EIL set to grow in South Korea following new pollution laws

The Act on Relief for Damages from Environmental Pollution was promulgated by the Korean government on 31 December 2014, and passed one year later. The Act imposes mandatory ELI as of 1 July 2016. The Korean government hopes to establish a system designed to compensate and insure against environmental pollution damage. The so-called ‘polluter pays’ principle serves to address situations where a polluting company is unable to meet the financial costs of mitigation or restoration following any environmental impairment incident, and these costs are paid for with tax money. The concept also aims to ensure that victims of pollution incidents are compensated without having to endure lengthy and costly litigation. hide While there is a range of environmental laws and regulations throughout Asia, this is the first act in the region to follow the ‘polluter pays’ principle. And while it bears similarities with the European Union’s 2004 Environmental Liability Directive, there are some unique attributes to the new law that will cast a wide net over impacted industries, said underwriters. “The compulsory insurance component is a relatively new concept and this aspect will lend a hand to drive corporate responsibility and better environment protection,” said Arthur Lu, head of global environmental impairment liability at Allianz Global Corporate and Specialty. The new Korean legislation may also lead other Asian nations to adopt a similar structure, said Mr Lu. “As the topic of environmental protection is gaining more traction beyond the corporate boardrooms, I am positive that other Asian governmental and regulatory bodies will keep a close eye on this new law.” The current compulsory insurance scheme is only accessible locally in Korea through three domestic carriers. However, global insurers that are able to provide international insurance policies can structure programmes that incorporate local cover as part of a master programme, said Mr Lu. “These controlled master programmes provide broad coverage through the master policy, where the client is typically domiciled, and include locally compliant admitted policies where the risk may be situated. A proper global programme should extend coverage, commensurate with risk, comply with local tax and, most importantly, address the client’s needs as they vary by region and country,” he added. The new law will also have some significant implications for risk managers, said Mr Lu. “It will no doubt land on the risk manager’s desk as a priority item, as a matter of complying with local legislation. But the insurance purchase will also assist in overall risk management practices for the client. EIL insurance is another tool for risk managers to quantify and manage risk, and to protect the company’s balance sheet.” Mr Lu said the legislative changes should also raise awareness of environmental risk throughout the Asian corporate environment and not just companies with exposures in South Korea. “Environmental risk transcends country borders, so companies with exposures in other Asian countries could be asking the question: What about China? What about Indonesia? What about India?” Mr Lu also expects the development of EIL to be part of a general increase in liabilities for companies looking to expand in Asia. “With business investments growing, liabilities stemming from such growth are a natural consequence,” said Mr Lu. “Besides traditional property and liability concerns, new liabilities such as EIL, product recall, terrorism and D&O will only get bigger.” In addition to the introduction of mandatory ELI, the South Korean government has brought in tough new anti-graft rules to curb a corporate culture that is thought to be overindulgent on lavish corporate hospitality and prone to corruption. The new law, dubbed the Kim Young-Ran law after the former supreme court judge who drafted the legislation, came into effect at the end of September. It covers more than four million public servants, including civil servants, teachers and journalists. Under the new rules, they will be banned from accepting gifts worth more than 50,000 won ($45) or meals worth more than 30,000 won ($25). Offenders face either a large fine or a possible prison term. In addition, doctors will also be prohibited from offering favourable treatment to personal acquaintances, including rescheduling of surgery dates. South Korea has faced a number of corporate scandals recently. Most notably, in 2015 the then prime minister Lee Wan-koo was forced to resign after being named in a suicide note written by a construction tycoon who had bribed a number of high-ranking officials. Meanwhile, in 2016 a senior prosecutor was indicted for bribery after receiving more than $1m in cash and shares from the country’s biggest online gaming company, while a former presidential candidate who founded the country’s second largest opposition party had to resign after members of his party were accused of receiving bribes. In August 2016, the vice-president of construction conglomerate Lotte Group committed suicide hours before he was due to be questioned over a police investigation into the family-run company’s finances. Korean ‘chaebols’, a form of conglomerate, are thought to be particularly prone to corruption and tax evasion and given their powerful status in the Korean economy, are often immune to thorough investigation. Nor has South Korea ranked particularly well in international corruption tables. In the 2015 Transparency International corruption index of Organisation for Economic Co-operation and Development (OECD) countries, South Korea was ranked 27th out of the 34 countries included. Added to the dim view of the country’s corporate culture, there is also a public lack of trust in officialdom of any kind. A 2015 OECD report stated that almost 70% of South Koreans do not trust the government and less than 30% have any confidence in the country’s judicial system. The new anti-graft laws are intended to help South Korea turn around this image problem. “We believe that the law will be a turning point to create a fair, clean society… and to enhance our national security,” said presidential spokesperson Jung Youn-kuk, speaking to reporters. However, the law has also drawn several complaints from farmers, restaurants, retailers and other local businesses concerned about a stark reduction in domestic consumption. A number of prominent government officials have also cited their opposition. Finance minister Yoo Il-ho and Bank of Korea governor Lee Juyeol have both said the new law is a risk to the country’s economic growth, while the Korea Economic Research Institute has estimated an annual loss of more than 11tn won for the affected industries. The new law also presents Korean corporates with two problems – how do they avoid unwittingly falling foul of the rules and how do they manage to do business without the same level of corporate hospitality? A number of Korean retailers have promoted lower cost gift sets while some restaurants have introduced ‘Kim Young-ran menus’ priced at 29,900 won. In addition a mobile app has been launched that helps people check whether they are subject to the new law, as well as giving further details on the legislation. The Financial Times reports that a number of large Korean companies, such as LG Group, SK Holdings and Hyundai Capital, have held classes for their employees to ensure compliance and help them familiarise themselves with the new rules. “Many of them feel uneasy about building business relationships without such lavish treats,” said Park Jugeun, head of corporate watchdog CEO Score, speaking to the FT. “It will be challenging for them to find other ways of doing business but such changes are overdue. The new law will bring great improvements to our business practices.” As with the EIL laws, the new anti-graft rules will bring South Korea more in line with international business rules. It will also mean a greater role for corporate risk managers both in terms of ensuring compliance but also in exploring possible insurance to cover the potential liability, especially directors’ and officers’ cover.

EIL set to grow in South Korea following new pollution laws

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