Businesses seeking to expand into the United Kingdom face multimillion-dollar liabilities following a European Union directive imposing new requirements on companies that harm the environment. Although the EU's Environmental Liability Directive (ELD) finally went into force in March 2009 (nearly two years after the EU-mandated deadline), regulators have not yet made enforcement a priority. But in time, they will. And companies that do business in the region need to be prepared. 

The directive goes beyond previous regulation, requiring that companies not only clean up any damage they may have caused to the environment, but also reinstate the ecosystem to its condition before damage occurred. It then requires companies to pay compensation for the time that the ecosystem was unavailable to the surrounding community. If it can never be restored to its pre-contaminated state, the company must then provide an alternative resource somewhere else to offset that loss. Essentially, the directive is a transition to a "polluter pays" system. 

If a factory, for instance, accidentally discharges a chemical into a local stream, killing all of the fish, it is not enough for the factory owners to clean up the stream, it must also replace the fish, plants and other wildlife that lived in the stream, and it must pay compensation for the loss of the use of that stream while it was being restored.

Although the liabilities associated with the directive are hard to predict, it is safe to say that companies are at risk for substantial losses. There have only been a few incidents in Europe so far-cases in Spain, Germany and France have led to losses totaling tens of millions of euros. As of yet, there have been no incidents in the United Kingdom, but it is just a matter of time.

Companies should give careful thought to any sites under consideration before making any purchase or investment. Companies need to find out whether there are any protected habitats or species in the area. They also must consider their own operations and think about the materials they are using and whether any of them could harm the environment if they escaped or were discharged. 

And they should ask themselves: What sort of environmental damage could be caused? Is it possible to make any changes to manufacturing processes to minimize the impact on the environment or can the company substitute different substances or materials that might have a less harmful effect on the environment?

Companies can also purchase insurance, and although it is not compulsory in the United Kingdom (as it is in Spain and Portugal), coverage does provide important protection. But UK companies must specifically request it. Even though pollution policies sometimes offer extensions that apply to directive liabilities, companies cannot assume this will be included in their policies. 

If companies do obtain such coverage, it should also protect directors and officers. The directive requires companies that damage the environment to report the incident to regulators, and failure to report or failure to comply with regulators' decisions could result in prosecution. In addition, directors and officers could be held liable if the company's actions that caused the damage were the result of the connivance of a director or officer. 

Written by Michael Cassella:

Michael Casella is president and CEO of Chubb Insurance Company of Europe.

The above article is reprinted from the April 2010 edition of Risk Management Magazine.