Polluter pays: European legislation imposes heavy financial burdens on companies and executives who accidentally pollute the soil, water and air.
Let’s clarify the insurance solutions to cover both environmental damage and the responsibilities of executives.
The Environmental Liability Directive imposes specific obligations on companies to repair, clean up and restore damage to the natural habitat and biodiversity: land, rivers, lakes, animal species.
This is a ‘strict liability’ that imposes an obligation to compensate for these specific damages regardless of our actual responsibility.
Which industrial sectors are exposed to environmental risk?
There is a widespread misconception that only high-risk companies, such as those in the petrochemical sector or those involved in the transport and disposal of hazardous substances, are required to take out insurance against environmental damage.
In reality, this is not the case! European legislation makes no distinction, quite the contrary.
Regardless of the size and type of business, all companies are exposed to liability for environmental damage, which is why insurance companies offer a wide range of specific solutions depending on the type of business (from manufacturing to services) and size (from large companies to small and medium-sized enterprises).
Below is a list of the sectors exposed to environmental risk:
- manufacturing
- food and drink
- storage and handling of goods
- gas, water and electricity distribution
- civil construction and reclamation of abandoned industrial areas
- warehouses and retailers
- transport and logistics
- estate agencies, owners and/or tenants
- professional environmental services companies
- hotels, restaurants and catering
Does a general liability policy cover pollution damage? A dangerous misunderstanding that can lead to complications and troubles for managers’ own pocket.
Neither a fire policy nor a civil liability policy is sufficient to cover pollution damage.
In most cases, it is thought that it is sufficient to extend the pollution expenses to the company’s civil liability policy.
Unfortunately, this type of coverage, which is only general in nature, does not cover the high costs for:
- remediation within the plant
- remediation outside the production site
- decontamination and restoration of buildings and their contents.
Unforeseen costs of environmental damage: 7 claims happened.
In this blog post we will provide updates on the most serious and recent accidents that have occurred in Italy and abroad.
In the meantime, for the sake of clarity, below is a list of the 7 most frequent types of pollution damage.
1. Property damage
A fire breaks out in a plastics factory: the highly toxic fumes affect neighbouring companies and residents.
2. Damage to soil and aquifers
A breakdown in a toilet paper production plant causes an alcohol spill in a nature reserve.
3. Clean-up of neighbouring production sites.
The spill of chemicals from a faulty pipe causes contamination of the soil of the neighbouring factory and the aquifers.
4. Gradual site pollution.
Leaking small amounts of toxic substances over time, while refuelling an underground tank, causes damage to the surrounding agricultural land.
5. Blocking of the company’s production activity
The discharge of liquid nutrients into the sewer leading to the wastewater treatment plant blocks the entire cleaning system, causing it to shut down for several weeks.
6. Interruption of third-party activities
The silo used for storing industrial powders collapses and contaminates the warehouses of the nearby factory. The neighbouring company is forced to suspend production until the clean-up work is completed.
7. Inherited pollution
The land on which the warehouse stands has been contaminated by previous industrial activities. The current owner has a specific obligation to clean up the pre-existing pollution.
Accidental or gradual pollution?
This is a very complex subject that requires a separate discussion.
We can anticipate that the liability policy for pollution includes both accidental pollution and gradual pollution.
The former is immediately visible: for example, a fire, a system failure, the rupture of the filler neck of a tank for the supply of fuel or other substances.
Gradual, slow, and ‘hidden’” pollution is more difficult to identify and therefore much more dangerous for the producer: it consists of a loss of materials/liquids/substances that is slight but constant over time, and by its nature difficult to identify and quantify.
Examples:
- underground tanks leaking toxic substances
- obsolete purification or disposal systems
- corroded sewage pipes
- tanks used for washing materials or cleaning premises
- rainwater contaminated by contact with structures and systems.
Does the company director risk paying personally?
Before even going into the merits of this specific insurance solution, I would like to emphasise that company directors risk having to resort to their personal assets for not having adopted all the appropriate measures to prevent environmental damage.
There is a well-known case of a manager of a company in the cosmetics sector who was taken to court for not having checked the state of the drainage pipes which, at the time, were worn and a considerable quantity of polluting substances had flowed into the public sewerage system.
It was proven in court that the board of directors knew about the poor condition of the pipes, but nothing was done to limit the damage.
However, two very important aspects must be emphasised.
One is damage to the environment, the other is the legal expenses a manager has to pay to defend himself against the accusation of having polluted the soil, water and air surrounding the company.
On the one hand, the damage to the natural habitat can be compensated by the environmental liability policy, as we will see immediately.
On the other hand, the manager of the company can protect his personal assets by taking out a different and specific policy.
I’m referring to civil liability coverage for administrators, a policy that can include the legal expenses that the administrator must incur to defend himself in court against environmental damage.
For more information, see here.
Damage to the environment: the advantages of a pollution risk policy
We have seen that if our company causes damage to the environment (for example, the leakage of toxic substances at the production plant site) it is necessary to resort to a specific insurance solution for the payment of damages to third parties, clean-up costs and legal fees.
Every company is different and insurance companies are well aware of this, providing specific coverage for pollution damage depending on the type and size of our company.
In general terms, I summarise here the main damages and expenses covered by this policy:
- death and personal injury
- destruction and deterioration of property located outside our establishment
- total or partial interruption or suspension of industrial, commercial, agricultural or service activities
- inability to use goods located outside the company affected by the pollution
- costs for clean-up operations
- costs for the restoration of polluted sites.
Some companies extend coverage to other events that should not be overlooked.
We’re thinking of the damage from asbestos pollution following a fire, explosion or blast, and the costs for the removal and disposal of materials, artefacts, debris or waste containing asbestos.
We can also include the costs of decontamination following pollution of movable and immovable property owned by the Insured and/or third parties located within the insured establishment.
In conclusion
Standard insurances against fire damage and general civil liability do not cover request of compensations following damages to the environment.
Firstly, we suggest to consult with expert insurance advisors and organise an inspection of the warehouse and outside areas.
The purpose of the technical inspection is to clarify those risks that are often unknown or completely ignored and that can bring the company’s assets to their knees, like the presence of other industrial warehouses or a groundwater aquifer or protected parks and nature reserves near your company.
In the event of damage, compensation claims can be very high and trigger an immediate liquidity crisis for the company.
In addition to company assets, the personal assets of managers are also at risk!
Precisely for this reason there is a specific insurance coverage to protect managers who unintentionally cause damage to the environment surrounding the company they manage.
We recommend never leaving anything to chance and get in touch with specialised insurance advisors: they will visit our company and advise us on the best environmental damages coverage.
