Insuring against environmental liabilities: the polluter pays, but how?

Companies and property owners are facing the possibility of being hit by bills for their effect on the environment, with a European Union directive set to be implemented into UK law.

The phasing in of the Environmental Liability Directive (ELD) will enshrine the 'polluter pays' principle in law, which extends companies' liabilities for the clean-up costs for causing environmental damage.

The liability for firms under the directive is to "remediate" the damaged environment, which in the case of protected species, natural habitats and water could extend to covering the cost of returning the environment to the condition it was before the damage occurred.

But if the damage is so extensive that the site cannot be returned to its baseline condition, companies can be required to create a similar site to replace the original resource which cannot be fully restored.

So if a damaged resource can only be recovered to 80 per cent of its original condition, companies will have to provide the equivalent of the 20 per cent shortfall elsewhere.

Commenting last year on the expected impact of the ELD, Karl Russek, a senior vice president for global insurance specialist Ace Group, told the Insurance Journal that companies "should not simply rely on their existing liability covers to provide the protection they need in the event of environmental damage clean up operations".

Without updating to a more comprehensive plan, firms may leave themselves exposed to "significant losses", he added.

But while firms are understandably keen to do this, insurers are reportedly finding it difficult to create reliable policies as the government is yet to enter the additional liabilities into written law and is not expected to until April next year.

Without the firm descriptions of liability to work with, insurers are not willing to lay down concrete insurance terms - but the ELD entered effect on April 30th.

A spokesperson for the British Insurance Brokers' Association said: "We are in limbo. Additional liabilities are out there. Until this is made into statute, that is where we will remain."

Further anger at the situation came from Bob Martin, director of risk management firm Aon's environmental consulting and solutions unit.

"It's time to wake up," he said. "The government has had three years to act on this. It hasn't been given the profile it deserves."

But Mr Martin put some blame on insurers who he said have few environmental specialists which exacerbates the problem.

"The chances that a regional broker understands environmental insurance liability cover - let alone the implications of the ELD - are remote," he said.

Aon believes that paying out for environmental damage presents the largest liability for companies and should view it as a core part of their risk management, while property owners should also remain aware of their responsibilities, for example with waste management or checking materials on their premises are safely stored.