Insurance cover for environmental enforcement undertakings

The following article was published in Insurance Day on the 27th May 2020 –https://insuranceday.maritimeintelligence.informa.com/ID1131123/Legal-Focus-Risingenvironmental-enforcement-undertakings-create-uncertainties-for-insurance-industry

Over the last few years, a new enforcement option for dealing with certain breaches of environmental law in England and Wales – the enforcement undertaking – has been growing in popularity.

Enforcement undertakings are a form of “civil sanction”. They can be used by regulators (in particular the Environment Agency) as an alternative to prosecution in respect of some, but not all, alleged environmental offences.

Fundamentally, an enforcement undertaking is an agreement in relation an environmental breach. They are created by a voluntary offer from the potential offender and subsequent acceptance of this offer by the regulator. Following acceptance, the regulator cannot prosecute for the environmental breach.

The voluntary offer should include a range of different actions which the offeror proposes to take to secure future compliance, remediation/restoration, consultation with and compensation of those affected, environmental benefit/improvement (including donations to local environmental charities) and payment of the regulator’s costs.

Regulators are drawn to enforcement undertakings. Rather than the regulator actively having to expend time/money investigating and pursuing enforcement action, the regulated entities will actively approach the regulator with a suggested approach to resolve the matter. Furthermore, a wider variety of environmental benefits can be generated through enforcement undertakings than through traditional enforcement.

On the other side of the coin, regulated entities are also drawn to enforcement undertakings. This is because, rather than going through the uncertain, stressful and often acrimonious process of a regulatory investigation/prosecution, they can take control of the process and actively manage the ramifications of a potential environmental offence quickly, finally and with minimum disruption and adverse publicity/reputational damage.

Enforcement undertakings now outnumber prosecutions. Although not formally confirmed by any statistics, they are being offered / accepted for breaches that would never otherwise have resulted in formal regulatory prosecution or the formal use of remediation powers. In other words, the regulated community is “over offering” in order to take control of their environmental breaches.

Insureds, insurance brokers and environmental insurers are giving increasing thought to the insurance coverage issues that arise from this enforcement trend. They are right to do so, because enforcement undertakings raise several questions when it comes to insurance.

To What Extent are Enforcement Undertakings Insurable in Principle?

It has long been a rule of public policy that fines and penalties for breaches of criminal law are uninsurable. With this in mind, the question of whether enforcement undertakings should be categorised as civil or criminal is very important.

As noted above, enforcement undertakings are a form of “civil sanction”. Since they are termed “civil” sanctions (not “criminal” sanctions) and they are not described as “fines” or “penalties” in the regulations that introduce them, a simple analysis would suggest they should be categorised as civil and hence insurable. However, things may not be that simple given that the origins of civil sanctions indicate that they have, at least in part, a deterrent/punitive rationale and, furthermore, enforcement undertakings only arise where an environmental offence may have been committed. There are certainly arguments either way as to their legal categorisation, and therefore uncertainty as to whether enforcement undertakings are insurable in principle.

Separate from the civil/criminal distinction is the question of fortuitous losses. A fundamental requirement of insurance is that cover is only available for losses which fall outside the insured’s control. If a business approaches a regulator to offer an enforcement undertaking, it is difficult to see how the costs arising from this can be “fortuitous”. So, perhaps the only enforcement undertakings which might be insurable would be those that are prompted by a regulator in circumstances where criminal sanctions are a clear alternative.

A final point to bear in mind here is that regulators may not be impressed to learn that the burden of an enforcement undertaking will be passed from offender to insurer. The view might be that the offender is not learning its lesson and so it is deemed appropriate to refuse to sanction the enforcement undertaking. There is no firm indication from the regulators yet as to what their stance might be but, if they take routine exception, any cover that does exist in principle for enforcement undertakings could (in practice) be rendered meaningless.

Are Enforcement Undertakings Covered by Existing Insurance Policies?

The Commissioner’s first report to the Welsh Assembly Government (May 20201) identifies measures to increase the pace of change in making better long-term decisions across the public sector in Wales. She cited the Newport Relief Road case as an example of how short-term thinking can be replaced by better decision making. This was the first big test for her role and for the “new thinking” underpinning the 2015 Act.

Following the Commissioner’s representations, the M4 relief road was abandoned because more sustainable alternatives were available. 35% of the working population in the Newport area are now working from home as a result of Covid 19 and many will continue to do so. Hence, traffic congestion here may be a thing of the past. By abandoning the plan for the new road, Wales has saved its taxpayers £1.5 billion which can now be invested in more deserving causes, such as alternative sustainable transport infrastructure that is fit for future generations.

This case is a highly pertinent example of how avoiding a poor infrastructure decision can lead to much better, greener and more socially equitable outcomes. The work of the Commissioner was critical to this decision. Other devolved administrations should take note.

International Exemplar?

Standard environmental insurance policies currently available in the London Market do not specify that cover is expressly provided for the costs arising from enforcement undertakings. Consequently, there is general uncertainty as to whether existing policies will respond to any potentially insurable losses related to enforcement undertakings.

Generally speaking, cover only usually triggers where a formal notice or claim has been served on the insured by a third party/regulator. Where the insured has taken the initiative in making an offer, with little or no prompting from the regulator, the insurer will be entitled to ask how any cover for enforcement undertaking losses has been triggered. This will be especially so in circumstances where the breach that has led to the offer is very minor and not one that might otherwise lead to enforcement action.

Another point arises in relation to the range of expenditure that an enforcement undertaking might entail. Some are similar to losses usually covered by environmental insurance (for example, expenditure associated with remediation, restoration and payment of the regulator’s costs), but others are not (especially donations to charities and precautionary measures to avoid recurrence of pollution incidents). Again, environmental insurers will be entitled to ask why the latter should be covered.

To conclude, a number of aspects of an enforcement undertaking do not sit at all well with traditional environmental insurance principles and policy coverage. However, as enforcement undertakings assume an ever increasing source of exposure alongside traditional criminal, civil and regulatory liabilities, debate between brokers, insurers and insureds is very likely to continue.

By Stephen Sykes LL.B, MA, Director at Ashfield Risk Transfer Solutions, Aidan Thomson and Sam Levy, Bryan Cave Leighton Paisner LLP

Email: stephen.sykes@ashfieldrts.com

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