Mother Nature's Red Tape: Environmental Liability Regulations around the World

By Hodge, Neil | Risk Management, July-August 2014 | Go to article overview

Mother Nature's Red Tape: Environmental Liability Regulations around the World


Hodge, Neil, Risk Management


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Any organization that is not concerned about environmental liability risk, or that believes it may have adequate protection through general liability insurance policies, should take a moment to reconsider.

Released in April by insurer ACE and law firm Clyde & Co., the white paper "Structuring Multinational Insurance Programs found that, despite general agreement on the principle of "polluter pays," there is little global consistency in environmental regulation. This is little wonder when there are now an estimated 17,000 or more separate regulations worldwide addressing air, water, land and soil contamination.

The report also found that there is "considerable confusion as to whether or not--and to what extent--companies' existing insurance programs cover environmental risks and clean-up costs, even though insurers apply pollution exclusions to their general liability policies in many countries.

More widely, insurers have found that the industries that are more susceptible to pollution incidents--heavy industry, oil and gas, mining, and chemical manufacturing, for example--are those that are more likely to seek specialized insurance products to ensure better cover. However, this leaves the majority of companies believing that they have a low risk of causing considerable environmental damage through their operations.

As a result, they do not feel the need to buy additional cover to supplement general liability policies.

Any organization can unwittingly cause tremendous environmental damage to its surroundings through its operations, or even through the actions of third parties working on its behalf. Lowe's Home Centers, for example, was forced to pay a $500,000 fine in April--the largest ever for violations of the EPA's Lead Renovation, Repair and Painting rule--after failing to ensure that the contractors it hired took steps to minimize lead dust from home renovation work. In 1003, U.K.-based solvents manufacturer Bartoline was forced to pay 770,000 [pounds sterling] (almost $1.3 million) in cleanup costs after a fire brigade polluted two waterways while trying to put out a fire on the company's premises.

The risks of inadequate insurance protection become frighteningly apparent when considering the costs of potential fines, remediation and compensation. Just look at oil giant BP. The U.S. Department of Justice handed the company criminal fines worth $4.5 billion for the 2010 Gulf oil spill, and effectively barred it from winning new contracts in the Gulf of Mexico because the company has failed to demonstrate that it is a "responsible" contractor.

In its 2013 fourth-quarter results, BP said its cleanup and compensation bill has so far reached $42.7 billion. The final figure could be far higher, however, as this tally does not take into account additional provisions for economic loss claims from other legal settlements. The company is also waiting for a U.S. court decision over whether it can be considered "grossly negligent" for the Deepwater Horizon accident. That could add another $20 billion in penalties under the Clean Water Act, which includes strict liability rules and tough enforcement mechanisms.

REGULATION IN NORTH AMERICA

When it comes to environmental liability in the United States, strict enforcement and highly punitive fines and damage costs can act in tandem, particularly as most environmental laws impose strict liability. Take for example the Comprehensive Environmental Response, Compensation and Liability Act 1980, or Superfund, which deals with the cleanup of hazardous substances. The act imposes a strict liability scheme that makes one party potentially liable for the entire cost of the remediation even where multiple parties were involved. It also exposes directors to criminal prosecution and civil liabilities. The EPA is also aggressive in prosecuting directors and officers for pollution incidents, stating that it "emphasizes prosecution of individual defendants as high up the corporate hierarchy as the evidence permits. …

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