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Liability and litigationThe stage is set for a soaring environmental insurance market in Europe, but uncertainties remain on the implications of key EU legislation, reports Christopher CundyBy the end of next month, European countries are due to have transposed the Environmental Liability Directive (ELD) into national law. The legislation was touted as one that could boost the markets for environmental insurance (see Environmental Finance, April 2006, page 16) but, while it will extend some companies’ exposure to environmental liabilities, insurers are still uncertain what its effect will be. Most EU states are likely to have implemented their laws by the end of this year, but there will be differences in their approaches and how strictly they will enforce the directive. “At the moment, it’s fairly difficult to make any predictions. But companies that are in a sensitive part of the country run the risk of causing damage which could have some far reaching financial effects,” says Tony Lennon, European manager of environmental solutions at Chubb Europe, based in London. The ELD aims to make those that damage the environment legally and financially responsible for that damage – an application of the ‘polluter pays’ principle.
If a company pollutes land, it will be liable for removing the risk to human health. But damage a protected species, natural habitat or water, and the polluter will have to return the environment to its previous condition – potentially incurring much higher costs than under existing legislation. The ELD gives rise to liabilities in other ways, explains David Barr, a divisional director at insurance broker Willis and head of the environmental team based in London. “If it’s not possible to remediate the site back to a baseline condition – for instance if the damage has been so severe – then there’s a requirement to undertake complementary remediation in another part of the country,” he says. On top of that, a polluter may be charged with compensatory remediation, covering the interim ‘losses’ until the prime or complementary remediation is finished. But – depending on member states’ implementation – the scope of the directive could be limited to certain habitats and species, so relatively few companies may be situated close enough to a sensitive site to cause damage. For this reason, some insurers think that the ELD is a bit of a paper tiger. There is also a feeling among insurers and brokers that the legislation is more aimed at bringing Eastern European countries up to the standards already established in the West. For instance, the UK established an environmental liability framework with the passing of its 1990 Environmental Protection Act.
“The UK’s current interpretation [of the ELD] isn’t going to lead to huge impacts. Existing legislation probably presents a bigger risk,” says Alexander Pohl, senior project manager at HSBC Insurance Brokers in London. At the time of writing, environmental impairment liability (EIL) policies are being reworded to take account of the directive, but not in a drastic way. “For the specialist EIL market, it’s not a radical change. There are aspects we would already provide cover on,” says David Simpson, vice president, environmental at XL Insurance, based in London. But, as Bob Martin, London-based director of risk management solutions at broker Aon, notes: “Until potential insureds see the law that enacts the ELD, they do not know what their risk and potential liability will be. Hence they cannot approach insurers for policies to cover such risks, and insurers cannot finalise their offerings.” Others give a starker warning. The new legislation demands “a special handling and some restrictive coverage elements to be able to calculate an adequate and affordable premium,” said Nils Hellberg of German insurance association GDV at a January meeting of the European Insurance and Reinsurance Federation. The Commission dropped one element in the draft ELD that would have created a stir in the market – mandatory insurance. Transpositions of the directive in Bulgaria, the Czech Republic, Hungary, Poland, Spain and Sweden could still include requirements for compulsory insurance, but Article 14 of the directive leaves the door open for mandatory cover across all member states, says Martin at Aon. The article states that, within three years, the Commission must report on the availability of insurance and other types of financial security – and, if appropriate, suggest “a system of harmonised mandatory financial security”.
