Standard D&O policies may cover the insured for the costs of defending criminal, regulatory and even civil proceedings arising out of a pollution incident. These policies are likely though to fall short of providing coverage for remediation or compensation costs arising from the same incidents. This article will analyse the nature of environmental liability and the reasons for the current position on D&O coverage relating to such risks. Do recent changes in environmental law make a case for broadening coverage?

Environmental liabilities

Broadly speaking, environmental liabilities can be divided into the following categories:

• liability for historic contamination (eg liability to clean up land contaminated by a previous occupier);

• operational liability (eg liability to clean up pollution caused by an operational incident such as a fuel spill); and

• third-party liability (eg liability to compensate a neighbour for pollution damage caused to their property).

Liability for historic contamination

Legal responsibility for cleaning up historically contaminated land is established by Part IIA of the Environmental Protection Act 1990 (EPA), and associated regulations and statutory guidance (the contaminated land regime – CLR).

Under the CLR, polluters are primarily responsible for clean-up. These are the persons who caused or knowingly permitted the presence of the contaminants. However, if the polluter(s) of contaminated land cannot be found, then the innocent owners or occupiers for the time being of the contaminated land can be made responsible for cleaning up the contamination. The regime is fully retrospective, so the passage of time provides no defence.

Not all contamination will give rise to liability under the CLR. Contaminated land has a special meaning under the legal regime: it is any land which is determined by the local authority as contaminated land as a result of contaminating substances in, on or under it, causing significant harm to the health of living organisms, interfering with ecological systems or property, or causing a significant possibility of such harm.

For land to be determined as contaminated, a ‘pollutant linkage’ must be demonstrated. That is, there must be:

• a contaminant (the potential source of harm);

• a receptor (that which may be harmed – these are specified by the regime, and include, for example, humans and crops); and

• a possible pathway between the two (a route or means by which the receptor is exposed to harm).

Operational liability

The second main category of environmental liability relates to operational acts or omissions. Generally, where an operational act or omission leads to an environmental incident of some kind, eg a fuel spillage, this will frequently amount to a breach of environmental law. For example, any pollution of controlled waters would amount to an offence under the Water Resources Act 1991 (WRA). A pollution incident could also amount to a breach of a licence condition or a breach of waste management legislation. Where a breach of environmental law occurs, the relevant regulatory authority will often have, in addition to a power to prosecute for an offence, the power to require clean-up actions to be taken and/or to carry out clean-up actions itself, and recover the cost of so doing from the relevant operator.

Criminal fines arising out of prosecutions for breaches of environmental law are not generally insurable. However, the legal costs associated with defending criminal prosecutions can be covered by insurance.

Generally speaking, operational and accidental liability will be directed at the person who was responsible for the act or omission which led to the breach of (or liability under) the law. The most significant areas of environmental law which give rise to operational liabilities in addition to the WRA are the:

• Pollution Prevention and Control Act 1999;

• Waste Management Regime under Part II EPA;

• Conservation (Natural Habitats) Regulations 1994; and

• Statutory Nuisance regime under Part III EPA.

Liability to third parties

Liability for environmental damage may also arise at common law in tort or contract. There are two main heads of liability in tort which are relevant to environmental damage: nuisance and negligence.

The tort of nuisance is based upon the premise that each person has a fundamental duty not to conduct themselves in a way that unreasonably fetters the use or enjoyment of the property or public rights of others. Nuisance is defined as the unlawful interference with a person’s enjoyment of land, or of some right over or in connection with it. Generally speaking, a defendant will need to have some kind of interest in land to bring a claim in nuisance, and will have to show that the defendant property owner’s use of land has caused foreseeable damage to the claimant’s property. So, if an operator causes a pollution incident that in turn causes foreseeable damage to a neighbour’s property, an action by the neighbour to recover damages may arise under the law of nuisance.

Negligence is essentially a breach of a duty of care imposed by law on one person causing foreseeable damage to a person under that duty of care which is not deemed to be too remote. Where pollution has occurred incrementally over a number of years, the relevant standard of care and the foreseeability of damage will be determined by reference to the knowledge and conditions which were around at the time the activities giving rise to the damage occurred. Where, in relation to a pollution incident causing damage to a third party, a breach of duty and foreseeable damage to the claimant’s property or the claimant can be established, an action to recover compensation and damages may arise in the law of negligence.

D&O coverage for defence costs

The current coverage offered by D&O policies reflects the perceived risk under both the regulatory and civil environmental liability regimes. Whilst directors have been at risk of criminal prosecution for pollution incidents resulting from their consent or connivance, or that have been attributable to any neglect, they have not recognised a risk of personal responsibility for remediation costs or compensation claims. As criminal penalties such as fines are not insurable, it has only been the defence costs that have been covered by D&O policies to date.

