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Underwriting Manager, Environmental, Iberia & Latin America, AXA XL

Although Mexico’s “new”, or current, environmental law is already one year old, many companies have not yet updated their business plans to meet the new requirements. What is the difference? A new “polluter pays” principle subjects businesses to much greater liability risk. What should companies do now to reduce the risk and increase resilience in the event of an environmental disaster?

Environmental Responsibility

“Everyone has a right to an adequate environment for their development and well-being.” A safe environment is a constitutional right in Mexico. An important milestone in environmental protection came in 1988 when “The Law of Ecological Balance” was enacted. It established a baseline of corporate liability, with guidelines on water, soil, air pollution, protected natural areas, protected species, ecological emergencies, and ecosystems. Mexico also supported the 1992 UN Declaration on the Environment and Development, and in July 2013, the Mexican congress passed the “Federal Law of Environmental Responsibility”, which raised the level of official environmental protection to match the European standard.

The good news is that Mexico is leading the Latin America effort to protect the environment. However, the new law significantly increases the responsibility of businesses to guard against environmental accidents.

Broken Trust

On August 6, 2014, the Buenavista del Cobre copper mine leaked 40,000 cubic meters of copper sulphite (acid). It quickly spread to seven cities in the Sonora region, contaminating two rivers and leaving approximately 24,000 residents without clean water. Authorities had to distribute millions of liters of bottled water to residents, as hundreds of wells were shut down. Farmers could not water their crops, and many residents claimed to be infected by the contaminated water.

The Mexican government has called it the worst environmental mining disaster in the country’s history. Some estimate cleanup and restoration will take 15-20 years.

The mine owner, Grupo Mexico, will pay fines of at least USD 3.4 million for environmental violations. Admitting that poor tank maintenance probably caused the leak, the company has established a trust of USD 150 million to pay for cleanup, restoration, and compensation to affected residents.

Despite those measures, the Sonora state government has publicly denounced the company for deliberate negligence, citing repeated, documented violations of dam codes and environmental standards over the years. The state officially broke off all ties with Grupo Mexico, and urged the federal government to revoke the mine’s license. Green Party members and NGO representatives have also accused Grupo Mexico of waiting five days after discovery to notify the government of the spill, and many have criticized the federal government for inadequate sanctions.

With 2013 revenues of USD 9.3 billion, Mexico’s largest mining and infrastructure company will probably survive this setback. But the repercussions to its reputation are spreading. Authorities in the US continue to monitor an Arizona river connected to Sonora for cross-border contamination, and Spanish regulators are thinking twice about issuing the company a mining license.

This is just one example of the growing political hostility towards perceived environmental negligence, and the international fallout to corporate reputations. The government is also likely to crack down harder on companies less integral to Mexico’s economy, to encourage rapid compliance with the new law.

The “Polluter Pays” Principle

What does the polluter pay for? Everything. The fact is that the current law is broadly worded, to allow for the maximum corporate liability. Environmental damage is defined as any adverse change or loss to a habitat, ecosystem, or natural resource. The goal of the law is to prevent damage wherever possible, and to compel polluters to restore the environment after disasters.

To encourage corporations to work hard to prevent environmental damage, legislators have imposed two kinds of liability in the current law: fault-based and strict.

Fault-based liability is the result of error or negligence. This would include poor maintenance or lack of compliance with building or environmental codes that result in environmental damage.

Strict liability holds companies responsible for accidents that occur, despite the best oversight and maintenance. If a perfectly maintained ship is operating on a coral reef, and the ship accidentally leaks hazardous waste and damages the reef, it isn’t the result of error or negligence. The ship still caused damage to the reef, and the ship company will be held responsible. Under strict liability, the plaintiff does not have to prove that damages were the result of negligence. He only has to prove that the damages occurred, and that the defendant was somehow responsible.  

