The blame game: D&O environmental liability

November 2017  |  FEATURE |  RISK MANAGEMENT

Financier Worldwide Magazine

November 2017 Issue

When environmental damage is alleged or proven to be caused by corporate wrongdoing the fallout can be fierce and uncompromising. In many cases the finger of blame is pointed at a company’s directors & officers (D&Os) – particularly those operating in manufacturing, petrochemical, waste management and energy-intensive productive and extractive industries.

Environmental liability claims may arise as a result of: unlawful contamination to air, water or land; a failure to rehabilitate land on which operations have ceased; accidents such as chemical spills, fires and seepage; persistent corporate non-compliance with environmental laws and regulations; or a failure to remedy previously identified environmental transgressions; among others.

In South Africa, for example, recent prosecutions of D&Os for such transgressions has brought the issue sharply into focus and demonstrated the risks and liabilities senior management is exposed to, as well as highlighting the limits of D&O cover for claims of this nature.

Exposures

Environmental risk and resulting liabilities can of course attach to D&Os at any company, no matter the size or industry, and are not the preserve of larger corporations or traditional polluting industries such as waste, chemical and oil & gas.

“If a pollution incident occurs at a site, such as the release of hazardous chemicals or the failure of a wastewater treatment process, that company can incur liabilities for clean-up of their own property and neighbouring land, third-party bodily injury and property damage and regulatory costs,” says Daisy Deanus, a D&O product specialist at Chubb. “Arguably, smaller companies may be at greater risk, as regulators are more likely to be able to pierce the corporate veil and prove that D&Os knowingly caused or permitted an offence.”

In terms of regulatory intervention, environmental protection legislation, as one would expect, varies from country to country, but a trend toward stricter compliance and enforcement is generally being seen. “Holding D&Os to account in their personal capacities for corporate environmental transgressions is an increasingly prevalent enforcement tool and a strong deterrent to delinquency, regardless of the scale of a company’s operations,” suggests Christopher MacRoberts, a senior associate at Clyde & Co.

Effective D&O risk management

“The starting point for an effective D&O risk management programme is to understand the particular risks affecting the industry in question and identify any gaps in cover,” says Daniel Le Roux, a partner at Clyde & Co. “This should be coupled with taking appropriate specialist legal advice on the risks attaching to environmental compliance for the industries in which a corporate operates.”

It is also deemed advisable for D&Os to take a critical approach, and with an independent mindset, to the individualised nature of the potential liabilities they face. The use of scenario planning has been shown to be particularly effective in this regard, with hypothetical environmental incidents performed in the presence of an insurance intermediary or legal adviser to help assess the insurance coverage required and to identify gaps in coverage.

“A properly structured environmental liability insurance programme will provide cover to past and present D&Os for liabilities incurred as a result of pollution or environmental damage, provided that the policy would have responded if the same claim had been brought against the insured entity,” notes Glenn O’Halloran, UK & Ireland Environmental Risk Manager at Chubb. “This is an essential aspect of any risk management programme, ensuring that the personal liabilities of its D&Os are covered for this complex area of law.”

With the potential penalties awaiting D&Os often harsh, the importance of putting in place a robust, regular and self-critical environmental compliance programme cannot be overstated. “Decision makers in companies would be well advised to review their insurance arrangements closely and at least annually, to ensure that adequate and appropriate liability cover is in place,” advises Mr Le Roux. “It is always prudent to plan for more serious eventualities and potential liabilities by maintaining proactive risk management policies coupled with regular insurance reviews.”

Future scenarios

Going forward, the expansion of environmental liability insurance programmes is a potential scenario for D&Os to digest – programmes could include specialist support services to adequately address and contain, as well as help pay for, an unfolding environmental crisis.

“Judging by recent trends, this will be an ever-evolving area of increasing liability, so it is vital that D&Os work with their brokers to ensure they have cover which gives them the maximum protection for potential individual risks and liabilities,” says Ms Deanus. “D&O insurers have been aware of the increasing risks in this area and we have seen policies expand to include defence costs for environmental prosecutions against D&Os to ensure they are adequately protected when they need it most. However D&O policies will still contain a clean-up costs exclusion for the actual pollution as this risk should be insured elsewhere.”

Undoubtedly, the risk environment for companies that pollute is undergoing a transformation, with the list of liabilities surrounding D&Os expanding rapidly. All the more reason then for those at the sharp end to ensure adequate protection is in place, alongside robust plans for effective environmental remediation.

© Financier Worldwide

BY

Fraser Tennant