This is not to say that this perception of risk reflects the legal position. In the case of Bruton and the National Rivers Association v Clarke ([1994] 5 WLAW 135) a sole trader was found personally liable for remediation costs and a compensation claim.

Personal liability for environmental damage

In Bruton a pig farmer was responsible for pollution of a river following an escape of slurry. The court ordered the pig farmer to pay compensation to Bruton for damage to local angling and remediation costs to the NRA (which had cleaned up the river). The NRA’s case was based on s161 of the WRA. Under the WRA the NRA (now the Environment Agency (EA)) has powers to remove pollutants, remedy the effects and restore the aquatic environment of polluted watercourses. Importantly, the EA also has the power to recover these remediation costs from the polluter.

It is likely that this case did not register on the radar of many company directors as it, like the majority of environmental prosecutions of directors or officers (under water or waste legislation), related to a sole trader. The CLR and the Environmental Liability Directive may change this perception of risk. Although the CLR came into force in April 2000, the volume of determinations and remediation notices is only now starting to reach the level of common consciousness. The Directive is due to come into force in April 2007.

The new emphasis of the CLR

Under the CLR persons who caused or knowingly permitted contaminating substances to be present in, on or under the land will be responsible for remediation costs (ie breaking the link between contaminant and receptor) and compensation claims (such as the costs of site restoration). The trigger for liability – to ‘cause or knowingly permit’ – is not new. Indeed, this was the head of liability under the WRA that the farmer admitted to in Bruton. However, the statutory guidance on the CLR for the first time makes specific reference to director liability alongside that of the company.

The statutory guidance directs the regulator through the process of determining liability for remediation costs of historically contaminated land:

• First, the regulator must exercise reasonable enquiries to find all persons (legal or natural) who ‘caused or knowingly permitted’ the presence of the contaminating substances.

• Secondly, the regulator must consider whether any members of this liability group (Class A) can be excluded from responsibility.

• Thirdly, the regulator must apportion remediation costs between the remaining members of Class A.

In relation to the third stage in the process the statutory guidance has a section specifically on dividing liability between companies and officers:

Having determined the share of liability falling to the company and its relevant officers together, the enforcing authority should apportion responsibility between the company and its relevant officers on a basis which takes into account the degree of personal responsibility of those officers, and the relative levels of resources which may be available to them and to the company to meet the liability [paragraph D.85(b)].

This arguably concentrates the regulator’s mind on whether individual officers have caused or knowingly permitted the presence of the contaminating substances.

The pressure on a regulator to hold directors and officers responsible will be increased where the company that polluted the land has been wound up. Dissolved companies cannot be ‘found’, and in the absence of a Class A person, the current owners or occupiers will be responsible for remediation costs (Class B). Class B persons are therefore likely to urge the regulator to find directors and officers of the dissolved company responsible for the presence of the contaminating substances. Such a conclusion is more likely under the CLR as the burden of proof on the regulator is the balance of probabilities, rather than the criminal burden of beyond all reasonable doubt.

The Environmental Liability Directive – broadening liability after April 2007

The Directive places strict liability on operators of certain listed activities to prevent and remedy measurable adverse change in, or measurable impairment of, a natural resource caused by their activity. A ‘natural resource’ means protected species and natural habitats, water and land. The UK must implement the Directive by April 2007.

In respect of protected species, natural habitats and water, the main difference in mid-2007 will be the legal requirement on causers who also happen to be operators of listed activities to undertake compensatory, and possibly complementary, remediation. This type of remedial liability will be in addition to traditional remediation costs.

The current regime for addressing water pollution, for example, provides a clear mechanism for achieving traditional remediation – the liability incurred by the pig farmer in Bruton. Pig farming is not a listed activity under the Directive, but most activities that require an environmental permit are. The purpose of compensatory remediation is to compensate for the interim loss of natural resources and services pending recovery. The purpose of complementary remediation is to provide a similar level of natural resource or service on the site or elsewhere in cases where it is not possible to return the damaged resource or service back to its baseline position.

Whether these types of liability will be attributed to directors and officers remains to be seen.

Reconsidering D&O coverage

Directors and officers of companies that are likely to be contaminating sites, or that are redeveloping brownfield land, may therefore soon begin to recognise the risk of personal liability for remediation costs and/or compensation claims.

Potential director and officer liability could grow even more if the government chooses to implement the wider scope of the Directive on the basis of the existing liability trigger of ‘causing or knowingly permitting’. As the perception of risk is therefore likely to soon change, insurers may gain valuable credibility by reconsidering the existing coverage of D&O policies in relation to environmental liabilities.  © Property Law Journal