Sustainable recycling – emerging liabilities in the circular economy

A circular economy is a market in which products are recycled rather than scrapped, avoiding also the extraction of new resources for new products. In a circular economy, all forms of waste, be that textiles, scrap metal and obsolete electronics, are returned to the economy or used more efficiently.¹ If what today is deemed waste is instead turned into a raw material or a new product, where does the responsibility for product safety of the original producer end, and where does responsibility for a recycled product transfer to the new producer?

The question will become more pressing as the circular economy becomes more commonplace. The European Union (EU) is drafting new legislation in the context of the Green Deal, which aims to make Europe the first climate-neutral continent.² Part of this is the Circular Economy Action Plan directed at sustainable growth.³ Among others, the drafts include proposals for substantiating green claims made by companies,⁴ revisions to regulations on packaging waste,⁵ the Ecodesign for Sustainable Products Regulation,⁶ and a proposal for sustainable and circular textiles.⁷ The intention is to hold firms accountable for the sustainability claims they make, and to provide transparency for consumers and investors. This will change the liability risk landscape.

The circular economy model: less raw material, less waste, fewer emissions

A circular economy can have implications for how existing legislation is applied. For example, a circular economy requires that products can be recycled. Already now, there are discussions about whether the Product Liability Directive of the EU, which requires product safety over its entire life cycle including disposal or recycling, should also apply to damages triggered by products that are not safe to recycle. The latter is often the case with products that have long life cycles. At the time of their development, it may not be foreseeable that one day a product would be recycled, and the original design may not take this future scenario into account.

Case law outside the disposal field provides examples that if producers can see the product will be dealt with in a certain way, they may be held liable.⁸ Hence, if a recycling worker is injured during the phase of dismantling a product so that it can be recycled, the producer could be liable for injuries if the dismantling process was not considered in the original product design.

This kind of cause and effect is not restricted to workplace injuries. In the US, several states have started to regulate waste at the consumer goods level by imposing “circular economy” directives.⁹ Hence, the city of Baltimore is suing cigarette manufacturers for costs born of litter in the city. The losses include the cost of clean-up and disposal of cigarette filters, damage to natural resources and depreciation of property values. And, based on violation of existing state and local pollution laws,¹⁰ a manufacturer can also be subject to fines for dumping by consumers of filter litter in the city.¹¹

The circular economy is gaining traction globally. For instance, Canada has adopted a law to minimise plastic waste, Ecuador has an Organic Law of Inclusive Circular Economy, China a Circular Economy Promotion Law, and Egypt a National action plan for sustainable consumption, to name a few.¹² As momentum gathers, insureds need to make their products circular-economy ready to avoid potential claims under individual countries’ liability laws. This involves considering the entire life cycle of a product, including distribution-related responsibilities. Just because a product can be recycled does not mean it will be recycled (eg, packaging, plastic bottles). This can be an issue when the law mandates that manufacturers recycle all materials.

Whole logistics concepts will have to be rethought. For insurers, this means considering what they cover under product liability business and also how the required materials, parts and sub-components are sourced. And as insureds, manufacturers will need to deepen understanding of their own processes and supply chains to avoid cases of oversight. Careful risk assessment is becoming a new frontier in product and process design.