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24 emea captive 2012
Pierre Sonigo, Federation of European Risk Management Associations




Green with liability
Following 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 into
possible 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 April
interest from the operators and the relevant authorities?
                                                                               30, 2004, only four member states met the transposition deadline of
The 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 Liability
Directive (ELD), had two objectives: the prevention and the remediation          The main reasons for the transposition delays were related to
of environmental damage. Environmental damage is defined as                    difficulties in fitting the new regulation into existing legal frameworks on
damage to protected species and natural habitats (“nature”), damage            environmental liability, the complexity of the technical requirements of
to water and damage to soil. We can immediately note that this is much         the directive with respect to the economic valuation of damages and
broader than the simple definition of “pollution” used in most insurance       the different types of remediation, and the many options left open to
contracts.                                                                     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 implementing
activities. 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 Annex
III 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 states
majeure, 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 system
as 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; and
of the substances involved was not sufficient to anticipate the damages
resulting 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 and
threat 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 financial
compensation is not satisfactory).                                              The long delay in transposing the directive revealed that little practical




                                                                                                                                         emea captive 2012 25
“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 not
did 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 always
institutions offering financial security were not sufficiently familiar with
                                                                               stated that it will not copy the US system and its known aberrations. US
the requirements their products had to meet to be ELD-compliant. Thus
                                                                               legislation was heavily influenced by the lobbying of American law firms
the 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 remedying
environmental 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’s
report identified 16 cases treated under the ELD at the beginning of            Under Article 14(1) of the directive, member states are requested to
2010, 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 of
the limited knowledge of operators; it is not envisaged that increased         providing cover for environmental risks. For many years products have
knowledge on the part of the operators will increase this number. In fact      been widely available to cover sudden, accidental and even gradual
I believe that operators that are aware of the added potential liabilities     pollution, including remediation costs, whether on an ‘all risks’ or on a
under the ELD will carry out better risk assessment of, and accident           ‘named perils’ basis. These policies may be sufficient to cover most of
prevention work in, the locations concerned (those close to Natura 2000        the costs involved in repairing damage to third parties. However, nature
habitats—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 by
accidents that generate damage to biodiversity as specified in the ELD         non-governmental organisations (NGOs), authorities or any other
are, and will remain, rare, particularly because of the preventive effect      stakeholder that can now claim to be indemnified for damage or loss
of 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) of
at 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 risks
years) a major incident will generate damages in the region of millions        are considered too small by a large majority of operators (confirmed by
of 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 legislation
that imposes natural resource damage (NRD) liability includes the               Insurers and risk managers are both strongly opposed to any mandatory
Oil 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 selection
remediation. 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 later




26 emea captive 2012
proved to be much less flexible, economical and innovative than traditional
insurance. The choice between deductibles, limits, wording, self-insurance
and use of captives, is much larger in open markets.

What happens next?
  The ELD will be reviewed by the Commission in 2014 and important
changes could be made. It is to be hoped that the complexity of
theoretical concepts will be clarified and differences in transposition
across member states harmonised. The threat of a mandatory financial
guarantee scheme, at first considered small, may be increasing. So, as
suggested by the facilitators of the November workshop: “Let us create
a sense of community and talk to each other.”



The views expressed in this article should not be considered to be the
official position of FERMA or CEA.

Pierre Sonigo is the secretary general of FERMA and a member of
the ELD ad hoc working group of the CEA. He can be contacted at:
psonigo@gmail.com




                                                        emea captive 2012 27

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Green with liability

  • 2. Pierre Sonigo, Federation of European Risk Management Associations Green with liability Following 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 into possible 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 April interest from the operators and the relevant authorities? 30, 2004, only four member states met the transposition deadline of The 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 Liability Directive (ELD), had two objectives: the prevention and the remediation The main reasons for the transposition delays were related to of environmental damage. Environmental damage is defined as difficulties in fitting the new regulation into existing legal frameworks on damage to protected species and natural habitats (“nature”), damage environmental liability, the complexity of the technical requirements of to water and damage to soil. We can immediately note that this is much the directive with respect to the economic valuation of damages and broader than the simple definition of “pollution” used in most insurance the different types of remediation, and the many options left open to contracts. 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 implementing activities. 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 Annex III 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 states majeure, 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 system as 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; and of the substances involved was not sufficient to anticipate the damages resulting 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 and threat 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 financial compensation is not satisfactory). The long delay in transposing the directive revealed that little practical emea captive 2012 25
  • 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 not did 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 always institutions offering financial security were not sufficiently familiar with stated that it will not copy the US system and its known aberrations. US the requirements their products had to meet to be ELD-compliant. Thus legislation was heavily influenced by the lobbying of American law firms the 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 remedying environmental 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’s report identified 16 cases treated under the ELD at the beginning of Under Article 14(1) of the directive, member states are requested to 2010, 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 of the limited knowledge of operators; it is not envisaged that increased providing cover for environmental risks. For many years products have knowledge on the part of the operators will increase this number. In fact been widely available to cover sudden, accidental and even gradual I believe that operators that are aware of the added potential liabilities pollution, including remediation costs, whether on an ‘all risks’ or on a under the ELD will carry out better risk assessment of, and accident ‘named perils’ basis. These policies may be sufficient to cover most of prevention work in, the locations concerned (those close to Natura 2000 the costs involved in repairing damage to third parties. However, nature habitats—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 by accidents that generate damage to biodiversity as specified in the ELD non-governmental organisations (NGOs), authorities or any other are, and will remain, rare, particularly because of the preventive effect stakeholder that can now claim to be indemnified for damage or loss of 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) of at 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 risks years) a major incident will generate damages in the region of millions are considered too small by a large majority of operators (confirmed by of 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 legislation that imposes natural resource damage (NRD) liability includes the Insurers and risk managers are both strongly opposed to any mandatory Oil 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 selection remediation. 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 later 26 emea captive 2012
  • 4. proved to be much less flexible, economical and innovative than traditional insurance. The choice between deductibles, limits, wording, self-insurance and use of captives, is much larger in open markets. What happens next? The ELD will be reviewed by the Commission in 2014 and important changes could be made. It is to be hoped that the complexity of theoretical concepts will be clarified and differences in transposition across member states harmonised. The threat of a mandatory financial guarantee scheme, at first considered small, may be increasing. So, as suggested by the facilitators of the November workshop: “Let us create a sense of community and talk to each other.” The views expressed in this article should not be considered to be the official position of FERMA or CEA. Pierre Sonigo is the secretary general of FERMA and a member of the ELD ad hoc working group of the CEA. He can be contacted at: psonigo@gmail.com emea captive 2012 27