A Business Guide to the European Union Environmental Liability Directive
Aon Risk SolutionsEnvironmental Services Group
Risk. Reinsurance. Human Resources.
2 Bridging the Gap in Corporate Environmental Programs
The Environmental Liability Directive (2004/35/EC) is a legislative act of the European Union creating new and significant potential liabilities for costs, damages and losses for operators and companies regulated by the ELD. All EU members have now adopted the ELD into their national laws, making compliance unavoidable for companies operating in EU member states, regardless of where they are headquartered.
Remediation Costs Can Be Severe
Environmental fines and litigation costs can be considerable, including time and resources. Information on ELD costs are gathered on an ad-hoc basis because Europe currently does not have a central database to track ELD loss and damage. However, while it’s still too early to confirm, the costs associated with Natural Resource Damage claims in the U.S. are expected to increase significantly. It is critical to have a professionally designed risk prevention and mitigation program in order to protect a company’s brand.
The Importance of Insurance
Financial security plays an important role in the ELD. Currently, eight EU member states have committed to imposing mandatory financial requirements on operators, and more member states are expected to join. In these member states, insurance – among other instruments – is accepted as financial security.
In some member states, the adoption of the ELD is backdated to April 30, 2007, and this should operate as the assumed date for the purpose of insurance retroactive dates for all member states.
The High Costs of Environmental Damage
A recent investigation by the French government examined two incidents. When they occurred in 1996 and 1997, the cost of the environmental clean-up was approximately $67,000 and $16,000 USD respectively. If those incidents occurred today, under the ELD, it is estimated that the costs would be $636,000 and $6.4 million USD.¹
A Business Guide to the European Union Environmental Liability Directive
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Strict Liability for Annex III
The ELD affects all organizations with any operations in EU member states and European Economic Area countries. However, only those operations and operators described in Annex III of the ELD are under strict liability and will feel the full force of all of the liabilities, costs, damages and losses under the ELD. All others have fault-based liability.
Annex III includes
•All operations licensed under the EU Integrated Pollution Prevention and Control Directive (2008/1/EC)
• Waste and waste management
•Mining, quarries and extractive industries
•Operations with consents to discharge to water
•Transport of hazardous materials
The Polluter Pays
The ELD supports the regulatory principle of “the polluter pays.” Annex III operators and operations must meet the legislative mandates of the ELD to prevent and mitigate the consequences of pollution and environmental damage that may result from their activities.
•Operations that intentionally or negligently cause biodiversity damage must remedy that damage in addition to any other environmental liability
•If biodiversity damage cannot be fully remedied, those liable must pay for compensatory measures
•Firms operating under specific EU environmental directives are strictly liable for a range of damage to water, land and biodiversity
•All operators must take practical steps to immediately prevent any environmental damage where there is an imminent threat
Furthermore, Directors and Officers, including non-executive directors, may be personally liable, in addition to their companies, for non-compliance with the legislation and for failing to take appropriate action.
4 Bridging the Gap in Corporate Environmental Programs
Required Remediation
The ELD includes prescribed losses and damages related to restoring damaged environments. Specifically, the process of restoring environmental damage can involve all of the following:
Primary
Remediation is any remedial measure which returns the damaged natural resources and/or impaired services to, or toward, baseline condition.
Complementary
Remediation is any remedial measures required to compensate where primary remediation fails to fully restore damaged natural resources and/or services.
Compensatory
Remediation is any action taken to compensate for interim loss of natural resources and/or services that occur from the date of damage until primary remediation has achieved its full effect.
Interim Losses
Losses which result from the inability of damaged natural resources and/or services to perform their ecological functions, provide services to other natural resources, or provide services to the public until the primary or complementary measures have taken effect. These do not include any financial compensation to members of the public.
Contractors Pollution Liability
Contractors are exposed and subject to the same duty as other operators to prevent damage to the environment. In some cases contractors are potentially strictly liable, and this applies especially to those working next to waterways or other sensitive environments. Examples include surface drainage and run-off from an on-site fire, as well as the increase of existing pollution where remediating or regenerating brownfield land. Construction works can also cause non-pollution damage where, for example, actions to control groundwater levels lead to the drainage of adjacent wetlands.
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Next Steps for Companies
Companies should consider the following options for developing an effective risk management program for the ELD which requires a high level of commitment and expertise.
Limited or Comprehensive
Some companies focus on discreet locations and individual facilities. Others adopt a portfolio approach including Europe as well as the rest of the world.
Determine Liability Limits
These amounts should be based on technical risk assessments as well as local or country requirements.
Understand the Regulations
ELD implementation can vary widely according to a country’s insurance laws and locally acceptable certification and, documentation processes must be considered.
Integrate with other programs
ELD coverage should be a fully integrated part of a company’s risk management and insurance program in order to avoid coverage gaps or an overlap in programs.
ELD Coverage Gap
Gaps in coverage for the ELD usually involve environmental damages caused by:
•Remediation process
•Gradual events Events other than pollution, such as fire
Are General Insurance Programs Enough for the ELD?
Unless a specific environmental program is designed and implemented with intended coverage for environmental damage and written to respond to the national law in the country of risk, the answer is typically “No.”
Even companies with existing programs or standard pollution insurance might not be covered for the liabilities stipulated under the ELD. According to a recent International Underwriting Association report entitled “Environmental Risks: insured or not?”, “The gap between traditional insurance cover and the range of environmental liability… has become uncomfortably wide and will get wider.” In addition, different member states can have different requirements for compliance, including compulsory financial security.
6 Bridging the Gap in Corporate Environmental Programs
How Aon Can Help
Aon’s Environmental Services Group offers a full range of services to assist in assessing your exposure to environmental risk and liability under the ELD. Our specialized staff with backgrounds in legal, engineering and insurance underwriting will assist in identifying your risk by utilizing our global specialty market knowledge, we will offer options on how best to mitigate it. Our network of over 60,000 colleagues in 120 countries is available to assist.
Working together, we can assist in the following:
•Review your current coverages
•Identify and analyze gaps in your coverage
•Provide integrated coverage for ELD
•Develop a fully coordinated global environmental master insurance program
•Transfer potential financial risk from your balance sheet to the insurance market
•Address compliance with ELD and additional evolving legislation in the environmental arena
•Enhance protection for increased litigation by environmental protection groups
•Contribute to Corporate Social
•Responsibility strategy
•Broaden protection for your directors, officers and employees
“Aon won this account by demonstrating leadership and strength in the area of Environmental Insurance to provide a program that is not only unique to our needs but also introduced a new market with strong global capabilities.”
– Mr. Nathan Dreyfuss, Vice President Finance, Israel Chemicals Limited
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Contact Aon Today
To learn how Aon’s Environmental Services Group can help you develop an effective, comprehensive strategy for Environmental risk management, please contact:
North America
John Welter +1.832.476.5730 [email protected]
Greg Schilz +1.415.486.7652 [email protected]
Asia Pacific
Jim Finnamore +61 3 9211.3671 [email protected]
Latin America
Veronica Benzinger +1.561.253.2514 [email protected]
U.K., Europe, Middle East & Africa
Simon Johnson +44 (0)20.7216.3710 [email protected]
1 Environmental Liability Directive and Methods of Equivalency. Institute of Sustainable Development – Department of Economics, Evaluation & Integration. Volume 19. April 2010
© Aon plc, 2011. All rights reserved.The information contained herein and the statements expressed are of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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Risk. Reinsurance. Human Resources.
