Ukraine wants to introduce mandatory environmental insurance without consideration of business opinions

10/ 09/ 2021

In May, the Ministry of Environment submitted the draft Law On Environmental Insurance for public discussion. On September 8, the Cabinet of Ministers approved the text of the document without discussion. And on September 9, the draft law was already registered in the Verkhovna Rada under number 6018. The draft law provides for the introduction of mandatory environmental insurance for high-risk companies. In the absence of a valid contract of environmental insurance or violation of other requirements of the document, the activities of companies may be suspended in part or in full. Anna Derevyanko. EBA Executive Director. As we can see, the adoption of the draft law is being hastily forced. Meanwhile, the business has many questions in this context. One is how much the insurance can cost the company. Strangely enough, it is not clear from the draft document. After all, this, again, violates the principles of long-term planning - companies did not include in the budget the fund for environmental insurance. So where to get the money for this is a rhetorical question. It is important to recall that in Ukraine there are already 2 types of similar compulsory insurance of civil liability – for high-risk companies and for the investor, including for damage caused to the environment, under the production sharing agreement. Therefore, it is not known how these legal requirements will be reconciled, and whether companies will be forced to enter into several insurance contracts with similar objects of insurance. In the EU, the environmental liability mechanism is regulated by Directive 2004/35/EC. The document does not establish a mandatory financial guarantee but encourages the Member States to promote the development of appropriate financial and economic instruments and markets for financial guarantees covering environmental liability. Financial guarantees are understood as a wide range of instruments (provision of corporate and bank guarantees, etc.) and insurance is only one of them. In most EU countries, environmental insurance is voluntary, only insurance against accidents at potentially dangerous sites is mandatory, similar to what already exists in Ukraine. Despite the fact that environmental insurance is conceptually based on the principles of current insurance legislation, some provisions of the draft law are not consistent with it, for example: the insured event in ecological insurance is established by a court decision, and not the fact of the event, with the occurrence of which the insurance obligation arises; environmental insurance is proposed to be classified as a type of voluntary insurance, although, in fact, it will be mandatory for more than 14 thousand high-risk companies, etc. Besides, the document contains a large number of vague provisions, which can lead to misinterpretations and, consequently, create corruption risks. In particular, we are talking about the following aspects: 1. the environmental insurance contract does not specify in its essential terms the reasons for refusal to pay insurance amounts under such a contract, which may lead to the invalidity of such a contract; 2. the absence of certain deadlines for registration of the insurance contract in the Register, as a mandatory term for its entry into force, creates a risk that even after payment under the contract it will be considered invalid; 3. the lack of methodology for calculating the profitability of insurance companies - members of the Bureau in establishing the obligation to maintain the target level of profitability at the expense of the Bureau, does not fully comply with the principles of commercial insurance, and can lead to uncontrolled withdrawal of money from the Bureau, and as a result - to the growth of the insurance rate; 4. the lack of legislative definition of modernization measures and preventive policy to reduce the likelihood of insured events, which insured companies will be able to invest in with the part of funds they withdraw from the Bureau in the absence of insured events within the last 3 years. The lack of a procedure for receiving such funds may lead to bias and opacity in decision-making regarding the funds; 5) too broad liability for violations of the rules specified in the draft law, including the lack of definition of the actual components of the offenses, may result in the fact that the supervisory authorities will be able to apply the provisions of the draft law ambiguously; 6) the absence of the obligation of insurers to enter into an environmental insurance contract at the initiative of the company and the lack of insurers’ liability for this potentially creates additional risks of not concluding such a contract; 7) the unresolved issue of exempting the company from reimbursement, if the damage was caused by a third party in violation of appropriate security measures or is the result of compliance with government orders or instructions, may lead to abuse and blocking of companies. The European Business Association sent the above comments and suggestions to the draft law, but they were not taken into account. We hope that environmental insurance in Ukraine will not become an additional tool for raising funds for bona fide businesses. Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

In May, the Ministry of Environment submitted the draft Law “On Environmental Insurance” for public discussion. On September 8, the Cabinet of Ministers approved the text of the document without discussion. And on September 9, the draft law was already registered in the Verkhovna Rada under number 6018.