Martin says an insurance pool could be one way to address the issue. “For instance, Spain, France and Germany each have types of environmental insurance or reinsurance pool. However, my proposal is more on the basis of Pool Re, which was set up in the UK to provide insurance cover for losses that could arise from terrorism. “I’m throwing this up as a radical thought, but I hope it will open up an appropriate dialogue, particularly as industry at large generally still fails to recognise its potential exposure to environmental risk arising from new EU laws.” According to Lennon at Chubb: “There may be other ways to make provision. Instead of mandatory insurance, companies could get a bond, a letter of credit, a trust fund, or put money into an escrow fund. But I suspect that insurance will be the most cost-effective and flexible solution.” Meanwhile, other legislation from Brussels could present companies with new environmental exposures. In particular, the sector is keeping a close eye on directives on soil – still being negotiated – and water quality, which is gradually being implemented. But, in the UK, insurers have been rather more excited by recent litigation, rather than legislation. Interest in specific environmental cover was sparked followed the ruling on Bartoline vs Royal & Sun Alliance Insurance on 30 November,which is being seen as a key piece of case law for the environmental insurance market. “This could be the boost that the environmental impairment liability insurance market needs to push it to the next level and develop mass products,” says Martin at Aon. Bartoline, a chemicals manufacturer based in Yorkshire, suffered a major fire in May 2003. The firefighters’ foam and other chemicalswashed off the site into local watercourses, causing pollution that the UK’s Environment Agency subsequently dealt with. Bartoline was obliged to pay more than £770,000 ($1.5 million) for clean-up costs, which the company sought to recover from its public liability (PL) insurance. Royal & Sun Alliance, one of the largest general liability insurers in the UK, argued successfully in court that these costs were outside the scope of its PL cover. Pohl at HSBC says that, in the past, insurers have tended to pay these costs out of goodwill towards their customers. “This legal challenge marks the beginning of a trend in the insurance industry with respect to environmental liability. We are likely to see insurers paying out of goodwill in future much less often.” Bartoline is seeking an appeal, but for many insurers the ruling is emphatic. “As a specialist insurer, we have been telling people for some time not to rely on PL coverage. Finally, with Bartoline we have seen some clarity. It put the limits of PL policies in a very clear light,” says Karl Russek, senior vice president, environmental risk, ACE European Group. The decision could also reverberate around Europe. “General insurers in other European countries may also take the view that they are not actually intending to cover remediation costs and hence make a positive attempt to clarify their position on the basis that the UK courts have come out with this decision,” says Lennon at Chubb. With such strong support from both new legislation and litigation, it perhaps no surprise to hear brokers and insurers reporting booming markets. “The market is growing exponentially and “premiums are dropping. By the end of 2006 we had underwritten three times as many policies compared with 2005.We are heading towards a more viable marketplace,” says Duncan Spencer, regional manager for environmental impairment at AIG Europe (UK). Cover for environmental impairment liability was traditionally taken out by parties in a land transaction, merger or acquisition. These were typically one-off deals, albeit with a large premium.While these are still a major segment of the market, the emphasis is moving towards annual policies for operating companies where the premium is lower, but risks and policy wordings are more consistent. The ELD and the Bartoline case are both likely to accelerate this trend. “50% of our policies last year were from operational risks. It was only recently that 80–90% of our policies were driven by mergers and acquisitions and transactions,” says Lennon at Chubb, who reckons 200 to 300 policies were underwritten in London last year. Lower prices have also helped broaden the appeal to operating companies.“The minimum premium would have been £10,000 two years ago. Now, it’s £750. This has been possible because we are selling it to more people, and have been automating our underwriting process,” says Spencer. However, policies are still some way from being standardised. “I would not say it’s approaching commoditisation, but there’s more opportunity for this product for midsize companies and up,” says Russek at ACE. Willis reports that the total premium spend within the London and European environmental insurance market (excluding pollution cover in general liability markets) in 2006 was in the region of £60 million. Premiums paid into pool insurance schemes in Europe reached approximately €70 million, while the premium spend on environmental coverage through Germany’s general liability market was estimated at €250 million ($330 million). “Premiums on individual EIL cover have come down by 50% or so in the last 12 to 18 months,” says Aon’s Martin, but the value of market has stayed steady thanks to a commensurate rise in the number of deals. Although he thinks the market has now reached a critical mass, he is concerned that it’s not far enough above that point to guarantee efficient pricing, or indeed to stop some underwriters pulling out altogether. Nonetheless, the recent legislation and litigation lends the market some optimism. “In the US, first you had the law, then the empowerment of the regulator. The claims came next, then the insurance market grew out of that. If people in Europe are smart, they will take out insurance before the claims come,” says Martin.
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