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Boom and bust?

Written by Andrea Kirkby
October 2010

The notorious Buncefield explosion led to a raft of prosecutions for environmental offences and record fines, the effects of which are being felt long after the oil storage depot disaster took place four years ago. Andrea Kirkby urges risk managers to heed the lessons

The award of record fines for safety and environmental offences against Total UK and the other companies involved in the Buncefield disaster is an opportunity to take stock of corporate environmental liabilities.

This event led to a new record for a single offence. Total UK was fined £600,000, the British Pipeline Agency £300,000, and Hertfordshire Oil Storage £450,000, for environmental offences under the Water Resources Act 1991, in addition to health and safety offences – a total of £1.35m for environmental offences and £5.35m in total.

Account should be taken of the absence of fatalities at Buncefield, and of the myriad mitigating factors mentioned in the judgement, including the existence of incident response plans that were not able to deal with the magnitude of the event; safety improvements were actually being carried out at the time of the disaster; and the fact that all parties cooperated in removing polluting materials from the site.

Had these mitigating factors not been present, it is possible that the fines would have been much larger. That suggests companies should see the Buncefield fines as the lower – not the upper – end of the range when they are assessing environmental risks.

These fines are certainly way ahead of previous pollution fines. Although Milford Haven Port Authority was fined £4m in 1999 after the tanker Sea Empress ran aground and spilled oil, that fine was reduced to £750,000 on appeal. Anglian Water was fined £190,000 for a series of offences at its Stewartby, Bedfordshire plant in 2002, the highest fine this decade before Buncefield.

But, as Nick McMahon, a partner at Reynolds Porter Chamberlain (RPC), says, despite its size, the case does not create new precedents: “The basic principles are the same – this case just reinforces the importance of having the right plans and procedures in place.”

There are, though, some interesting facets of the case. One is the fact that the ground was contaminated not only by escaping hydrocarbons, but also by firefighting foams. McMahon comments, “This is obviously something that should be taken into account in risk plans – is there an increased risk of collateral damage?”

Another interesting feature was the complexity of the supply chain at Buncefield (something this disaster has in common with the more recent Deepwater Horizon blowout). The prosecution sought to identify responsibility throughout the entire supply chain, rather than pursuing a single contractor. McMahon believes the courts are now taking a sophisticated approach to subcontracting. “In relation to criminal liability the fact that you have subcontracted a job will not get you off the regulatory hook,” he says; “you still need to carry out your own assessment of the risks.”

The collaboration of the Health & Safety Executive and the Environment Agency in prosecuting the case is also interesting. Given the result, it seems likely that the two agencies will continue to collaborate in future, and this may herald a tighter approach to prosecuting environmental offences.

McMahon says, “I would be surprised if this didn’t focus a few minds. One aspect is reviewing systems and emergency plans; another is environmental liability insurance – there are some gaps in many standard insurance policies’ cover so companies should be talking to their brokers about this.” Although there are an increasing number of special products from insurers such as Chubb and Ace, he says this remains a specialised area of insurance.

Insurance won’t cover the fines in a criminal case – but it can cover remediation costs. However, a difficulty for many companies is assessing just how far they are covered for their environmental liabilities with existing commercial property and public liability policies. While general insurance may provide some cover, companies need to look carefully at any exclusions or limitations in the policy.

At the same time the Environmental Liabilities Directive (ELD) has increased potential risk with its introduction of the ‘polluter pays’ principle into English law (through the Environmental Damage Regulations 2009). Its remediation requirements are unlikely to be covered in many circumstances – for instance where remediation costs involve a property other than that insured, or are greater than the value of the property. The Bartoline case, in 2003, showed that clean-up costs incurred by a public body were not covered as ‘damages’ in the company’s public liability insurance. Yet many companies are still relying on their general liabilities policies to provide the protection they need for environmental clean-up operations.

The ELD doesn’t just cover pollution; it also covers any kind of impact on natural habitats, such as that caused by construction activity. Remediation costs could be considerably greater than the value of the property insured, and might even include the creation of a similar natural habitat elsewhere if remediation can’t be achieved on the original site (for instance, where construction work has destroyed a particular habitat). This goes a good deal further than the rules which applied previously (and which were in force at the time of the Buncefield explosion).

It should also be noted that remediation can now be ordered by the Environment Agency. An increasing number of insurance products now address environmental issues directly. For instance Chubb now offers two lines, environmental site liability and contractors pollution liability, and Ace has founded a specialist practice, Ace Green, which brings together a number of products aimed at ‘green’ industries such as carbon capture and renewable energy, as well as environmental liabilities cover. The Ace move is particularly interesting, as the company has taken a positive approach to insuring both green businesses and sustainable buildings, carving out a market niche for itself.

Another approach is to offer environmental liabilities cover as an optional addition to general insurance policies. FM Global, for instance, now offers Sustainability Select as a two-part coverage endorsement to its all-risks policy. Risk improvement enables clients to transfer some of the risk for improving risk quality after a loss occurs, explains Gary Love, vice-president and staff operations underwriting manager, while the Green Coverage Endorsement enables clients to follow ‘green’ practices and use sustainable materials rather than building to the lowest cost as part of their recovery options.

However, there does appear to be some way to go for both the insurance industry, and business in general, in getting to grips properly with environmental risk. An EIU survey taken in 2008 showed that environmental risk was still managed in an ad hoc fashion in most larger companies. In particular, companies were relatively poor at managing environmental risk in the supply chain – something that should be seen as a red flag given the lessons of Buncefield. This seems to be changing – but not very fast.

And while the insurance industry is providing specialised environmental liabilities products, with a few exceptions general insurance has not caught up. At FTSE 100 level, companies may be adequately covering their risk, but there is a worrying absence of coverage further down the scale.

While sectors such as oil and gas and petrochemicals are getting up to date, some businesses still appear to be overlooking their potential environmental liabilities. As an example, construction companies in the US have been fined for not managing storm water runoff – affecting nearby wetlands and streams. And according to Simon Johnson, director of Aon’s Environmental Services Group, many companies still believe the ELD only covers pollution – whereas it increases liability for any operator who causes environmental damage, however that damage is caused. In Aon’s 2009 Global Risks Survey, environmental risk only ranked 32nd as a concern with corporate risk managers, suggesting that they are somewhat complacent (and possibly underinsured). The size of fines and remediation costs at Buncefield might just be the sort of bad news that is worth heeding.


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