Pollution and Enviormental Risk Digest

UK Developments

• On 30 October, in Eastern Counties Leather PLC v. Eastern Counties Leather Group Ltd, the Court of Appeal held that the claimant was entitled to be indemnified under the terms of an environmental indemnity (see the Summer 2002 Digest for the High Court’s decision). The Court determined that a clause in the indemnity, which obliged the defendant, in carrying out any remediation works, to ensure that water was pumped from boreholes in accordance with the requirements of the National Rivers Authority (one of the predecessors to the Environment Agency, "EA") but not further or otherwise, meant that the claimant was required merely to pump water from boreholes to comply with its requirements as expressed from time to time. The defendant had argued that the provision required the claimant to pump water at the maximum rate permitted by the abstraction licences.

• The Court of Appeal, in Jan de Nul (UK) Ltd v. Axa Royale Belge, has re-opened the issue of whether an insured’s remediation of contamination can be covered by a public liability insurance policy. The case is discussed in an article by Valerie Fogleman at the end of this issue of the Digest.

• In R. (on the application of Valpak Ltd) v. Environment Agency, Moses J. decided that a pub landlord who sold bottled drinks for consumption in licensed premises was responsible for ensuring that recovery and recycling obligations imposed by the Producer Responsibility Regulations (Packaging Waste) Regulations 1997 (SI 1997/648) were carried out. The EA had argued that, in cases in which the landlord opened the bottle when he served the customer, the obligations were imposed instead on the brewer who supplied the bottles.

• The Control of Asbestos at Work Regulations 2002 (SI 2002/2675) entered into force on 21 November, with the exception of the provisions relating to the new duty to manage asbestos which will come into force on 21 May 2004. The regulations are discussed in the article by Aidan Thomson at the end of this issue of the Digest.
• The Control of Lead at Work Regulations 2002 (SI 2002/2676) entered into force on 21 November. The regulations implement the Directive on the protection of the health and safety of workers from risks related to chemical agents at work (98/24/EC) insofar as it relates to risks to health from exposure to lead. The regulations largely re-enact with modifications the Control of Lead at Work Regulations 1998 (SI 1998/543).
• The Control of Substances Hazardous to Health Regulations 2002 (SI 2002/2677) re-enact, with modifications, the Control of Substances Hazardous to Health Regulations 1999 (SI 1999/437). The regulations implement a number of EC Directives, including the Directive on the protection of the health and safety of workers from risks related to chemical agents at work (98/24/EC) insofar as it relates to risks to health from exposure to substances other than asbestos or lead.
• The Genetically Modified Organisms (Deliberate Release) Regulations 2002 (SI 2002/2443) came into force in October. The regulations implement, in respect of England and the UK sector of the Continental Shelf, the Directive on the deliberate release of genetically modified organisms, 2001/18/EC (see EU Developments section).

