24 emea captive 2012
Pierre Sonigo, Federation of European Risk Management AssociationsGreen with liabilityFollowing developments on the implem...
“The threat of a mandatory financial guarantee scheme, at first considered small, may be increasing.”experience on its imp...
proved to be much less flexible, economical and innovative than traditionalinsurance. The choice between deductibles, limi...
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Green with liability


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Following developments on the implementation of the European Liability Directive, Pierre Sonigo explores its implications for captives and operators in the region.

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Green with liability

  1. 1. 24 emea captive 2012
  2. 2. Pierre Sonigo, Federation of European Risk Management AssociationsGreen with liabilityFollowing developments on the implementation of the European Liability Directive,Pierre Sonigo explores its implications for captives and operators in the region.T o investigate the slow implementation of the Environment An effective directive? Liability Directive (ELD), the European Commission gathered A report, prepared by the Commission for the Council, the European together 200 experts in Brussels in November 2011 “to discuss parliament and two other committees and published in October 2010, and explore difficulties, causes, challenges and pathways for assessed the effectiveness of the ELD through its transposition intopossible solutions”. Why is the implementatiown of the ELD so slow? national laws and its effective implementation.Is it too complex? Are there sufficient cases? Or is it simply a lack of The report noted that although the directive entered into force on Aprilinterest from the operators and the relevant authorities? 30, 2004, only four member states met the transposition deadline ofThe main features of the ELD April 30, 2007. It took almost three more years and several constraining judgments from the European Court of Justice to have the directive The Directive 2004/35/CE of the European Parliament and of the transposed on to the legislation of all 27 member states.Council of April 24, 2004, commonly called the Environmental LiabilityDirective (ELD), had two objectives: the prevention and the remediation The main reasons for the transposition delays were related toof environmental damage. Environmental damage is defined as difficulties in fitting the new regulation into existing legal frameworks ondamage to protected species and natural habitats (“nature”), damage environmental liability, the complexity of the technical requirements ofto water and damage to soil. We can immediately note that this is much the directive with respect to the economic valuation of damages andbroader than the simple definition of “pollution” used in most insurance the different types of remediation, and the many options left open tocontracts. member states at the time of transposition. The liable party is the “operator” who carries out occupational This resulted in broad divergence concerning several key implementingactivities. The general principle is that polluters pay for any fault-based provisions among the member states, including that:damage they cause to nature. A strict liability regime (no fault) applies • The definition of what is an operator can vary widely in each state;to certain operators which perform dangerous activities, listed in AnnexIII of the Directive. • Fewer than half of the member states allowed the “permit defence” or the “state of the art defence” to be invoked by operators, a similar There are some cases for exoneration of liability, for example, force number decided not to allow either defence, and the remaining statesmajeure, armed conflict, third party intervention. The framework of the admitted only one of the two defences;directive has provided each member state with the opportunity to accept • For multi-party causation, most member states opted for a systemas a defence the granting of a permit to operate prior to the accident of joint and multiple liability, while a minority chose proportionate(permit defence), or that the scientific knowledge on the potential toxicity liability; andof the substances involved was not sufficient to anticipate the damagesresulting from the accident (state of the art defence). • Regarding financial security, the issue is left to the discretion of the member states. Eight have introduced mandatory financial security Finally, operators have to take preventive actions if there is an imminent measures, which will enter into force at various dates between now andthreat of environmental damage and have an obligation to remedy, at 2014, while the remaining states will rely on voluntary financial security.their own cost, damage when it has occurred (paying a fine or financialcompensation is not satisfactory). The long delay in transposing the directive revealed that little practical emea captive 2012 25
