Insurance law experts are raising concerns about new risks to company directors and officers arising from remediation obligations. The risks are the result of mining and energy companies leaving Australia’s state and federal governments with multimillion dollar environmental clean-up bills following the closure of their operations. In response, Australia’s federal government brought in new legislation that came into force in September.
“So, if you’re a director of a resource company, or a broker for D&O, keep an eye out for this being a potential risk, particularly if you’re operating in Queensland or in federal areas where there are these federal requirements,” said Charu Stevenson (pictured), partner with insurance law firm Wotton + Kearney (W+K), and author of a report looking into the issue.
“The amounts involved can be enormous. It may be a small risk but the magnitude of it could be large,” she said.
In September, Australia’s Offshore Petroleum and Greenhouse Gas Storage Amendment Act 2021 received Royal Assent. The legislation aims to make mining and energy companies more responsible for cleaning up their environmentally destructive operations.
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One catalyst for the federal legislation was the fate of the Northern Endeavour, an offshore oil facility north-west of Darwin. In 2019, the company’s owners went into liquidation leaving the federal government to fund what could be $1 billion in clean-up costs.
There could be lots more to clean-up in the future, too.
According to Geoscience Australia there are more than 350 operating mines in Australia and the Mineral Policy Institute says there are about 50,000 legacy mines across the country.
The federal legislation aims to ensure any remediation work will no longer be left to governments.
Stevenson said, in light of this new legislation, insurers, brokers and their mining or energy clients need to be aware of the definitions in D&O policies, the wordings used, any exclusions and what exactly is covered, in case of possible future remediation liabilities.
“The D&O insurance policies often either have a pollution exclusion or the definition of loss writes out pollution remediation costs but then insurers need to be aware, if they’re underwriting these sort of entities, that decommissioning mining operations is more than just pollution - so if you’re decommissioning you’re removing all the plant and equipment and then you’re cleaning up any pollution but you’re also revegetating and reforming the land,” she said.
Stevenson said climate change risks are also playing into this issue.
“In terms of D&O risks people are very concerned with climate change risks,” she noted. “That is more broadly applying concern across a lot of industries and that influences mining because some things that might have been economically viable aren’t anymore because of climate change and its impact.”
That means mining operations might close earlier than expected and, she said, when they close early they’re less likely to have met the remediation requirements.
According to the data in Stevenson ’s report, only 25% of mine closures are planned, with 75% being either premature or unplanned closures.
“So, when you close early, for a variety of reasons, it could be uneconomic or you get into insolvency - it just increases the risk that you’re not around to fix it up,” she said.
Remediation is a complex process.
“With the oil rigs, they’re taking off all the equipment, they’re plugging it up, they’ll be remediation for the environment around there and if it’s quite far offshore this increases the costs,” she said.
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This clean-up process is all part of the deal under federal and state regulations when you apply for approval to start a mining project. When the mine closes and you start the remediation, Stevenson said, the company that owns the mine negotiates with the regulator who decides if the clean-up is sufficient.
“So, it’s a bit of a moveable feast because it’s not a case of ticking boxes - every site is unique, every requirement is unique,” she said.
Historically, a major clean-up issue has been that the ownership and liabilities of the mining operation might not be with the company that originally applied for the approvals and produced the remediation plan. Instead, they might be with a different company that took over the operation and this company might not be big enough or solvent enough to undertake remediation.
The new legislation, said Stevenson, aims to resolve this problem.
“So both in Queensland and with the federal government they’ve decided to introduce legislation to not only tie it back to the people who are controlling the company, like the directors, but also these previous entities that might have operated and got some benefit from it before handing it on to a different entity.”
