage. This will be done firstly by making site polluters liable for the costs of restoring the environmental damage, and secondly by providing an incentive to avoid causing the damage in the first place.

While some Member States such as UK and Germany already have legislation in place, others have no specific environmental legislation and no regime establishing liability for contaminated land (eg. Portugal and Greece). Even for most countries with a contaminated land regime, when the polluter cannot be found or is insolvent, they do not always require the national regulatory authority to clean up the site. Significantly, the enlargement of the EU in 2004 to 25 Member States will bring into the EU several former eastern bloc countries which previously have had poor environmental protection policies, creating a legacy of substantial contamination problems. Essentially, despite the difficulties this legislation may pose for some EU countries, it is necessary for a harmonised framework at the EU level to address the problem of environmental damage.

The directive defines ‘environmental damage’ very widely and includes land contamination and water pollution, which pose a threat to human health, as well as biodiversity damage to community and nationally protected sites. However, it is only intended to deal with serious or significant forms of damage. It establishes a framework to ensure that future environmental damage is restored or prevented and Member States may adopt more stringent legislation if they wish. This would include for example, the UK Contaminated Land Regime which sets out that under Part IIA of the Environmental Protection Act 1990, local authorities have a duty to identify and inspect contaminated land within their localities.

The directive is based on the ‘polluter pays’ principle ensuring that the person responsible for the damage is liable for the remedy. This means that, in most cases, the site operator would be the responsible person. The definition of operator is likely to be subject to amendment but currently covers the person who directs the operation of an activity covered by the directive. Whilst it is not proposed that a Member State make it a criminal offence to contaminate or to own contaminated land, there is a duty on Member States to ensure that operators have an obligation to prevent significant environmental damage and require the operators to take restorative measures if damage occurs. If the operator fails to do so, the Member States can take appropriate action and recover the costs of doing so. Where contaminated land is concerned, the objective is to ensure that the contamination no longer gives rise to serious or potentially serious harm to human health.

Environmental damage resulting from those activities specified in Annex 1 will result in strict liability (ie no fault or negligence required) for the operator. Annex 1 activities include operation of installations authorised under the IPPC Directive, water abstraction and waste management activities. Operators of non-Annex 1 activities may be liable for biodiversity damage if negligent. As expected, much controversy already surrounds the proposed directive. On the one hand, some industry groups are concerned that if adopted it would expose companies to unlimited liability claims. Whilst on the other hand, environmental lobbyists have criticised the proposal, especially the exclusions and subsequent amendments, which they claim will water down the effect of the directive when finally implemented.

While the directive has a relatively wide scope of application, it specifically excludes certain activities, in particular those already regulated by and subject to their own liability regimes. Thus environmental damage caused by nuclear activities, oil pollution or the carriage of noxious substances at sea are not covered by the proposal. Therefore environmentalists who were keen to see retribution for the recent oil spills off the coast of France and Spain will be disappointed.

Other key points which have arguably lessened the directive’s impact, are that it will not apply retrospectively (unlike the contaminated land regime in the UK). Therefore, the main emphasis of the directive is for ongoing operational liability, and will in essence ignore past activities that may have caused damage prior to the directive coming into force. Additionally, the Commission has left it up to individual Member States to define their own approaches to determine appropriate restoration levels if environmental damage has occurred.

Two defences were added to the proposal at the eleventh hour, which have received wide criticism from environmental groups. The first of these is compliance with a permit. It is argued by critics that this will allow operators to avoid liability all too easily. Secondly, there is a defence for any emissions or activities which were not considered harmful according to technical knowledge at the time they were carried out. This led to accusations that the defences are far too wide and will allow liabilities to be avoided. In March 2003, the European Council’s compromise text proposed that these two factors should be treated only as mitigating circumstances in deciding to what extent a company was liable for damage.

Most significantly, in recent weeks the European Council of Ministers postponed the requirement for mandatory insurance of environmental liabilities. This decision will be reviewed within five years from the directive’s date of implementation. It is hoped that this time will give Member States and the insurance industry the opportunity and time to develop financial security instruments and markets for dealing with environmental impairment and mandatory financial security may then be forthcoming. The European Parliament considered that imposing mandatory insurance would upset the volatile market for environmental liability risks when European businesses already face reduced choice, increased costs, solvency concerns and shortage of capacity for certain lines of business. However in countries such as the UK, this is disappointing news, as the environmental insurance market has been growing year on year, proving a popular choice for businesses and individuals wishing to protect against environmental liabilities.

