September 29th, 2009

Continental European Legal Update: New Developments in Austrian Legislation Affecting the Insurance Act

Posted at 1:00 AM ET

recentlegislationDavid Lewin, Managing Director

The global economic situation has resulted in challenging conditions for the D&O liability insurance market. Particularly in the United States, carriers worry that a torrent of claims for damages is coming, which could run into the billions of dollars. Statistical models forecast compensation payments of approximately EUR3 to EUR10 billion.

It is not yet known to what extent the credit crisis will affect Austria’s insurance companies. At present, there are no statistics available that would correctly gauge the number of claims and the amount of potential compensation payments. Further, reliable data does not exist to illustrate the potential consequences for the Austrian D&O liability insurance market. But, if history is any guide, developments in the Austrian D&O liability insurance market will mirror those in the German market, where the need for environmental liability is expected to rise. The similarities between Austrian and German civil, criminal, and corporate law — at least as far as the liability risks within agencies and executives are concerned — provides some indication of where the market is headed.

The Federal Environmental Liability Act

The Austrian Federal Environmental Liability Act came into force on June 19, 2009. The Act is based on the EU Environmental Liability Directive 2004/35/CE, effective April 21, 2004, and addresses the prevention and remediation of environmental damages. The goal of the directive is to achieve a legal framework which will both prevent and remedy environmental damage caused by potentially or unequivocally dangerous activities. A specific goal is to regulate all business operations which could potentially cause damages through the use of chemicals, water, and waste in the natural environment. Particular reference is made to the species protected under the Birds Directive 1979 or to the Directive on the Conservation of Natural Habitats and of Wild Fauna and Flora 1992 and the Water Framework Directive 2000.

According to the terms of the Federal Environmental Liability Act, it is considered a strict liability under the polluter pays principle: the operator of the plant is liable for any dangerous activity regardless of whether the environmental damage was caused culpably. Damages are deemed to be illicit (and the entity causing them liable) only if the operator of the plant breaches one of the compulsory duties mentioned under the Federal Environmental Liability Act. Hence, the operator must immediately take all necessary measures to prevent, as well as to remedy, any environmental damage, should it occur.

The Federal Environmental Liability Act applies to all environmental damages that result from unauthorized activities, incidents, or accidents. According to the Federal Environmental Liability Act the liability ceases to be in force if damages are caused by an official injunction or a third party, although the operator must have taken all necessary precautions.

According to the Federal Environmental Liability Act, only administrative authorities are allowed to take action against violations which cause claims for damages. Private individuals (natural persons or legal entities) are not permitted to assert private claims within the framework of the regulations in The Federal Environmental Liability Act. In particular, they are not allowed to charge the operator for damages which constitute a violation of the Act. However, all persons have the right to appeal violations of their rights caused by environmental damages. The responsible authority has to fulfill its duties ex-officio, if such complaints are filed.

Although one major Austrian insurer has now introduced an additional coverage component providing a maximum limit of EUR500,000 for property losses caused by environmental damage, most insurance companies in the Austrian market have yet to adapt their coverage to the new environmental damage liability risk. Gaps in coverage might occur for commercial insureds if there is no contract for complementary insurance.

The Corporate Law Amendment Act 2008

The Corporate Law Amendment Act is based on the EU directive on statutory audits of annual accounts and consolidated accounts (2006/43/EC), as well as on the EU amending directive on the annual accounts of certain types of companies (2006/46/EC). The application of the previously mentioned directives also increases the reporting requirements in Austria for companies under the Austrian Corporate Law Amendment Act 2008. This includes a status report featuring the most important measures of controls and risk management systems with regard to accounting policies, as well as an extensive obligation to disclose business relationships with close persons or companies and significant businesses that do not appear in company financial statements. Publicly traded companies have to provide corporate governance reports disclosing general policy principles. At the same time, the audit committees and auditors are given new responsibilities. Time will tell if an infringement upon duties stipulated in the Corporate Law Amendment Act will bring about stronger demand for D&O liability insurance.

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