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Spain to mandate pollution cover

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Spain to mandate pollution cover

MADRID, Spain—Spain's government has unveiled plans to require many companies to purchase insurance coverage for environmental liabilities.

Spain is going beyond the minimum requirements of the European Union's environmental liability directive, EC/35, and has proposed a compulsory insurance system--targeting the largest potential polluters--to protect the nation's natural resources.

Some fear the proposal could lead to coverage gaps as local and international insurance companies struggle to meet the sharply increased demands of buyers and deal with complex areas such as liability for historic contamination to public sites.

The E.U. environmental liability directive was introduced to protect Europe's natural resources such as air, water and coastlines and to make polluters pay for cleanup should damage occur.

Requirements

The liability directive requires that those companies that deliberately or unwittingly damage the public environment must pay to restore its original state under a strict liability system. All E.U. member states must introduce legislation to comply with the directive by April 30.

The Spanish government approved its draft bill on March 9 and has handed it over to Congress for debate and approval. In its current form, the government says that the bill would affect some 5,000 of Spain's largest industrial companies, 30,000 transportation companies and almost a million agricultural operations.

A spokesman for Associaciòn Española de Gerencia de Riesgos y Seguros, the Spanish risk management association, said that liability will initially be unlimited under the planned new regime.

According to the spokesman, the conditions of the law will be tougher on those organizations with a higher risk profile, based on a sliding scale.

He said that those companies that are only thought likely to cause damage valued up to e300,000 ($398,700) will not be required to take out any kind of coverage or guarantee. Companies that could potentially cause damage valued at between e300,000 and e2 million ($2.66 million) must either take out coverage or adhere to a new system of environmental management and audit.

Those companies that have the potential to cause serious damage to the environment valued at over e2 million will be required to obtain insurance, a financial guarantee or set up a form of internal technical reserve from April 30, 2010, the AGERS spokesman said.

Spain has an association of insurers of environmental risks, the Pool Española de Riesgos Medioambientales, that is backed by the main Spanish industrial risks companies. Experts say that the coverage provided by this pool is inadequate to cover the new law, although PERM is developing new wordings.

Some say that, as the compulsory coverage will not be required until 2010, the local and international insurance and wider financial markets should have plenty of time to develop adequate solutions for Spanish insurance buyers.

But others are not so sure that the standard insurance markets in particular will be able to meet the substantially expanded and often uncertain exposures faced by many companies after the April deadline and could leave companies struggling to find cover and balance sheets exposed in the short term at least.

"I'm confident in the capacity of the financial and insurance markets to react, but to fully satisfy the needs (of) the new legislation will be difficult," said Eduardo Romero, chairman of AGER.

Luis Alfonso Fernandez Manzano, lawyer with the Madrid arm of London-based law firm Lovells, said: "The deadline is wide enough to let the companies be prepared to offer those coverages. I believe that the Spanish insurance market is mature enough to offer that kind of guarantee and to cover companies' needs."

Miguel Angel Macias Perez, director of insurance at Fomento de Construcciones y Contratas S.A., the Madrid-based construction giant, said that there is clearly insufficient local capacity to meet the needs of buyers and that it will be necessary for Spanish companies to seek alternatives in the international market.

He said that he is hopeful, however, that sufficient capacity would be gathered in time for the 2010 deadline and that it would be offered at a "competitive premium."

Jose Luis Ibànez Götzens, director at Spain's leading insurance group Corporacion MAPFRE, said that the work is already underway to provide solutions for buyers and reassured them that the market would be ready in time for the 2010 deadline.

New wordings

He said that PERM is developing new wordings to cover the new exposures and said that a "limited number" of insurance companies already offer coverage, albeit with "limited capacity."

Luis Basabe y Suàrez de Tangil, managing director of risk management at Marsh, S.A., the Spanish arm of New York-based Marsh Inc., said that he believed that sufficient capacity will arrive by 2010. He believes that the trickier part will be working out what the rules actually mean.

"We understand that there will be no problems regarding market capacity. The main issues to be clarified are the procedures for the environmental damage appraisal and the risks evaluation," he said.