• An EA report entitled Dealing with Contaminated Land in England: Progress in 2002 with Implementing the Part IIA Regime was issued in October. It reported that up to March 2002, local authorities in England had notified the EA of 33 contaminated sites, 11 of which have been designated as "special sites" (see the Winter 1999 Digest). As of July 2002, 94 per cent of English local authorities had prepared strategies.
  Past land use, identified through an extensive review of historical maps, suggests that 100,000 sites in England and Wales could be contaminated. The EA estimates that local authorities could ultimately identify between 5,000 and 20,000 sites as requiring some form of remediation under the regime.
  A separate report will be prepared on progress in Wales, the timing of which has yet to be agreed with the National Assembly for Wales. The Scottish Environment Protection Agency has not produced an equivalent implementation progress report on the basis that no contaminated land has been identified in Scotland as yet.
• A report entitled A Benchmark Study: Environment Credit Risk Factors in the Pan European Banking Sector by ISIS Asset Management in association with the University of Strathclyde suggests that whilst banks understand that environmental risks can directly impact bank profitability, there are significant differences in the adequacy of the environmental credit risk procedures that they carry out. The report focused on a sample of ten banks based in Western Europe with international operations.
• Sentencing guidance and an information toolkit were launched in November by the Magistrates Association with the aim of helping magistrates to deliver appropriate sentences for environmental offences. The information toolkit is designed to highlight the harm caused by environmental offences as well as to identify aggravating and mitigating circumstances and therefore help magistrates to assess the implications of environmental crimes when passing sentence.
• The EA and Total have reached an agreement aimed at cutting Total’s pollution incidents. The agreement represents a new style of regulation by the EA in relation to companies in industries that are responsible for regular pollution incidents. Negative publicity surrounding Total’s identification as a polluter in the EA’s annual Spotlight on Industry resulted in the two organisations entering into a voluntary and non-binding agreement that commits Total to a number of initiatives aimed at improving environmental performance. Total will report quarterly to the EA and the two will publish an annual public report.
• A code of practice covering petrol stations and other fuel dispensing facilities with underground storage tanks ("USTs") was published by the Department for Environment, Food and Rural Affairs ("DEFRA") in November. The code applies in England and Wales. A consultation on a similar code for Scotland was launched by the Scottish Executive in November.
  The new code outlines operational and management practices relevant to USTs and related facilities which are necessary for groundwater protection. When deciding whether to serve a notice under the provisions of the Groundwater Regulations 1998 (SI 1998/2746), the EA will consider whether or not the code has been followed.
• Data published by the EA alongside its latest annual report shows that prosecutions for environmental offences, which have been rising in number in recent years, levelled off last year. Average fines remained steady in comparison with previous years.

• In Commission of the European Communities v. Luxembourg and Commission of the European Communities v. Federal Republic of Germany, the European Court of Justice held on 26 September that waste incineration with energy recovery is a disposal, not a recovery, operation. The distinction is important. Under the Regulation on the supervision and control of shipments of waste within, into and out of the European Community (259/93), the grounds for Member States’ objections to the transboundary movement of waste shipments that are intended for disposal differ to the grounds of objection to waste shipments that are intended for recovery.
  Advocate-General Francis Jacobs stated that the decisive question was whether the waste is used for a genuine purpose. If it was not available for a given operation, would that operation nonetheless be carried out using some other material? He did not consider that it would be right to describe waste incineration with energy recovery as "recovery" simply because whenever waste is available and incinerated, the heat generated from the incineration is used, wholly or partly, as a means to generate energy. Such a fact does not of itself make the principal objective of the incineration the use of the waste as a fuel or other means to generate energy.
• Conciliation negotiations between the European Parliament and the Council of Ministers have led to agreement on the Directive on the recycling of waste electrical and electronic equipment ("WEEE") and the related Directive on restricting the use of hazardous substances in such equipment. The draft final text of the WEEE Directive makes producers responsible for financing the collection, treatment, recovery and disposal of their own products put on the market later than 30 months after the Directive’s entry into force (anticipated in 2003), either through collective or individual schemes.
  In its current form, the WEEE Directive sets an annual WEEE collection target of 4kg per person and recycling targets of 50 to 70 per cent depending on the type of product. It also establishes the principle of free return of WEEE by members of the public by requiring Member States to set up schemes to collect household WEEE. In addition, the Directive requires mandatory labelling of goods with the manufacturer’s name, and establishes a system of financial guarantees before products are placed on the market to avoid the problem of "orphan" waste.
• The Directive on the deliberate release into the environment of genetically modified organisms ("GMOs") (2001/18/EC) took effect in October 2002. The Directive strengthens previous EC legislation on GMOs by requiring a more detailed pre-market scientific evaluation of GMOs, mandatory post marketing monitoring and general surveillance and improved transparency throughout the different stages of the authorisation procedure and their subsequent handling.

INTERNATIONAL DEVELOPMENTS

• The eighth meeting of the Conference of the Parties to the UN Framework Convention on Climate Change took place in New Delhi in October (see the Autumn 2002 Digest for other recent developments). The 167 countries in attendance signed a declaration emphasising the urgency for states to adapt to climate change impacts. The EU had hoped that the declaration would acknowledge the need for a second round of greenhouse gas emission targets once the Kyoto Protocol’s 2008 to 2012 targets are achieved but this was opposed by a number of developing countries and by the USA.