Environmental risks involving previously developed land are now commonplace, presenting a number of potential liabilities to those parties involved, if not managed correctly. Once the European Directive comes into force, environmental liabilities will take on further significance, especially for those countries who currently have minimal legislation to regulate the environment. One key feature, mentioned previously is that the EC directive will not apply retrospectively. It is only relevant for current and future contamination. Thus in most cases developers who have acquired a brownfield site will not be affected by the directive (they may however have liabilities under other legislation for historical contamination in their individual countries). The directive will have more of an impact on current operators or companies involved in mergers or acquisitions where a potentially contaminative operation is ongoing.

If, as and when such potential hazards actually arise under the directive clean up can be required. The ensuing costs can be substantial and may extend to fines, clean-up costs and even imprisonment. In addition, the manifestation of contamination can seriously disrupt any revenue generating activity on the site – leading to increased cost of working and loss of profit. The potential impact of such business interruption may make obtaining lending more difficult or financially prohibitive. Anyone involved in industrial activities therefore needs to be aware of the potential liabilities they could face.

The directive states that where significant environmental or significant biodiversity damage has occurred as a result of an operation to which the directive applies, the competent authority shall either require the relevant operator take the necessary restorative measure or shall itself take such measure. The aim is to restore the environment to the state it was in before the damage, so that the contaminated land no longer gives rise to serious or potentially serious harm to human health. In the worst case scenario, this may cost several hundreds of thousands of pounds per acre.

If clean-up liability is incurred the operator is also bound to incur professional costs either in bringing or in defending a legal action. These professional costs will include legal and technical costs and expenses. Where potential liabilities and costs present unacceptable risks, there are a number of solutions to consider.
Technical Risk Management is one, and it relies on total remediation or the permanent containment of contaminants (this is not suitable for all sites). The extent and quality of technical information is vital when assessing the extent and type of land contamination. Assessments are usually based on environmental data and soil sampling. By its very nature sampling is only able to give accurate information on the area directly sampled at the time of sampling. Once remediation starts, unknown contamination could be found, or there could be migration of contamination that was previously unanticipated. These problems could result in heavy unbudgeted expenditure.

Setting aside contingency reserves for clean up is essentially a self-insurance exercise and can be appropriate for smaller sites where contamination is localised. However, in addition to requiring a greater financial provision than an insurance premium, it also ties up expensive capital, which could be employed in revenue generating operations.
As mentioned earlier, the directive has not made insurance mandatory but insurance has a number of advantages over other risk management tools. Environmental insurance will transfer any liabilities that might occur in the future, protecting against any residual liability and adding value to the site and ensuring a clean exit. In many cases insurance has enabled property transactions to proceed that otherwise would have stalled.

The environmental insurance market in Europe is again country specific and it would be futile to talk of a European picture. Suffice to say there is no Environmental Insurance market in Europe as developed as the UK. To date, environmental insurance has not featured heavily in Europe. Some countries (France, Italy etc) have environmental insurance available from ‘pools’ of insurers who keep a percentage retention. Belgium uses environmental impairment insurance products available from London but the quantity is not substantial. Germany has limited environmental cover but environmental liability is generally excluded from commercial policies which have incepted since 1993.

Insurance is available in the London market for Europe through AIG, XL, Chubb and in the UK only, Allianz Global Risks (Certa can place environmental insurance with all the major insurers). Typical products include:
Pollution clean up for first party. This indemnifies the insured for costs of cleaning up its own property when a regulator has required action or there is a threat of action being taken. Pollution legal liability. This indemnifies the insured against legal liability for environmental damage caused to the person and property of third parties.

There are other variations on the above two products and also policies which cover defence/appeal costs, cover for claims/losses arising from the removal of asbestos and policies which provide a cost-cap for remediation works. Policies typically cover a wide range of manufacturing activities. So it can be seen that whilst there are some weaknesses with the directive in terms of environmental protection, it will have a significant effect on industry and any European company contemplating a European merger or acquisition. Significantly, this is the first time that damage to biodiversity has been included in legislation within the Member States, and this will be an interesting development to watch.

In addition, tighter liability rules with regard to all existing forms of environmental liability are leaving some in industry anxious. However, with the right advice, instead of being a burden and liability, brownfield land can become a manageable and valuable asset. For those in industry who are concerned about the effects, there is plenty of time to learn more and get expert advice. It is unlikely the regime will be in force before 2006/7 and there is still further lobbying to be done from all sides, leaving the final form of the directive and its likely consequences largely unknown.