Financial Provision for Environmental
Liability
Nicola Dunleavy, Partner
EPA & ICEL Environmental Law Conference, 3 October 2014
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Topics
 Powers of the EPA
 What must be covered by financial provision?
 Forms of financial provision – new Draft EPA Guidance:
 Secured fund / charge on property
 On demand bonds
 Insurance
 Parent company guarantees
 Consultation on Draft EPA Guidance on forms of financial
provision
Powers of the EPA
 Eg, under the EPA Act 1992:
 Such financial provision as the EPA may specify (which may include
the entering into a bond or other form of security) as will, in the
opinion of the EPA, be adequate to discharge the financial
commitments or liabilities that the EPA reasonably considers will be
incurred by the licensee carrying on the licensed activity
 EPA has discretion, subject to the usual legal safeguards
 New Draft Guidance states that the EPA will take a case by case
approach, but also appears to incorporate some definite policies
 A statutory body cannot enlarge its statutory power by contract:
 Eg, New Draft Guidance: EPA holds funds “on trust” for “other
appropriate statutory authorities” – no explanation of legal basis
Powers of the EPA
 Ireland’s national report on Environmental Liability Directive:
 In transposing the Directive, Ireland opted not to make financial
security mandatory
 Ireland would be opposed to the imposition of a general
mandatory levy on industry to cover environmental damage
 It is Ireland’s opinion that risks to the environment are better
addressed through strict licensing and enforcement systems,
and where appropriate private financial security mechanisms
What must be covered?
 EPA Guidance on Costing and Assessment of Liabilities 2014
 Risks of Environmental Liabilities – ELRA
 Closure and restoration costs – CRAMP
 Current scenarios of potential double cover, eg:
 Insurance for ELRA and
 Parent company guarantee for ELRA
 What is the new approach? Appears to favour “complementary”
provision not double cover
Secured Fund / Charge on Property
 New Draft EPA Guidance: Secured fund “is the only instrument
that is suitable to cover inevitable closure costs”
 “Inevitable closure costs” = closure costs for an activity with a
finite lifespan such as landfill, mine
 Why?
 No reason given why other forms would not be accepted
 New Draft EPA Guidance: Charge on property only accepted in
very limited circumstances to cover temporary shortfalls
 Why?
 No reason given
On-Demand Bonds
 EPA template is an ‘on-demand’ bond. This means:
 EPA can make a call on the Bond without first establishing any
default (obliged to account for overpayment)
 As good as cash - The bank must pay according to its guarantee, on
demand, if so stipulated, without proof or conditions - Edward Owen
Engineering Ltd v Barclays Bank International Ltd
 Call only refused by surety where there is fraud
 Payment of the amount must be made if bond not renewed
 New Draft EPA Guidance on Financial Provision: “It is not an
acceptable financial provision to cover the costs of inevitable closure”
 Why? No reason given
On-Demand Bonds cont…
 High cost to provide on-demand bond; impact on credit
facilities
 Counter-indemnity generally means that:
 when the bond is called, the entire payment from the bond
is taken by the surety from the company
 unlike insurance where premia and excess only are paid
by the industry company, not the amount of the policy itself
Insurance
 New Draft EPA Guidance:
“General third party liability policies will not be
acceptable as financial provision. The EPA may,
however, consider environmental impairment liability
policies in respect of licensed facilities with a RBME
[risk-based methodology for enforcement risk ranking]
of B or C provided that the policy wording is
acceptable to the EPA”
 Third party, or public liability, insurance – can include
extensions to cover environmental liability
Insurance
 What can insurance cover:
 Known versus unknown
 Closure costs versus ELRA
 New EPA Draft Guidance: “Insurance is not a suitable financial
provision for most risks”
 Why? No reason given
 Insurance policy covers what it is contracted to cover. Most public
or third party liability policies have limitations:
 “Bartoline” – only pay damages
 Sudden, accidental incidents
Bartoline v Sun Alliance (2006) – English High Court
 Fire in Bartoline’s factory resulted in the pollution of two
watercourses, which led the UK Environment Agency (“EA”) to
incur substantial clean up costs
 EA claimed this sum from Bartoline under statutory power
 Bartoline attempted to recover under its Public Liability Policy
 Wording of Public Liability Policy covered:
 damages “ in respect of accidental loss of or damage to
property…nuisance, trespass to land or trespass to goods or
interference with any easement or right of air light water or
way.”
Bartoline v Sun Alliance (2006): Decision
Court held:
 Liability to pay clean-up costs was not a liability to pay
“damages”
 Clean up costs are a statutory debt
 The purpose of public liability insurance did not extend to
monies payable under statute
 Court did not adopt “commercial assumptions” interpretation
that ran counter to established usage
Bartoline revisited?
