23 July 2018 Insurance

Costs of environmental fines against companies jump

The average fine per prosecution brought by the UK government-sponsored Environment Agency (EA) against companies has increased six-fold in the last five years, according to research from global law firm Clyde & Co.

Data obtained directly from the EA show that the average fine against a company in 2017/18 was £147,575. This compares to just £23,731 in 2013/14.

While the number of prosecutions against companies has reduced to almost a quarter of where it stood five years ago (from 114 in 2013/14 to 32 in 2017/18), the average value of a fine has significantly increased, according to the law firm.

Sentencing guidance introduced on July 1, 2014 toughened penalties for most environmental offences. Under the new approach, the scale of fines varies but can exceed £20 million for the very worst cases involving the largest companies.

"The environmental sentencing guideline has now been in force for almost four years and is biting hard," said Rod Hunt, partner at Clyde & Co.

"However, we believe the increase in average fine level is not only attributable to the sentencing guidelines but also the fact that the EA is effectively deploying its full armoury of enforcement sanctions, and is more readily using enforcement undertakings for less serious offences while typically reserving prosecution for the worst offences and worst offenders. This has resulted in a decrease in the number of prosecutions but an increase in the average fine level."

"In 2016/17 we had the big ticket, multi-million pound (£20.3 million) fine against Thames Water that really made its mark. The message to businesses is that the EA will continue to prosecute the more serious offences and offenders so ensure you are complying with your environmental obligations or risk potentially eye-watering fines in the criminal courts."

Clyde & Co pointed out that there were 22 prosecutions against company directors in 2017/18, compared with 25 in the previous year.

Anna Willetts, senior associate at Clyde & Co, commented: "The data show that directors are clearly still at risk of prosecution. The number of director prosecutions remains very similar to last year and we expect the EA to continue to target those at the top for compliance failures."

Clyde & Co noted that organisations impacted by the increased enforcement activity may wish to ensure they have appropriate insurance cover.

James Cooper, partner and head of FIDO at Clyde & Co, commented: "Defence costs cover for environmental offences is often included in commercial D&O (directors and officers liability) policies and may become all the more crucial to business operating in sectors where the potential for enquiries, investigations and prosecutions by the Environment Agency are a reality."

"The greater the risk of prosecution, the more likely a director is to want to access the D&O policy to retain the best legal representation available, particularly given that director disqualification proceedings could also follow on conviction."

"The potential for larger fines against the entity for environmental failings could trigger claims by investors against the D&Os where the entity's share price has suffered as a result, or the entity has gone bust," Cooper noted.

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