US DEVELOPMENTS

• On 19 August, in Gainsco Insurance Company v. Amoco Production Company, the Wyoming Supreme Court held that the total pollution exclusion in a commercial general liability ("CGL") policy does not bar cover for non-environmental pollution. The claim arose when an employee of the insured’s contractor died from exposure to hydrogen sulphide gas when he was emptying a vacuum truck in an oil field.
  The exclusion barred cover, in relevant part, for:
  "‘bodily injury’ or ‘property damage’ which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time".
  The word "pollutants" was defined to mean:
  "any solid, liquid, gaseous, bacterial or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed".
  The court discussed the history of the absolute and total pollution exclusions in CGL policies and stated that: "we cannot believe that any person in the position of the insured would understand the word ‘pollution’ in this exclusion to mean anything other than environmental pollution".
• On 22 November, the Alabama Supreme Court, in Porterfield v. Audubon Indemnity Company, held that the 1986 version of the absolute pollution exclusion in a CGL policy does not bar cover for bodily injuries caused to the insured’s tenant’s children by the ingestion of lead in paint, blinds, water, pipes and soil on premises under the insured’s control. The exclusion barred cover, among other things, for:
  "‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants [a]t or from premises you own, rent or occupy".
  The word "pollutants" was defined the same as in Gainsco, above. The court concluded that, although a reasonable insured would have concluded in 1991 (when the policy was issued) that lead was a pollutant, a reasonably prudent insured would not have concluded that the presence of lead-paint flakes, chips and dust in a residential flat was a "discharge, dispersal, release or escape" of a pollutant. The court concluded that the term "discharge, dispersal, release or escape" is ambiguous and, therefore, construed it against the insurer.
• On 14 November, the federal Court of Appeals for the Third Circuit, in Port Authority of New York & New Jersey v. Affiliated FM Company, held that neither the presence of asbestos in a building nor the general threat of future damage from the asbestos were sufficient to trigger all risks policies. The policies provided cover for "physical loss or damage". The plaintiffs had argued that the policies covered the cost of removing asbestos-containing materials from parts of structures in New York and New Jersey in the 1980s and 1990s. The court applied New York and New Jersey law after concluding that there was not a conflict between them on the issues.

News from Hong Kong

• The Hong Kong Government is preparing a set of regulations for introduction in 2003 under which an approved particulate removal device will be required for all pre- Euro diesel light vehicles. Pre-Euro diesel light vehicles include diesel private cars, light buses and light goods vehicles weighing up to four tonnes that were first registered on or before March 31, 1995 as well as diesel taxis first registered on or before December 31, 1995.

A recent case has re-opened the issue of whether an insured’s remediation of contamination is covered by a public liability policy. In Jan de Nul (UK) Ltd v. Axa Royale Belge SA, the Court of Appeal concluded that a public liability policy covered such costs.

The case arose when Jan de Nul (UK) Ltd ("JDN"), an English subsidiary of a Belgian company, contracted with Associated British Ports ("ABP") to conduct dredging works in Southampton Water. The works included increasing the depth of a major shipping channel. JDN pre-cut the compacted sub-soil in the channel prior to dredging it. The operation resulted in dislodged silt being put into suspension, carried from the channel by tidal action and settling on property adjacent to the estuary.

Following complaints from owners and operators of properties along the estuary, ABP removed some of the silt and insisted that JDN also conduct remedial works as part of its obligations under the dredging contract. The cost of ABP’s works was £778,000, which it withheld from JDN under the contract. JDN denied that it was obliged to remove the silt but did so at a cost of approximately £1,722,000. JDN claimed the total cost of approximately £2.5 million from its public liability insurer, N.V. Royale Belge (subsequently Axa Royale Belge); ABP, which was a co-insured under the policy, having assigned its claim to JDN. Among other things,

JDN claimed approximately £100,000 for costs incurred by the owner of a nature reserve to determine whether siltation on the reserve would have long-term effects on it. The study concluded that such effects would not materialise. Axa Royale Belge denied the entire claim.

