Environmental Liabilities in Europe: Changing Times

Historically, U.S. companies doing business in Europe weren’t likely to list environmental litigation among their major concerns. While the United States has boasted a robust regulatory environment for some time, Europe has traditionally been perceived as lagging behind – but that appears to be changing. Recent environmental legislation by the European Union (EU) and increased enforcement among its member states means that U.S. businesses would be well-advised to stay abreast of European environmental trends and consider steps to help protect themselves against potential claims, which could be financially devastating.

In April 2004, the EU adopted legislation known as the Environmental Liability Directive (ELD), designed to protect the environment by holding businesses responsible for both preventing and remedying environmental damage. The ELD recognizes three types of environmental damage: damage to protected species and natural habitats, water damage, and land damage. The underlying principle of the ELD is that “the polluter pays.” By 2010, all EU-member states had officially signed on to the legislation and incorporated it into national law.

Although there have been a number of prosecutions under the ELD, we have not yet seen a dramatic uptick in enforcement action. This is partly due to the relatively recent implementation of the ELD, but also because in some countries such as the United Kingdom, there was already an established framework of environmental legislation, under which regulators have continued to take enforcement action, rather than under the ELD.

The ELD is perhaps of most significance to those companies (referred to as operators) that are engaged in certain relatively hazardous activities that are listed in the ELD, particularly those situated close to protected habitats and species. Such activities can include:

• Waste management;
• The manufacture, handling or transportation of hazardous chemicals; and
• Business operations subject to emission control legislation as well as those involved in handling and transportation of genetically-modified organisms (GMOs).

For those operators, the ELD applies on a “strict liability” basis – it is not essential to establish whether the operator has been negligent or at fault. However, all companies, irrespective of the nature of their activities, may well be strictly liable for cleaning up pollution under other local, environmental legislation.

For example, in the United Kingdom, landowners may be held responsible for the cost of cleaning up pollution that they did not cause, including acts of vandalism or the negligence of tenants. And of course, even where environmental protection procedures appear to be adequate, incidents can still happen.

Under the ELD’s “precautionary principle,” companies are required to be proactive with respect to environmental risk mitigation. A company can be held liable if its actions create an “imminent threat” of environmental damage and it hasn’t put in place procedures to prevent that damage. If a company damages the environment, it is legally required to remediate it. If the environment can’t be brought back to baseline conditions, the company may be required to compensate for damages by improving an alternate location or habitat, which is known as “complementary remediation.”

For example, if a chemical spill pollutes a stream, the company held responsible may be tasked with bringing the stream back to its pre-spill (or baseline) conditions. If that isn’t possible, the company might have to move the remaining fish to a nearby stream or undertake some other works of equivalent environmental value.

Companies may also be required to compensate for the temporary loss of resources and/or services as a result of the damage – providing drinking water to residents after groundwater has been polluted, for example – and to cover the assessed cost of “interim losses” suffered by the environment until remediation is fully accomplished (known as “compensatory remediation”).

In fact, cases have already been brought against companies in Europe. In 2009, for example, the British company United Utilities was held responsible for water pollution that killed an estimated 6,000 fish and damaged a three-mile stretch of a waterway in the northwest of England. The Environment Agency fined United Utilities £14,000 (about $22,000) and, under the ELD, required the company to repair the damage and also undertake compensatory remediation – which could prove far costlier than the fine.

U.S. companies can help protect themselves against this and other types of environmental liability by considering the following steps.

Keep abreast of developments

It’s important to have an understanding of potential environmental liabilities under the ELD, but it’s even more crucial to be aware of trends in the implementation of the legislation. Keep in mind that individual countries are permitted to enact stricter regulations than those laid-out in the ELD. Find out what regulations are in place in the country or countries in which the insured is operating and whether those regulations are likely to be enforced.

Consider environmental liability insurance

In Europe, general liability policies typically provide very limited insurance protection for pollution incidents and no insurance for habitat damage under the ELD. Companies need to assess their potential environmental exposures; consider the legal and public relations expenses they may incur should a claim arise; and work with their agents or brokers to determine whether to purchase an environmental liability insurance policy. A good policy should extend to gradual pollution and include insurance for losses triggered by the ELD, including emergency and preventative measures that may need to be taken to avoid or reduce environmental damage that has not yet occurred, but the threat of it happening is imminent.

Companies should also work with their insurance broker to ensure that their environmental liability insurance program complies with EU-member states legislation, including the use of local policies in countries where non-admitted insurance is not permitted. Such an approach also offers the benefit of accessing local underwriting expertise and claims-handling services.

Look broadly at potential environmental exposures

Given the risks involved, it’s crucial that a company’s environmental risk manager (or any employee with those responsibilities) examines the company’s existing environmental risk management processes and procedures, like pollution prevention, reporting and response, to make sure that they are adequate to prevent incidents of environmental damage. Environmental risk managers should be working closely with other departments such as finance and facilities management, especially if improvements are going to necessitate significant expenditures or site disruption. In addition, corporate counsel should be familiar with EU environmental laws, including the ELD and the specific regulations of the country or countries in which business is being conducted.

Consider the community

One of the least predictable components of risk, and often the most difficult to manage, is a company’s relationship with the local community, especially in high-profile operations – such as landfills, incineration facilities and other waste management activities. Under the ELD, affected communities, as well as citizens and environmental groups, have legal standing to request that the authorities pursue companies causing environmental damage. Even where adequate controls are in place to reduce environmental risks, nearby communities may still perceive the risks to be high, potentially increasing concerns. That makes it essential to be aware of any local concerns and to establish lines of communication with neighbors before problems escalate into claims.

For now, some European regulators have tended to take a pragmatic, rather than a punitive, approach to environmental issues. That, of course, could change at any time, which makes it critical that U.S. companies operating in Europe make a diligent effort to protect themselves against potentially costly environmental claims.