The cost of pollution - who pays?

The 'polluter pays' principle is now well established, both in law and the calculations of underwriters. The principle requires the person responsible for pollution to clean it up, or if not, at least to pay for the cost of the clean-up. What is not always clear is whether the clean-up costs will be covered by the insurance policy.

In Bartoline v Royal and SunAlliance, the High Court held that the particular wording in the defendant insurer's policy did not cover the Environment Agency's clean-up costs. The claim followed a massive explosion and fire at the claimant's factory in East Yorkshire, which led to chemicals entering a nearby watercourse. The EA carried out remediation works and sent the claimant a bill for £622,000. The claimant also carried out works themselves, at a cost of £148,000.

The policy provided an indemnity "against legal liability for damages". The claimant passed on the bill to the defendant, saying that the EA's costs were covered by that term. The defendant disagreed, and the dispute found its way to the High Court.

The judge decided the word "damages" meant some form of recompense following an actionable wrong. It did not include the EA's clean-up costs, which were a statutory debt.

He rejected the claimant's argument that the policy term should be seen in a wider "commercial" context. Accordingly, the claimant had to pay the EA from its own resources. The court also held that the policy did not require the insurers to indemnify the claimant for their own costs, even though they had been required by the notice.

While this is good news for insurers, for insureds and brokers advising them the Bartoline case is not so welcome. However, it does illustrate the need to think carefully about possible environmental liabilities, and to manage environmental risk. The new environmental liability regime can impose expensive responsibilities on companies. It also illustrates the need to check policy wording carefully. Some policies undoubtedly will include cover for EA costs. If a PL policy does not cover the EA's costs and other environmental liabilities, there are other policies that are specifically designed to do so.

This will not, however, be the last word on the matter - the case is due to go before the Court of Appeal in October 2007.

Tom Corrigan, partner

Michael Feakes, associate

Commercial and property risks group, Beachcroft LLP.