Aon Warns Of Gaps In Environmental Cover

NU Online News Service, Sept. 28, 2:20 p.m. EDT

Many European firms are unaware that under the European Union Environmental Liability Directive they face giant cleanup costs for environmental pollution incidents, Aon brokerage is cautioning businesses.

This means, said Aon, that many concerns have gaps in their liability coverage.

Simon Johnson, Aon's environmental director for UK and EMEA, said, "U.S. companies with European subsidiaries are becoming increasingly aware of their potential exposures, and in turn we've seen a higher take up for environmental liability insurance. We're encouraging European risk managers to adopt a similar strategy in protecting against uninsured environmental damage."

"Risk managers need to review the ELD and their operations in relation to their insurance programs, as there will be gaps," he advised.

Aon said its Global Risk Management Survey 2009 found environmental risk ranked lower as a concern in Europe than any other region despite the introduction of the EU Environmental Liability Directive.

The firm said it will be warning European companies next week at the Oct. 4 Federation of European Risk Management Associations conference in Prague "to wake up to the reality that this legislation could see companies held liable for unprecedented costs for clean up and restoration of environmental damage."

Mr. Johnson said there is a common misconception that the liability directive is just about ongoing operational pollution issues. "The reality is the ELD significantly increases liability in the EU for operators that cause environmental damage, regardless of how that damage is caused," he explained.

Mr. Johnson noted, "The fact that environmental risk ranked 32nd as a concern in the survey is worrying because risk managers are seemingly lulled into a false sense of security, believing they have no exposure or their pollution strategies are under control.

"This ignores exposure to the impact an unpredictable one-off event on the environment could have on the balance sheet. It's about preparing for the low frequency, high severity event by having insurance in place that covers all the risks, damages and losses that could occur."

As an example of what kind of exposure could occur, Aon cited the case of a riverside factory operation that catches fire due to an electrical fault with debris from the fire spreading to the river and poisoning the local fish supply, damaging the aquatic environment.

Aon pointed out that the ELD, which became law in 2007 across the EU, requires companies that cause environmental damage to restore the environment to its previous condition. In this case, the operator of the facility would have to pay for the cleanup of the area and restoration of the damage caused, including replenishing the fish stocks and re-establishing the aquatic environment.

The firm said this represents "a potential and significant gap for European companies and subsidiaries under their existing general liability policies. In response to the legislation, the insurance market offers environmental liability programs and cover for such damages, costs and losses."

While there is a minimum legal transposition of the ELD, some countries have taken this further by introducing compulsory financial security arrangements for the riskiest operators in industries such as chemical production and waste management, Aon said.

The brokerage mentioned that Spain has set such a precedent and the Czech Republic--FERMA's host country this year--is set to follow in 2012.