More than six months after the implementation period set forth under the Environmental Liability Directive, the German Environmental Damages Act has finally come into effect on 14 November 2007.

The EU Environmental Liability Directive imposes liability on industrial operators, among others, for the damage they cause to the environment and Member States were required to have implemented this Directive in national law by 30 April 2007. In response, the Federal Government of Germany (Bundesregierung) approved the draft of the German Environmental Damages Act ("GEDA") implementing the Directive in September 2006; it was passed by the Bundestag in March 2007 and finally entered into force on 14 November 2007. In comparison to the draft approved in September 2006 the final version contains a significant change in relation to insurance obligations. However, this does not seem to have prevented the predicted development of new insurance policies.

Even though the Directive does not impose a duty to take out insurance with the respect to operators' potential liability under the Environmental Liability Directive, it states that Member States "shall take measures to encourage the development of financial security instruments and markets by the appropriate economic and financial operators."

While the draft GEDA empowered the Federal Government to enact provisions in relation to the duty of all responsible persons or companies to provide for financial security instruments, the relevant provision has now been deleted in the final version. Nevertheless, the

Association of the Insurance Industry (Gesamtverband der Versicherungswirtschaft) has prepared Draft General Insurance Terms which will be the basis for the insurance policy terms offered by German insurance companies to cover.

Following the existing scheme which has been developed in relation to civil law damage claims in Germany under the Environmental Liability Act (Umwelthaftungsgesetz), Insurance for GEDA liability is likely to cover only environmental damages which are caused by disruption of operations. As a consequence, environmental damage which is caused in the course of normal (and permitted) operations of the plant are not covered under the insurance policies offered. Furthermore, the General Insurance Terms contain a long list of environmental damages which would not be covered under the standard insurance policy, including for example:

Damage to groundwater (it is likely that companies will try to rely on their existing polices which provide cover for groundwater damage).

Damage to real property owned by the policy holder (although insurance companies will most likely offer additional insurance modules to cover such liability).

According to several press releases, several insurance companies have already incorporated environmental damage insurances into their insurance programmes to cover GEDA liability. It is understood that a number of large companies which operate in several European countries have begun to take out environmental damage insurance. However, at this point in time it is still very hard to predict what impact GEDA will have on liability consequently how large the environmental damage insurance market will be.

Furthermore, there is continuing uncertainty as to elements of the GEDA itself and this is still affecting the development of the insurance market: for example it is still unclear on which basis environmental damages under the GEDA will be quantified, particularly in case of damage to biodiversity. Further insecurities result from the fact that contrary to the position taken by other Member States (including France, Spain and as proposed in the UK), the Environmental Damage Act does not release operators from their liability if the emission which caused the environmental damage was permitted. Whether or not this will be the case is up to the discretion of the federal states which have not finally decided on how to handle this question.

Copyright Clifford Chance 2008

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