Keeping up to date with the latest changes to the regulatory landscape of the insurance sector can be somewhat daunting at the best of times, and becomes all the more so during a global pandemic. Yet, despite seemingly more pressing coronavirus-linked concerns, the regulatory environment cannot and should not be overlooked as its impact on the operational resilience of businesses remains as vast as ever.
One such vital piece of regulation is the Regulatory Enforcement and Sanctions Act 2008. It introduced enforcement undertakings as a form of “civil sanction” that can be used by environmental regulators as an alternative to prosecution when it comes to certain alleged environmental offences. Discussing what this means for the corporates, Aidan Thomson (pictured above) and Sam Levy (pictured below) from the international law firm Bryan Cave Leighton Paisner (BCLP) and Stephen Sykes, an environmental insurance lawyer and executive at Ashfield Risk Transfer Solutions, recently spoke with Insurance Business.
For corporates and individuals, enforcement undertakings have changed the way that potential breaches of environmental law in England and Wales are dealt with, Thomson said. Enforcement undertakings are essentially binding agreements in respect of breaches of environmental law. They are formed by an offer of a package of measures (including, for example, remediation/restoration, charitable donations and paying the regulator’s costs) from the potential offender and acceptance of this offer by the regulator. Once accepted, formal enforcement steps cannot be taken for the breach.
“Under this new system, corporates and individuals can agree with regulators to counter their actions of breaking environment law by carrying out environmentally restorative activities,” Levy noted. “Once accepted, the regulator cannot then prosecute for the breach of environmental law.”
The uptake of enforcement undertakings is increasing, largely because both sides can benefit from their use, Sykes said. Enforcement undertakings have become popular with regulators because of their “reverse regulatory” nature (i.e. rather than regulators actively pursuing enforcement action against a passive regulated sector, the regulated sector makes the running).
“Regulators also appreciate that enforcement undertakings can generate wider environmental benefits than traditional enforcement powers,” he said. “Regulated companies like enforcement undertakings because they allow for the active management and control of a potential environmental liability with less of a chance of disruption/negative publicity that often goes hand in hand with more formal enforcement.”
Looking to how these enforcement undertakings fit into the insurance sphere, Levy noted that since losses arising from civil liability are generally insurable, but fines/penalties for breaches of criminal law are uninsurable, the question is whether enforcement undertakings are civil or criminal in nature. There is currently legal uncertainty on this point.
“In addition, there is the matter of fortuitous losses,” Thomson said. “Bearing in mind that it is a fundamental requirement of insurance that cover is only available for fortuitous losses, if an insured regulated company actively approaches a regulator to offer an enforcement undertaking, then it is conceptually challenging to interpret the costs arising from this as ‘fortuitous’.”
Standard environmental insurance policies currently available in the London market do not expressly specify that cover is provided for costs arising from enforcement undertakings, Sykes said. Therefore, uncertainty exists regarding whether existing insurance policies would respond to any potentially insurable losses linked to enforcement undertakings. A single enforcement undertaking can contain several different elements within the one undertaking.
“Some elements may be very similar to the types of losses traditionally covered by environmental insurance (e.g. remediation costs, payment of the regulator’s costs) but other elements clearly do not fit the description of types of losses traditionally covered by environmental insurance (e.g. donations to charities),” Levy said. “This introduces further nuance and subtlety to the interaction between enforcement undertakings and insurance policies.”
Evaluating the role of insurance brokers when it comes to these enforcement undertakings, Thomson said that their most important function, in the current circumstances, is to raise the matter of enforcement undertakings with their clients and explain the nature of the current coverage position in relation to this exposure in the event that one is offered.
Brokers run the risk of being sued if they fail to identify this area as a potential cause for concern, Levy said. As enforcement undertakings continue to grow in popularity, they become an increasingly significant source of potential liability. Therefore, brokers’ clients will expect meaningful advice on this developing area.
“Brokers should be aware of how popular enforcement undertakings are becoming with companies, and that their clients may well want to resort to using them in the event of an environmental breach,” Sykes said. “They also need to be aware that a number of the elements that may be offered in an enforcement undertaking are problematic from an insurance coverage standpoint, and they may not be covered at all.”