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Buyers be warned

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Valerie Fogleman, consultant at London-based law firm Lovells and visiting professor at the University of Ghent in Belgium, considers whether it is time for an absolute pollution exclusion clause in public liability policies for U.K. risks

The gap in cover for environmental liabilities in public liability policies for U.K. risks widened considerably on November 30, 2006, when the Manchester Mercantile Court ruled that cleanup costs are not "damages" under a public liability policy.

The events leading to the case, Bartoline Ltd vs. Royal & SunAlliance Insurance P.L.C. and Heath Lambert Group Ltd., began on May 23, 2003 when a fire at the premises of Bartoline Ltd. in East Yorkshire, England, resulted in fire-fighting foam and chemicals polluting the water, beds and banks of two water courses.

The Environment Agency, which exercised its powers under the Water Resources Act 1991, remediated the pollution at a cost of £622,681.78 (€943,699.34) and subsequently sought to recover its costs from Bartoline. In addition, the Environment Agency served works notices on Bartoline, requiring it to carry out further remedial works at a cost of £147,988.14 (€224,281.99).

Bartoline made various claims for losses arising from the fire against its combined policy, which it had renewed with Royal & SunAlliance Insurance Group P.L.C. for a 12-month period beginning on July 31, 2002. RSA paid some claims, but denied the claim for cleanup costs on the basis that they did not arise from a "legal liability for damages" under the public liability section of the policy.

The insuring clause in the public liability wording obliged RSA to indemnify Bartoline "against legal liability for damages in respect of ... accidental loss of or damage to property ... nuisance, trespass to land or trespass to goods or interference with any easement right of air light water or way."

Bartoline filed an action against RSA for alleged breach of contract, arguing that RSA had failed or refused to indemnify it for the cleanup costs. Bartoline also filed an action against its brokers for alleged breach of contract and/or negligence.

The court ruled in favor of RSA in a judgment that does not involve the action against brokers. His Honour Judge Hegarty QC concluded that the public liability policy provides cover for liability in tort, but not for Bartoline's liability for reimbursing the Environment Agency or complying with a works notice under the Water Resources Act 1991.

In reaching his conclusion, the judge relied heavily on the legal meaning of the word "damages" in marine insurance policies, stating that the word has an "established usage" which limits it to tortious liabilities.

Bartoline is not the final word under English law on whether public liability policies provide cover for cleanup costs, even if the case is appealed and the High Court's judgment is affirmed. Unlike the United States, where the majority of state courts have held that cleanup costs are "damages" under the standard commercial general liability policy, public liability policies for U.K. risks are not standardized. For example, insuring clauses refer to "compensation," "claims" and "liability" rather than, or as well as, "damages".

An English court may hold, therefore, that another wording provides cover for cleanup costs.

The gap in cover for environmental liabilities will continue to grow. On April 30, 2007, new liabilities under the Environmental Liability Directive (2004/35/EC) will enter the domestic law of the EU member states.

If an operator causes environmental damage to surface, coastal or ground waters or protected species or natural habitats, it may be liable, not only for restoring natural resources to their condition prior to the damage but also for interim costs prior to their full restoration. If a damaged site cannot be fully remediated, the operator may be liable for providing a similar level of natural resources at another site.

No public liability policy for U.K. risks specifically covers—or is likely to cover—ELD liabilities. Buyers can, therefore, hope that their insurer and/or a court will conclude that their policies provide cover for ELD and other environmental liabilities or, as in Bartoline, discover after the event and to their considerable cost, that they do not.

Buyers are not the only persons at risk. Insurers and reinsurers risk discovering that their wordings cover environmental liabilities that they do not intend to cover. Brokers who do not advise clients that there is a potential or actual gap in cover for environmental liabilities in the public liability policies they are placing may face claims for alleged breach of contract and/or negligence as in Bartoline.

In view of the potential for substantial uninsured losses by buyers, inadvertent cover for environmental liabilities by re/insurers and/or claims against brokers due to potential gaps in cover in imprecise wordings, the time has surely arrived to introduce an absolute pollution exclusion in public liability policies and otherwise to clarify the wordings in respect of environmental liabilities. The gap in cover will remain, but all parties will know its scope and recognize that the only way to ensure cover for environmental liabilities is an environmental insurance policy.

The wordings of past policies with a long liability tail cannot, of course, be changed, but the longer it takes to introduce an absolute pollution exclusion in public liability policies, the greater the number of imprecise past policies.

Valerie Fogleman is a U.S. attorney, as well as a solicitor. She specializes in all aspects of environmental law, in particular environmental liabilities, and insurance cover and claims for such liabilities. She is named as a leading environmental lawyer in Chambers & Partners Legal Directory, the Legal 500, Euromoney's Best of the Best, Guide to the World's Leading Environment Lawyers and the International Who's Who of Environmental Lawyers. Ms. Fogleman's book, entitled "Environmental Liabilities and Insurance in England and the United States" is published by Witherbys (2005).