Polluters to pay but what is the cost for insurers?

Ask any schoolboy to name the most important issue of the day and there's a fair chance that, entering a trance like state, he will chant, "the en-vir-on-ment".

It's an automatic response, yet how much do we really know about the subject or, more pertinently, the legislation being enacted in its name, let alone how that legislation might affect us?

Take the latest pearl from the EU's great word mincing machine, the plausibly enough named EU Environmental Liability Directive (ELD). Enabling legislation for this piece of law should have been on the statute books of every member state by 30 April 2007. The ELD redefines liability and extends environ-mental liability to cover natural habitats and species.

Biba has been active in analysing and commenting on the new challenges created, as well as offering members' views to the parliamentary committee, charged with the consultation exercise on initial proposals to bring the directive into UK law.

Previously, public liability policies have often included accidental environmental liability cover for accidental spillages, leaks and other system breakdowns.

However, as Steve Foulsham, technical services officer at Biba explains, the definition of an insurable incident is about to be superseded by something a lot less clearly defined and with consequences that (while they will certainly cost money) are not about penalties but restoration.

As Foulsham puts it: "A buyer of property could, as the current owner of the land, also be getting liability exposure to remediate any future environmental consequences resulting from past pollution; even though he did not own the land at the time the pollution was caused."

Of course, the present owner may well have recourse to the previous owner if the pollution can be laid at that previous owner's door, but what if the previous owner no longer exists or cannot be traced?

The liability for restoration will stay with the present owner. So, what is this new piece of legislation that can create such novel concepts of liability?

Implementing the Directive

The Department for Environment, Food and Rural Affairs (Defra) will be publishing draft proposals in the summer following a consultation period in which interested parties have been able to contribute to how the ELD should be implemented in UK law. Full enactment will take place in Spring 2008.

The new directive will seek to make those responsible for pollution also responsible for the restoration of the damaged water, land or people to their previous, unpolluted, "baseline" position.

However, there is a concern that the baseline itself will have to be defined by the ruling authority. There are also concerns over the possibility that different countries of the UK might eventually operate slightly different interpretations of the directive.

This would make the quant-ifying of risk more difficult and it has still not been decided when more than one party is involved whether liability will be joint and several or proportional.

The presence of such grey areas and the uncertainty they create has hampered the emergence of a market for insurance to address the risks of environmental liability under the new directive. Biba feels that this is a problem for both smaller brokers and their SME clients.

Defra also believes the main impact of the ELD will be on SMEs but Bob Martin, director for Aon's environmental consulting and solutions believes that: "This is based on their belief that larger entities already have environ-mental risk management as part of their core corporate governance reporting systems, in reality this is not generally the case. So the ELD will impact all entities."

Although Biba does operate a number of schemes for members to offer their clients, the assoc-iation has not yet settled on an environmental liability directive scheme but has only made enquiries about setting up such a scheme.

Biba feels that larger providers and brokers will offer cover to large corporations for specific pollution threats but that the SME market (the staple client base for most smaller, regional and local commercial brokers) is not well served in this area nor are the more open ended definitions of pollution and liability which the new directive creates.

Lobby government

Biba does operate a number of schemes, and industry views about this vary. On the one hand, Mark Wood, managing director of The Broker Network asks: "Why should Biba believe it is its role to neg-otiate schemes? Its role is surely to lobby government, the FSA and other stakeholders to ensure that members' interests are protected. It is not a commercial entity – it is a trade body."

Martin, on the other hand, sees, "no reason why Biba could not construct a facility with the leading environmental impairment liability insurers to provide specific products that could be offered to SMEs by the regional."

What Biba has certainly done is to be proactive in representing members' interests in the consultation process, making four proposals to the parliament-ary committee which it believes to be of fundamental importance:

1. The same legislation should apply across the whole of the UK to facilitate the framing and pricing of UK wide cover

2. Liability should be proportionate rather than joint and several

3. Lliability should be fault based rather than simply falling on the current landowner, that is the previous polluter, where it still exists, should pay

4. There must be some control built in to the terms of remediation work that can be required by the relevant authority.

When asked, a Defra spokesperson was unable to comment on the Biba proposals but was able to confirm that the draft UK regulations, taking into account all inputs to the recent consultation process, will be out in late summer 2007 from when there will be a further period of consultation before final legislation in spring 2008.

No decision has yet been taken on whether liability will be joint and several or proportionate and the terms of remediation will relate to an environmental baseline established by the relevant authority, hopefully in discussion with liable parties.

England, Wales and Northern Ireland will share legislation at the outset. Although Scotland will have its own law, a Scottish Executive spokesperson confirmed that [the Executive] will apply generally the same principles and is working to the same timetable as Defra.

ELD is going to be a complex matter for insurers and brokers alike and so Biba's involvement at all levels seems to be both justifiable and useful for members and the market. IT