The complex policy, which contained general conditions, brokers’ clauses and special conditions, did not contain a choice of law clause. The High Court considered that either Belgian or English law applied and, because neither party had argued that English law differed from Belgian law, applied English law.

The policy covered, among other things, liability to third persons for "property damage" and "pollution, environmental impairment and nuisance to neighbours". The term "property damage" was defined as "damage to, destruction or loss of property",

The policy excluded, among other things, cover for various liabilities arising from "non-accidental pollution". The word "pollution" was defined as "impairment by alteration of the existing quality features of the air, the water [or] the earth by adding or withdrawing substances or energy". The word "accident" was defined as "a sudden occurrence which is unintentional and unexpected for the policyholder".

The policy imposed a duty on JDN "to take all reasonable action to prevent and mitigate the consequences of loss".

Counsel for JDN accepted that JDN must establish either of the following to make a claim under the policy for costs incurred by it in removing the silt:

• JDN had incurred a liability to third parties which were adversely affected by the silt; or
• if JDN relied on sue and labour clauses in the policy, it had taken reasonable measures to avoid incurring a liability to third persons.

The High Court found that JDN had incurred liability to third persons for property damage in respect of claims arising in negligence and nuisance. Moore-Bick J concluded that the policy covered some of the costs incurred in ABP’s and JDN’s remedial works.

Moore-Bick J further concluded that the pollution exclusion barred cover for some costs which would otherwise have been covered. He concluded, in particular, that damage resulting from dredging that occurred "over a period of many weeks" was not "the result of a sudden and unforeseen occurrence". The extent of the pollution exclusion was not one of the issues that were appealed.

Schiemann LJ of the Court of Appeal agreed that the policy covered JDN’s and ABP’s costs of removing silt from the property of claimants to which the defendants were liable in negligence and private nuisance. He further concluded that the siltation of the nature reserve was "property damage" rather than financial loss and that the cost of the study to determine the adverse effects of the siltation was, therefore, covered by the policy.

Schiemann LJ further commented that the clause imposing a duty on the insured "to take all reasonable action to prevent and mitigate the consequences of the loss" was in the interests of insurers as well as the insured. He stated that when an insured’s actions result in suspected property damage, investigations should be conducted, prior to embarking on "vastly expensive remedial operations", to determine whether damage has been caused. Insurers are protected, therefore, because "it must be reasonable to commission the investigation and the price paid for it must be reasonable".

The Court of Appeal’s conclusion that a public liability policy covers remedial costs incurred by the insured contrasts with its 1996 judgment in Yorkshire Water Services Ltd v. Sun Alliance & London Insurance plc. In Yorkshire Water, the court concluded that a water company’s public liability policy did not cover the cost of conducting works in order to avoid or mitigate a loss which its insurers would or might have had to pay under the policies.

Yorkshire Water conducted the remedial works to prevent flooding that was caused by its sewage tip collapsing into a river. Unlike the remedial works in Jan de Nul, which were all conducted on third-party property, Yorkshire Water conducted all the remedial works on its own property. ICI, whose property had been flooded as a result of the collapsed tip, had begun proceedings against Yorkshire Water for £1.1 million in negligence, nuisance and the rule in Rylands v. Fletcher. (The Official Referee’s Court (now the Technology and Construction Court) concluded, after the Court of Appeal’s ruling, that the money that was subsequently paid by Yorkshire Water to ICI in settlement of the claim was not covered by the policies due to Yorkshire Water not being liable to ICI in any of the alleged heads of common law.)

The policies at issue indemnified Yorkshire Water, among other things, against legal liability for "damages" in respect of property damage. They also imposed a duty on the insured to "take reasonable precautions to prevent any [Occurrence or circumstances] or to cease any activity which may give rise to liability under this Policy".

Some commentators have stated that Yorkshire Water stands for the proposition that public liability policies do not cover an insured for costs expended by it in conducting remedial works to alleviate harm or the risk of harm to a third party’s property as well as on its own property. This proposition has been cast in doubt by Jan de Nul.

