Financial Provision for Environmental Liability

1. Financial Provision for Environmental Liability Nicola Dunleavy, Partner EPA & ICEL Environmental Law Conference, 3 October 2014

2. 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

3. 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by the licensee carrying on the licensed activity • EPA has discretion, subject to the usual legal safeguards • New Draft Guidance states that the EPA will take a case by case approach, but also appears to incorporate some definite policies • A statutory body cannot enlarge its statutory power by contract: • Eg, New Draft Guidance: EPA holds funds “on trust” for “other appropriate statutory authorities” – no explanation of legal basis

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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.”

12. 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

13. 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?

14. 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

15. 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.

16. 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

17. 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

18. 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?

19. 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?

20. 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

21. 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

22. 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

23. 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

24. Thanks and questions Nicola DunleavyMatheson70 Sir John Rogerson's QuayDublin 2T: +353 1 232 2033F: +353 1 232 3333E: nicola.dunleavy@matheson.comW: www.matheson.com 31388399.2