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 explores the reasons for this current position and asks whether recent changes in environmental law make a case for broadening coverage.

D&O coverage for defence costs

The usual coverage offered by D&O policies probably reflects the perceived risk under both the regulatory and civil environmental liability regimes. Directors have been at risk of criminal prosecution for pollution incidents for many years. This risk of liability arises when such incidents result from a director’s consent or connivance or are attributable to any neglect. Until now directors have not, though, recognised a risk of personal responsibility for remediation costs or compensation claims. As criminal fines are not insurable, it has only been 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 1993 case of Bruton and the National Rivers Association v. Clarke a sole trader was found personally liable for remediation costs and a compensation claim. More recently the contaminated land regime has intensified the focus on the risk of personal liability for company directors.

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 him to pay for the environmental damage. Compensation was paid for damage to local angling and the National Rivers Association recovered its costs for cleaning up the river. The Water Resources Act 1991 gives this body (now the Environment Agency) powers to remove pollutants, remedy the effects and restore the aquatic environment of polluted watercourses. Importantly, the Environment Agency 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 concerned a sole trader. A sole trader is the controlling mind of his company. On this basis the Environment Agency has found it more straightforward to pursue prosecutions against sole traders, typically under water or waste legislation. This can be contrasted with the difficulty of identifying the director who controlled the relevant decision in larger companies. This difficulty becomes a major hurdle when the Environment Agency must demonstrate that there is no reasonable doubt that the director controlled the relevant decision (the criminal burden of proof).

Company directors now at risk

The contaminated land regime under Part IIA of the Environmental Protection Act 1990 may change this perception of risk. Part IIA came into force in April 2000,but the volume of determinations and remediation notices is only now starting to reach the level of common consciousness.

Under Part IIA persons who caused or knowingly permitted the contaminating substances to be present in, on or under the land will be responsible for addressing the harm. Typically this will include both remediation costs (i.e., remedying the significant harm caused by the contaminating substances) 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 that the pig farmer admitted to in Bruton. However, Part IIA is an administrative and not a criminal regime. Consequently the burden of proof on the regulator is to show that it is more likely than not that the director controlled the relevant decision.

Interestingly the statutory guidance on Part IIA for the first time makes specific reference to director liability alongside that of the company. The Part IIA statutory guidance directs the regulator through the process of determining liability for remediation costs of historically contaminated land. The regulator must:

  • make reasonable inquiries to find all persons (legal or natural) who "caused or knowingly permitted" the presence of the contaminating substances (Class A)
  • consider whether any members of this class can be excluded from responsibility and
  • apportion remediation costs between the remaining members of Class A.

The statutory guidance has a section specifically on dividing liability between companies and officers in Class A.

"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 may concentrate 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. Owners and occupiers are therefore likely to urge the regulator to find directors and officers of the dissolved company responsible for the presence of the contaminating substances.

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 wider with the implementation of the Environmental Liability Directive in 2007. This will hinge on whether the wider scope of the new regime is based on the existing liability trigger of "causing or knowingly permitting". As the perception of risk is therefore likely soon to change, it may be time for D&O policies to broaden coverage for environmental liabilities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.