  3. 3. “The threat of a mandatory financial guarantee scheme, at first considered small, may be increasing.”experience on its implementation is available thus far. Authorities often remediation measures in specific cases, an approach that does notdid not have rules compliant with the ELD in place or on time. Operators exist in Europe.were often unaware of the specific legal obligations. Insurers and other Fortunately for European operators, the Commission has alwaysinstitutions offering financial security were not sufficiently familiar with stated that it will not copy the US system and its known aberrations. USthe requirements their products had to meet to be ELD-compliant. Thus legislation was heavily influenced by the lobbying of American law firmsthe available information does not yet allow for concrete conclusions which made millions of dollars out of the complexity of the US model.to be drawn about the effectiveness of the directive in remedyingenvironmental damage. Should financial security be mandatory?Few accidents reported During the preparation of the green paper of the directive many pressure groups brought to the attention of the Commission the fact An issue of concern with this directive is the very small number of that new risks imposed on the operators should be adequately financed.cases which would fall under its specifications. The Commission’sreport identified 16 cases treated under the ELD at the beginning of Under Article 14(1) of the directive, member states are requested to2010, and estimates that the total number of ELD cases across the EU encourage the development of financial security instruments and markets,may be now around 50. with initiative for such developments coming from the private markets. The report explains that the low number of cases can be attributed to Over time, insurance has proved to be the most popular way ofthe limited knowledge of operators; it is not envisaged that increased providing cover for environmental risks. For many years products haveknowledge on the part of the operators will increase this number. In fact been widely available to cover sudden, accidental and even gradualI believe that operators that are aware of the added potential liabilities pollution, including remediation costs, whether on an ‘all risks’ or on aunder the ELD will carry out better risk assessment of, and accident ‘named perils’ basis. These policies may be sufficient to cover most ofprevention work in, the locations concerned (those close to Natura 2000 the costs involved in repairing damage to third parties. However, naturehabitats—an ecological network of protected areas in the EU territory). cannot be considered a third party under those policies. Will we see more cases in the future? I doubt it, because environmental This is the novelty of the directive: “nature” is represented byaccidents that generate damage to biodiversity as specified in the ELD non-governmental organisations (NGOs), authorities or any otherare, and will remain, rare, particularly because of the preventive effect stakeholder that can now claim to be indemnified for damage or lossof the directive. of service. Insurers such as ACE, Allianz, AXA CS, Chartis, Chubb, LIU Remedial costs have been estimated in the Commission report and XL have all developed special policies to cover most (if not all) ofat between €12,000 and €250,000. These, again, are relatively small the risks introduced in the ELD .amounts but there is no doubt that occasionally (perhaps once every 10 However, due to a lack of awareness or simply because the new risksyears) a major incident will generate damages in the region of millions are considered too small by a large majority of operators (confirmed byof euros. Those, however, should remain the exception. the low loss record), demand for the new insurance policies has so far been modest.A (bad) US influence? Is this a good reason to make insurance mandatory? A few pressure Although compensatory and complementary remediation is new in the groups are pushing for it, either nationally or at a European level.EU, it has existed in the US for more than 40 years. Federal legislationthat imposes natural resource damage (NRD) liability includes the Insurers and risk managers are both strongly opposed to any mandatoryOil Pollution Act 1990 (OPA) and the Comprehensive Environmental arrangement, whether through pools or any other government schemes.Response, Compensation and Liability Act of 1980 (CERCLA). This position has regularly been stated in reports of the ad hoc committee of the CEA (European Insurers Associations) of which FERMA (Federation Although CERCLA and OPA have a wider scope of liabilities for NRD of European Risk Management Associations) is a member.than the ELD, there are many similarities between the three regimes,particularly in relation to primary, compensatory and complementary Both parties prefer the freedom of underwriting, pricing and risk selectionremediation. One major difference, however, is that CERCLA allows offered by a competitive market. At first, pools (nuclear, natural catastrophes,the Environmental Protection Agency (EPA) directly to implement terrorism), when and where implemented, fulfilled a purpose but they later26 emea captive 2012
  4. 4. proved to be much less flexible, economical and innovative than traditionalinsurance. The choice between deductibles, limits, wording, self-insuranceand use of captives, is much larger in open markets.What happens next? The ELD will be reviewed by the Commission in 2014 and importantchanges could be made. It is to be hoped that the complexity oftheoretical concepts will be clarified and differences in transpositionacross member states harmonised. The threat of a mandatory financialguarantee scheme, at first considered small, may be increasing. So, assuggested by the facilitators of the November workshop: “Let us createa sense of community and talk to each other.”The views expressed in this article should not be considered to be theofficial position of FERMA or CEA.Pierre Sonigo is the secretary general of FERMA and a member ofthe ELD ad hoc working group of the CEA. He can be contacted at:psonigo@gmail.com emea captive 2012 27