A major difference may be that JDN conducted remedial work on the property of third parties when harm caused by it to that land had resulted in claims being made against it. As noted above, all the remedial works conducted by Yorkshire Water took place on its own property.

The most crucial difference, however, may simply be the different wordings interpreted by the Court of Appeal in the two cases. This article, which appeared in the 28 November 2002 issue of Insurance Day, is reprinted with the kind permission of Informa Publishing Group Limited.

An important new set of asbestos regulations (the Control of Asbestos at Work Regulations 2002 (S.I. 2002 No 2675)) were laid before Parliament on 31 October 2002. The key feature of the Regulations is the introduction of a duty to identify and manage asbestos in "non domestic" premises.

The duty comes into force on 21 May 2004. The Government estimates that the new duty, together with the other obligations set out in the Regulations, will save 4,700 lives at a cost to industry over a 50 year period estimated at £1.5 billion.

A strict regulatory framework already exists alongside the general employers’ duties under the Health and Safety at Work etc Act 1974 in relation to the control and use of, and exposure to, asbestos. This framework:

• prohibits the import, supply and use of blue, brown and white asbestos (see the Asbestos (Prohibitions) Regulations 1992 (S.I. 1992 No 3067) as amended);
• strictly controls all work with asbestos (see the Control of Asbestos at Work Regulations 1987 (S.I. 1987 No 2115) as amended); and
• requires a licence for work with certain forms of asbestos (see the Asbestos (Licencing) Regulations 1983 (S.I. 1983 No 1649) as amended).

Although the use of asbestos in buildings is now illegal, it is estimated that asbestos still remains in half a million buildings in the UK due to its widespread use in the construction industry in the 1950s, 60s and 70s. No law to date has required all asbestos contained within older buildings to be identified and made safe. When asbestos in old buildings is damaged, there is a risk to human health because of the possibility of airborne fibres. Those who work in the building and maintenance trades are particularly at risk. If they do not know whether or where asbestos is present in a building structure, they risk making fibres airborne as they carry out their work. The Health and Safety Commission believes that the Regulations are necessary to protect such workers.

Landlords, employers and managing agents are most likely to be subject to the new duty. The duty will be imposed on every person whose contract or tenancy obliges it to any extent to maintain or repair non domestic premises or any of their means of access or egress. Where these is no contract or tenancy, the duty is imposed on every person who has, to any extent, control of that part of those non domestic premises or their means of access or egress. Where more than one person is subject to the duty, the relative contribution to be made by each such person in complying with the duty will be determined by the nature and extent of the maintenance and repair obligation owed by that person.

In short, persons subject to the duty are required to:

• carry out a "suitable and sufficient" written assessment as to whether or not asbestos is, or is liable to be, present in the premises. "Reasonable" steps are required to be taken in carrying out the assessment, including an inspection of those parts of the premises that are reasonably accessible. The assessment must be reviewed forthwith where there is reason to believe that it is no longer valid or there has been a "significant change in the premises".
• carry out a risk assessment where asbestos is or is liable to be present, and prepare and implement a written plan for managing any identified risk. The plan must provide details of monitoring, maintenance and, if necessary, removal. The plan must also include adequate measures for ensuring that information about the location of any asbestos is provided to every person who may disturb it and is made available to the emergency services. The plan must be reviewed regularly (and reviewed forthwith where there is reason to believe that the assessment is no longer valid or there has been a "significant change in the premises").

The Regulations also introduce further duties and obligations on employers to ensure that risks from asbestos in the workplace are considered and minimised before any work is carried out. Although the new duty will not come into effect for a further 18 months, employers, landlords and managing agents need to start considering how they will satisfy the new obligations. The discovery of asbestos in an unexpected location when carrying out an assessment could lead to considerable disruption and possibly even third party claims for compensation, which may mean insurers becoming involved. The implications of the new duty must also be fully considered when any new leasehold tenancies are being negotiated.

This article, which appeared in the 19 November 2002 issue of Insurance Day, is reprinted with the kind permission of Informa Publishing Group Ltd.