The draft law provides for the introduction of mandatory environmental insurance for high-risk companies. In the absence of a valid contract of environmental insurance or violation of other requirements of the document, the activities of companies may be suspended in part or in full.

Anna Derevyanko EBA Executive Director

As we can see, the adoption of the draft law is being hastily forced. Meanwhile, the business has many questions in this context. One is how much the insurance can cost the company. Strangely enough, it is not clear from the draft document. After all, this, again, violates the principles of long-term planning - companies did not include in the budget the fund for environmental insurance. So where to get the money for this is a rhetorical question.

It is important to recall that in Ukraine there are already 2 types of similar compulsory insurance of civil liability – for high-risk companies and for the investor, including for damage caused to the environment, under the production sharing agreement. Therefore, it is not known how these legal requirements will be reconciled, and whether companies will be forced to enter into several insurance contracts with similar objects of insurance.

In the EU, the environmental liability mechanism is regulated by Directive 2004/35/EC. The document does not establish a mandatory financial guarantee but encourages the Member States to promote the development of appropriate financial and economic instruments and markets for financial guarantees covering environmental liability. Financial guarantees are understood as a wide range of instruments (provision of corporate and bank guarantees, etc.) and insurance is only one of them. In most EU countries, environmental insurance is voluntary, only insurance against accidents at potentially dangerous sites is mandatory, similar to what already exists in Ukraine.

Despite the fact that environmental insurance is conceptually based on the principles of current insurance legislation, some provisions of the draft law are not consistent with it, for example:

the insured event in ecological insurance is established by a court decision, and not the fact of the event, with the occurrence of which the insurance obligation arises;
environmental insurance is proposed to be classified as a type of voluntary insurance, although, in fact, it will be mandatory for more than 14 thousand high-risk companies, etc.

Besides, the document contains a large number of vague provisions, which can lead to misinterpretations and, consequently, create corruption risks. In particular, we are talking about the following aspects:

1. the environmental insurance contract does not specify in its essential terms the reasons for refusal to pay insurance amounts under such a contract, which may lead to the invalidity of such a contract;

2. the absence of certain deadlines for registration of the insurance contract in the Register, as a mandatory term for its entry into force, creates a risk that even after payment under the contract it will be considered invalid;

3. the lack of methodology for calculating the profitability of insurance companies – members of the Bureau in establishing the obligation to maintain the target level of profitability at the expense of the Bureau, does not fully comply with the principles of commercial insurance, and can lead to uncontrolled withdrawal of money from the Bureau, and as a result – to the growth of the insurance rate;

4. the lack of legislative definition of modernization measures and preventive policy to reduce the likelihood of insured events, which insured companies will be able to invest in with the part of funds they withdraw from the Bureau in the absence of insured events within the last 3 years. The lack of a procedure for receiving such funds may lead to bias and opacity in decision-making regarding the funds;

5) too broad liability for violations of the rules specified in the draft law, including the lack of definition of the actual components of the offenses, may result in the fact that the supervisory authorities will be able to apply the provisions of the draft law ambiguously;

6) the absence of the obligation of insurers to enter into an environmental insurance contract at the initiative of the company and the lack of insurers’ liability for this potentially creates additional risks of not concluding such a contract;

7) the unresolved issue of exempting the company from reimbursement, if the damage was caused by a third party in violation of appropriate security measures or is the result of compliance with government orders or instructions, may lead to abuse and blocking of companies.

The European Business Association sent the above comments and suggestions to the draft law, but they were not taken into account. We hope that environmental insurance in Ukraine will not become an additional tool for raising funds for bona fide businesses.

Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.