European risk managers face expanded liability under the European Union's environmental liability directive, but they are not rushing to buy the coverage that insurers are developing in response to the regulations.

The directive establishes a “polluter pays” principle of strict liability for environmental damage caused by companies that pollute as part of their normal business operations and fault-based liability for damage to natural habitats and species.

As E.U. member states have transposed the local regulations, insurers have not been far behind in offering new products to address the risks, although risk managers have been slow to take up the coverage.

“I think people are now at a point where they can engage with the insurance market if they want,” said Gary Marshall, chairman of the industrial manufacturing special interest group at the London-based Assn. of Insurance & Risk Managers and group risk manager at Polestar Group Ltd., a Dunstable, England-based printing company. “Some may be choosing not to because they” don't want to put money “into an insurance product where they don't necessarily see a threat.”

Peter den Dekker, president of the Federation of European Risk Management Assns. and corporate risk manager at Stork B.V. in Naarden, Netherlands, said a recent FERMA survey of a small number of risk managers showed “a very limited number have bought stand-alone protection” to address potential liabilities stemming from the directive and are “relying on their current insurance cover.”

“Very few have stand-alone policies,” said Sylvie Monereau, an environmental underwriter with AXA Corporate Solutions in Paris. “We quote a lot,” but few buyers have purchased it, she said.

“From what we see, there is not such a great demand” for coverage related to the directive, said Carmen Bell, policy adviser and environmental liability expert at the Comite Europeen des Assurances, the Brussels-based group that represents insurers and reinsurers in Europe. “We're not sure if that is because operators lack awareness or just think they don't need it.”

In the 1990s, European governments began to address environmental issues through legislation, said Simon White, London-based environmental branch manager for XL Insurance. “The environmental liability directive is an extension of these environmental laws that were already in place.”

The latest directive, however, expands liability set down by previous laws, Mr. White said. Under the directive approved in 2004 and since implemented across the European Union, environmental damage does not have to be linked to a pollutant, but can be tied to any type of incident that caused the damage, such as a fire, he said.

“It's still very much an educational process,” Mr. White said. “For companies that have a dedicated risk manager, there is a lot of focus on” making sure the company complies with environmental regulations, he said.

However, risk managers don't seem to be “aware of how much of a strict regime is now in place and the cost of responding to that regime if you have a problem,” Mr. White said.

For some companies, environmental risk was well-managed under regulations in place before the directive was implemented and remains so under the latest environmental liability directive, experts said.

“Insurers invested quite a lot of time to analyze the impact and solutions” related to the directive, said Jürg Busenhart, Zurich-based vp of Swiss Reinsurance Co.'s casualty center, liability Asia and Europe. The result has been new products or endorsements to existing coverage that respond to liabilities under the directive, he said.

On the other hand, operators are rightly focusing on the potential impact on their businesses, said Mr. Busenhart, who also heads Swiss Re's Center of Competence for Environmental Liability. “This is part of the operator's risk management process; this will include the decision whether to transfer the risk to insurers.”

Ms. Monereau pointed out that environmental regulations in some countries, France and Germany in particular, were so strict even before the European Union environmental directive that risk managers were well-prepared for it with comprehensive coverage already in place.

“They were used to having some protection beginning in the 1990s,” Ms. Monereau said of French and German risk managers.

“Some member states, through culture and tradition, have stronger environmental liability regimes,” including Spain and Italy, agreed the CEA's Ms. Bell.

“There has been a whole raft of liability laws in the last 15 years that have made businesses wake up” and carefully address their environmental exposures, said Mr. Marshall. The focus of environmental regulation has shifted in that period to greater oversight and continuous monitoring and away from regulatory actions taken after a problem occurs, he said.

Some insurance buyers, though, may not realize the significance of the exposure they face under the directive, Mr. White suggested.

“If a company has a pollution incident, they are looking at a very complex claims process and cleanup” under the directive, said Mr. White. A lot of companies do not have the proper expertise in-house to handle the claims and cleanup process effectively, he said.

Risk managers need to make sure their companies are aware that a pollution incident as defined by the directive can cost a significant amount of money, said Mr. White. “It will have a detrimental impact on the balance sheet and will be a challenging and complex claim.”

Though some risk managers are not buying additional coverage for environmental liabilities as outlined by the directive, others see it as a smart move in the uncertain economy, Mr. White said.

“A lot of companies are tightening their belts” and buying coverage for environmental risks as a way to bring some certainty to their balance sheet exposures, he said.