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Polluters to start paying, tardily

EU environmental liability regime for England finally kicks in

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New regulations implementing the 'polluter pays' principle for environmental damage come into force in England on 1st March 2009, nearly two years after an EU Directive's original deadline.

An insurance law expert has warned that many businesses remain unaware of their potential liabilities under the new regime. Those that find themselves caught are unlikely to be covered by conventional public liability insurance, he said.

The Environmental Liability Directive was due to be made law in all member states by 30th April 2007. England has now belatedly complied by issuing the Environmental Damage Regulations 2009. Separate measures will be introduced in Scotland, Wales and Northern Ireland.

Under the Regulations, those responsible for carrying out almost any economic activity will be held financially liable for remedying or preventing environmental damage caused by that activity to water, land and biodiversity (protected species and natural habitats or sites of special scientific interest).

The rules impose a pro-active duty on operators to notify the relevant authorities (the Environment Agency or the local authority in most cases) when environmental damage has occurred or is threatened. Interested parties, such as environmental groups, will also be able to notify suspected damage.

The new regime will not only affect businesses but also many charitable and public sector organisations whose operations fall within the very broad definition of "economic activities". Purely domestic or recreational activities, however, are not included.

Operators will be required to take steps to prevent an imminent threat of environmental damage, to prevent further damage happening and to "remediate" any damage that has already occurred by returning the environment to the condition it was in, or, in the case of land, to remove the risk of human health being adversely affected.

Where it is not possible to restore the site completely, operators may be required to carry out "complementary remediation" comprising additional measures, possibly at an alternative, equivalent location. They could also be liable to pay "compensatory remediation" for the loss of environmental resources and environmental services pending recovery.

In many cases, the operator will need to have been at fault for liability to apply. But for operators carrying out a range of specified activities deemed particularly hazardous, such as agriculture or waste management, liability will be strict.

Defences include that the damage was caused by a third party despite appropriate safety measures being in force, that the operator was complying with a compulsory order or in accordance with an official permit, or that the activity was not considered likely to cause environmental damage according to the state of scientific knowledge at the time (the "state of the art" defence).

Operators who fail to comply with the regulations could face criminal sanctions. In extreme cases, directors and senior management could also be held personally liable and prosecuted. Insurance

A proposal to make it compulsory for operators to take out insurance was not included in the final version of the Directive. Instead, it suggests that member states encourage the use and development of insurance products or other forms of financial security.

Colin Read, an insurance law specialist at Pinsent Masons, the law firm behind OUT-LAW.COM, said that liability policies will need to be reviewed in light of the regime change.

"Traditional liability policies are ill-equipped to meet the challenges posed by the new legislation because the Directive does not introduce a liability regime in the traditional sense," said Read.

"A standard public liability policy, for instance, will cover the insured's legal liability to pay damages to a third party for accidental injury, damage to property, nuisance or interference with some other right," he said. "It will not normally cover the cost of clean-up operations the insured is statutorily obliged to pay."

Read pointed to a ruling from 2006 that highlights the problem. The High Court ruled in the case of Bartoline v RSA that a public liability policy covering legal liability for damages did not cover liability to repay clean-up costs incurred by the Environment Agency exercising its statutory powers, or the insured's own costs in complying with the Agency's work notices. (See OUT-LAW's case report on Bartoline v RSA.)

Claims under the new regulations, however, will not be brought by individuals but by public bodies. Insureds will have a positive duty to notify the authorities of any actual or threatened pollution. Any money payable will not be payable as damages or compensation for loss but to prevent or remedy the damage the operator has caused – possibly even to its own land.

Lloyd's of London reports that some insurers providing cover for environmental impairment liability are willing to extend their policies to cover liabilities under the Directive. Stand-alone insurance products specifically tailored to the new regime may also be developed over time. But Read warned that the untested nature of these new liabilities makes it difficult for insurers to assess the risks involved.

The European Commission is due to report on the availability of insurance and other types of financial security in 2010, when it will reconsider the issue of a mandatory scheme.

Meanwhile, the CEA, the European insurance federation, has set up a working group to consider insurance and other risk transfer solutions in connection with the Directive. Last year it published a paper outlining key points for insurers to consider.

Copyright © 2009, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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