 Bedfordshire Police v Constable (2009)
 English Court of Appeal decision:
 Public liability policy - sums the insured "may become legally
liable to pay as damages”:
 Covered a police authority against liability to pay statutory
compensation to claimants whose property had been
damaged during a riot
 Court confirmed a meaning of “damages” consistent with the
ordinary commercial purpose of the insurance
 A one off?
Lessons from Bartoline
 Modifications need to be made to public or “third party” liability policies:
 ‘stand alone’ - environmental impairment liability insurance, or
 top-ups to existing liability product
 2010 Commission Report on ELD:
 Insurance has proven to be the most popular instrument to cover
environmental liability
 Followed by bank guarantees (Austria, Belgium, Cyprus, Czech
Republic, the Netherlands, Poland, Spain, and UK)
 Other market based instruments, such as funds, bonds, etc (Austria,
Belgium, Bulgaria, Cyprus, Poland and Spain)
 Insurance pools - Spain, France and Italy
Insurance and insolvency - Section 62, Civil Liability Act
 Where an insured who has an insurance policy in respect of
liability for a wrong, becomes insolvent, moneys payable to
the insured under the policy shall be applicable only to:
 discharging in full all valid claims against the insured in
respect of which those moneys are payable, and
 no part of those moneys shall be assets of the insured or
applicable to the payment of the debts (other than those
claims) of the insured in the insolvency proceedings.
Case law on insurance
 Dunne v P.J. White Construction Ltd (In Liquidation) (1989)
 Decision: Claimant had the benefit of the presumption that the
insurance policy was good
 McCarron v Modern Timber Homes Ltd & ors (2012)
 Liability should be determined in the underlying claim before
the insurer is joined to proceedings
 Decision: insurer struck out claim on the basis that no
reasonable cause of action was disclosed
Case law on insurance
 Yun Bing Ha v Duleek Formwork Limited (2013)
 Claim was declined by the insurer because the insured
breached a condition precedent to liability in the policy, namely
the payment of the excess
 Claimant offered to pay excess – Court refused
 Claimant argued negligence against the insurer on the basis of
the insurer’s failure to inform that a pre-condition to liability
under the policy had been breached. Court concluded that the
insurer did not have such a duty of care to the claimant
 Insurer allowed to repudiate
Insurance - Advantages
 Can the wording of the insurance contract address the limitations
identified in case law? In principle – yes
 Insurance can survive insolvency
 Standard instrument for business across Europe for
managing risks
‘Master’ insurance policy – appropriate?
 Inequities in distributing the master policy premia and the
transfer of cost from high risk facilities to low risk facilities
 Competition law issues?
 Require legislative change?
Parent company guarantees
 New Draft EPA Guidance – suitable for many liabilities
 Comments on two provisions previous draft templates
 First provision: Unlimited in time and survives the surrender / transfer
of the licence
 Questions - Appropriate to remain on risk for an infinite period? Note:
 When a licence is transferred, the legislation provides that the
transferee assumes all past liabilities - why does the surety remain
on risk if the licensee is not?
 A facility may have been transferred to a competitor
 The surrender of a licence discharges the licensee from the licence
obligations – why does the surety remain on risk if the licensee is
not?
Parent company guarantees
 Second provision: If the Surety breaches the Guarantee, the Licensee
is required to suspend all activities on receipt of written notice from the
Agency
 Questions – Appropriate?
 Not provided for in legislation
 Interaction with the Licensee’s constitutionally protected property
rights and rights to fair procedures
 The EPA has the power to apply to require the activity to cease under
the legislation, which has appropriate safeguards and rights for the
Licensee to be heard
Legal Opinion
 Requirement for a legal opinion from a “reputable law firm
acceptable to the EPA” if financial provision is to be provided by
an entity from outside the jurisdiction
 Applies in relation to all forms of financial provision
 The legal opinion is to address:
 Incorporation, capacity/authority, execution, choice of
law/jurisdiction, enforcement of judgments
 The legal opinion is to confirm that:
 There is no contravention of law
 There are no insolvency proceedings
Legal Opinion
 Queries about this requirement:
 Out of step with other public sector bodies
 Jurisdiction-specific difficulties and costs involved in
providing such a legal opinion
 It is possible for an external firm to provide this opinion
without extensive due diligence which may not be
feasible?
 Suggest that the more flexible (and case by case)
approach of other Irish public sector bodies is considered
The future
 2014 Commission report on Environmental Liability Directive
due by end of year
 The New Draft EPA Guidance – open for consultation
 Suggest clarification of:
 Reasons for positions taken
 Legal basis for positions
Thanks and questions
Nicola Dunleavy
Matheson
70 Sir John Rogerson's Quay
Dublin 2
T: +353 1 232 2033
F: +353 1 232 3333
E: nicola.dunleavy@matheson.com
W: www.matheson.com
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