But what does cleanup and compensation entail? Cleanup involves repairing all damage and restoring the environment to its “baseline” -- its natural state before the damage. If the baseline cannot be achieved, equivalent compensation must be provided. For example, if hydrocarbons spill into one river, killing off a certain kind of fish that cannot be repopulated in that river, that species, or a similar one, must be introduced into a different river. This is obviously highly complex and difficult to enact practically.

Finally, the current law requires businesses to compensate any and all persons, companies, and other legal entities affected by the damage.

Who is entitled to register official environmental-damage complaints? The list includes anybody residing in the damage-affected community, government authorities, NGOs that become aware of the damage, and companies.

Who can be held responsible for environmental damage? Any company or person whose action or omission causes damage to the environment. Companies will be held responsible for damage caused by a director, manager or any employee.

Liability is comprehensive under the new environmental law.

Does Your Existing Policy Cover Current Liability?

Environmental accidents are precisely the kind of low probability, high-impact events best covered by insurance. Unlikely as they are, if they happen, the costs are likely to be much higher than imagined, a fact underscored by the new “polluter pays” principle.

Many companies assume that their liability policies, which satisfied the risk transfer imposed by previous laws, also satisfy the risk transfer imposed by the 2013 law. They don’t. They do not cover potential cleanup costs, gradual pollution incidents, compensatory remediation, preventive measures, or emergency costs. Since this law can now affect any business, companies operating in Mexico should take immediate action.

Reduce Risk, Increase Resilience

Because the new law imposes both fault-based and strict liability, most companies will need to reassess their operations and environmental protocol. Businesses should work with insurers and experienced environmental risk engineers to conduct risk assessments of their premises and supply chains throughout Mexico. Risk engineers will examine each facility and location to produce an integrated risk assessment. They will then be able to advise businesses on accident and loss prevention. These measurements will also provide a basis for estimating potential cleanup and restoration costs following an environmental incident.

The government’s environmental taskforce is currently understaffed. That does not mean that inspectors and regulators will not prosecute. It only means they might take longer to respond in an emergency. It falls to companies to be vigilant about their own inspections, and to detect problems early before the adverse impacts spread.

Environmental insurance provides comprehensive coverage for: clean-up, restoration, full legal defense costs, personal and environmental compensation, crisis management consulting, and business interruption.

Crisis management is a crucial coverage component. Consultants will provide invaluable assistance, helping companies to establish emergency procedures, training the business to respond, and of course, providing on-the-spot support during a crisis.

The number of environmental NGOs is growing, and some may be inclined to inflate the magnitude of an accident or disaster. When a company’s reputation is under attack, crisis consultants provide swift and expert public relations support, as well as regulatory and legal advice. They will work to minimize the duration of public scrutiny and business interruption, and restore public trust. Not only will this help the business resume operations sooner, reducing losses, it could also reduce the probability of long-term legal repercussions.

Considering the all-inclusive scope of the liability, an environmental incident presents a high potential for both private and public prosecution. Insurance can offer defense coverage. However, in most cases, out-of-court settlements, like the Grupo Mexico trust, will lower costs, and help restore a company’s reputation.

Equally important is a swift claims response. Claims inspectors need to be able to access the site as quickly as possible. This way they can issue payments that enable prompt cleanup and restoration. It is also vital that the insurer offers a policy with longevity, because restoration of the environment to the original baseline can take years. An insurer with the ability to streamline all of this coverage within a global program will provide a premium cost advantage.

Global Environmental Mandate

Environmental protection is a global issue, and astute companies will consider regional operations in the context of their global reputations. In Mexico, it will take the government time to enforce the current law fully. Companies are well advised to review their environmental risk now, consider how it could impact their bottom line, get fully compliant with environmental codes, and secure insurance for unforeseen and unavoidable disasters. Acting now will not only reduce risk and increase resilience in Mexican operations; it will also help safeguard a multinational’s international reputation. 

Want to know more? You can reach Lourdes Valencia, Senior Casualty Underwriter Mexico, or Rodrigo

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