The ELD has been a real challenge for UK law, and the market looks like it won't take off until the first big case, but, as Peter Davy points out, a 'wait and see attitude' could do more harm than good; companies need to work out their liabilities now

Better late than never? By the time the UK government implemented the Environmental Liability Directive (ELD) earlier this year, even the Confederation of British Industry (CBI) had come round to urging the government to get a move on, despite initially declaring it the final nail in the coffin of UK manufacturing. By April, when it was implemented in England, it was a full two years after the deadline. In Northern Ireland it only came into force in July.

However, if the UK was slow to act, it had both company - with eight other member states also referred by the Commission to the European Court of Justice for their tardiness - and a good excuse: the difficulty in integrating it in UK law. As Gavin Reese a, partner in the liability group at Reynolds Porter Chamberlain, explains, "The main problem the UK has had is really fitting it amongst all the other environmental legislation."

The Clean Air Act, Environmental Protection Act, Water Resource Act: legislation covering much of the same ground has already been in place in the UK for a decade or more, and some of the duties in existing laws are in fact stricter than the new regime. Indeed, the government itself estimates that just one per cent of environmental cases will involve the new directive.

"In some ways the directive hasn't done that much," says Peter Vanderweele, a director at Oval Insurance Broking. "It just confirms that the polluter pays." Consequently, perhaps, most companies haven't really taken a great deal of notice - something that's reflected in the insurance market. "Across the board the amount of environmental insurance that is purchased is fairly minimal," he says.

GROWING LIABILITIES

That, though, might be set to change. For a start, the directive is far from an irrelevance. Look outside the UK, for instance, and in countries in Eastern and Central Europe, where existing environmental legislation is thinner on the ground, it often now forms the core framework of environmental legislation.

"If your company operates there then the Environmental Liability Directive is the key risk to your business from an environmental perspective," says Cliff Warman, head of Marsh's environmental practice, EMEA. In the UK, too, the impact of the directive should not be underestimated. In fact, Warman insists it's "life-changing stuff". That's primarily down to three aspects. First, that the environmental damage doesn't have to be driven by pollution, although obviously it often will be. Second, companies must also now inform the authorities of any potential or actual environmental damage (a provision that also makes it likely other environmental failures may come to light). These provisions have some doubting that use of the directive will be as limited as expected: "Personally I think this could have a much greater impact," says Anna Nilsson, UK and Ireland manager for environmental insurance at AIG.

Either way, though, the third aspect is that those cases that do come through will face a far wider scope of remediation, being faced with both complementary and compensatory damages. Not only do companies have to pay for primary remediation, cleaning up the mess and restoring the environment to its original condition; they also face an order to pay compensation for the period the environment was damaged and work elsewhere to make amends where the harm at the initial site cannot be reversed. That could see the expense of such incidents soar.

As Graeme Merry, environmental specialist at Heath Lambert puts it, "For a lot of every day manufacturers the chances of incurring significant additional liabilities under the new regulations might be quite low, but when these do come up there's a chance they'll be very significant." And it wouldn't necessarily have to be a firm in a high-risk industry. Reese refers to a recent case he's seen where a firm had a leak in an oil tank; even under the existing law that meant a bill for £30,000. "There are plenty of small firms with an oil tank on the premises," he points out.

At the same time, it's clear that most companies aren't covered against such a risk by their insurance. As Merry explains, growth of the specialist environmental insurance market has traditionally been hampered by the cover for sudden and accidental pollution under public liability wordings. However, the Bartoline case, by holding that emergency works by the Environment Agency and the clean-up costs it required weren't covered, suggested this was inadequate. The added liability introduced by the directive confirms it. "I think most people would now agree there is a need to have something other than a standard public liability policy for accidental pollution," says Steve Foulsham at BIBA.

EMERGING MARKETS

Exactly what, though, is another question. On the one hand, many of the PL carriers are stepping in to address the shortfall in coverage. Gary Marshall, chair of the environment, health and safety group at AIRMIC, for example, says some long-term clients have been able to negotiate coverage for sudden and accidental incidents back into their policies. Other PL providers are offering bolt on policies to address the uncertainty over Bartoline. That's not enough, says Nilsson.

"It's a band-aid," she says. "It's still not addressing the full scope of exposure." Gradual pollution, for instance, or complementary and compensatory damages still wouldn't be covered in many cases. And even where there is bolt on coverage for ELD liabilities, the specialists argue that clients need to be wary.

"They're all very different in terms of their coverage," says Simon Harwood-Matthews, environmental underwriter at XL Insurance. "It's a fragmented approach so it's pretty important you understand what you're buying." A standalone EIL policy will always be the safest bet, he argues. And it is true that the EIL providers - ACE, AIG, Chubb, XL and now Liberty - have a great head start, says Glen Donaldson, Crawford & Co's head of liability for Northern Ireland. "There's a significant opportunity for them to get out to a wider market," he says.

The intention is clearly there. ACE, for instance, marked the directive's implementation in April with the launch of its Commercial Premises Pollution Liability product, designed specifically for small and medium-sized businesses. It followed AIG's Enviropro, again geared towards lower underwriting requirements and premiums; Liberty too have targeted the low to medium risk companies trying to capture the widespread demand for operational environmental liability cover that to date has largely been satisfied through the PL market - it is, says Merry, the "holy grail".

To date, it's unclear how far they're succeeding. In May, BIBA launched its online Environmental Liability scheme, the cover underwritten by ACE. According to Foulsham, interest in the scheme is picking up, but is still modest. Partly, of course, that's down to the economy. As he puts it, "It's being put on the back-burner." But it's also because there remains an enormous amount of uncertainty about exactly what impact the directive will have. Crawford's Donaldson says that at a recent conference he attended on environmental liability even the experts consulted by the government during the transposition of the directive were uncertain how it would be applied. Like the companies, they were waiting for a big case, and the insurers admit that may be what it takes for the market to really take off.

"There are still a lot of UK businesses that need to wake up to these liabilities," says Harwood-Matthews. For now, they are waiting for the cases to come through to give them a better handle on the magnitude and frequency they may face. "The question is whether that's really a good risk management approach," he says. Or, to put it another way, it's a strategy that only pays off if your firm isn't among them.

THINK PIECE: THE CASE FOR COMPULSION

Before the end of next April, the Commission will present a report on the ELD's effectiveness, including the availability of insurance to ensure the burden of environmental damage doesn't fall back on the state. It's at this time that the Commission could propose a system of mandatory financial security.

Some countries, such as Spain, have already gone down the compulsory insurance route; others are said to be considering it, and according to Georgina Crowhurst at solicitors Clyde & Co, it's still possible the Commission may opt for it.

If it does, though, it faces two significant problems: the first is a general antipathy to compulsory insurance. "I think many people would say we really don't need another compulsory class," says Gary Marshall, chair of the environment, health and safety group at Airmic. The criminally negligent, after all, simply still wouldn't bother.

Furthermore, with countries such as the UK having implemented the law so late and without a single case yet decided, there's likely to be little in the way of evidence that the market is failing to justify a mandatory approach. Most reckon that in the absence of high profile uninsured corporate failures that leave society exposed to the clean up costs of environmental incidents, it will be difficult to make the case.

Longer-term some form of compulsory financial security remains a possibility and has wider support. In fact, argues Graeme Merry, environmental specialist at Heath Lambert, it's the only way the system can work.

"It seems ridiculous to have gone down this route of implementing the directive and requiring polluters to bear the responsibility for correcting environmental damage and then not insisting they put in place provision to ensure they have the finances to do it," he says.

"I'd never support compulsory insurance, but compulsory financial security? Absolutely."

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