In a recent blog post I discussed how a comprehensive Phase I Environmental Site Assessment (ESA) and the Bona Fide Prospective Purchaser (BFPP) liability protection can help to protect you from acquisition environmental risk.  Today I’ll look at Environmental Insurance, and how it can help cover the cost of remediation if an environmental hazard is found at your site.

Prior to the mid-1970s General Liability Insurance, the most common type of commercial risk insurance, made no mention of environmental damages.  Then in the wake of the environmental movement and numerous regulations, insurers began to write environmental exclusions into the General Liability Policies, which led to the emergence of a new tool to manage environmental risk: environmental insurance.
Regulations Creating Liability
In 1972 the Clean Water Act was established.  This law established the goals of eliminating releases of high amounts of toxic substances into water by 1985.
Two years earlier, Congress passed amendments that strengthened the scope of the 1967 Air Quality Act with new regulations such as national air quality standards and statutory deadlines for compliance.
In 1976, the Resource Conservation and Recovery Act (RCRA) was enacted. It is now most widely known for the regulations promulgated under RCRA that set standards for the treatment, storage and disposal of hazardous waste in the United States. 
The Comprehensive Environmental Response, Compensation, and Liability Act ( CERCLA), generally known as the Superfund Act, was passed in 1980.  The law provides broad federal authority to clean up releases or threatened releases of hazardous substances that may endanger public health or the environment. 
The law authorized the Environmental Protection Agency (EPA) to identify parties responsible for contamination of sites and compel the parties to clean up the sites. There are liability exemptions for innocent landowners who conduct All Appropriate Inquiry for lenders who do not participate in the management of the facility, and also for Bona Fide Prospective Purchasers.  However attorney fees may be considerable to accomplish these arrangements and some of the environmental policies available can cover this risk. Where responsible parties cannot be found, the Agency is authorized to clean up sites itself, using a special trust fund. 
So was the pattern of liabilities created.   Environmental due diligence, as part of property transactions, became second nature in property transactions.  More investigations meant more environmental risks were being identified, and more environmental claims filed. As a result, insurance companies began to exclude environmental contamination as a covered loss. Always looking for new areas of business, many insurance companies, after underwriting the risk, started writing environmental policies.
Different Kinds of Environmental Insurance
Today, there are a wide range of different environmental insurance types. Some of the key policies are described below (note that these are broad, generalized definitions to provide an overview only – for legal definitions please contact specific service providers and as always, be sure to read the fine print!) 
  • Pollution Legal Liability (PLL) or Site Pollution Liability
This covers third-party claims for cleanup, bodily injury and property damages. Several coverage extensions are available including business interruption.   
  • Cleanup Cost Cap (CCC)
An owner pays an agreed-upon amount for cleanup costs of identified contamination and the insurance company pays any additional costs up to an agreed upon amount. There is very limited insurance market for this coverage.
  • Property Transfer/ Property Owner’s Policy 
Property transfer liability insurance covers the seller and buyer of a property for third-party bodily injury (BI) and property damage (PD) claims and cleanup costs arising out of the property, but only for contamination that had not yet been detected as of the policy’s inception date.
  • Contractor’s Pollution Liability
Insurance for third-party claims for bodily injury and/or property damage and remediation costs stemming from pollution incidents resulting from the contractor or consultant’s covered operations.
  • Errors and Omissions Insurance
Professional liability insurance for consultants’ work.
  • Finite Risk
Transfers the financial liabilities associated with contaminated properties from the legally Responsible Party to an insurance carrier. 
  • Lender Liability 
CERCLA Section 101(20) contains a secured creditor exemption that eliminates 
Owner/operator liability for lenders, who hold ownership in a CERCLA facility primarily to protect their security interest in that facility, provided they do not “participate in the management of the facility. While CERCLA liability exempts the lender from EPA liability, the property has a decreased value and the CERCLA exemption does not extend to state claims.” 
This policy is for the Lender’s benefit in lost value. Typically the policy is designed to cover the lesser of: (i) the outstanding covered loan balance due on the date of default with respect to the insured real property that s found to be contaminated; (ii) the cost to clean up such property or (iii) the fair market value of the covered location at the time the loan closed. State and third-party bodily and property claims against the lender can be covered. 
  • Institutional Controls and Post Remediation Care Insurance
This type of insurance is directed at property buyers or owners who undertake the remediation of a site under an EPA “Brownfields” or state Voluntary Cleanup Program with the goal of making the site safe.  These programs often have post-remediation responsibilities for the owner. A recurring issue at sites in the program is the responsibility of the participants in maintaining land use restrictions and performing long-term operation and maintenance that may be part of an approved remedial action. Concern over these contingent risks and responsibilities could deter a party otherwise willing to proceed with a brownfield development.  An insurance program to transfer the risk associated with these long term responsibilities to a financial entity would reduce the owner’s concern. It is possible to include a “reopener” clause if more contamination is discovered or environmental regulations change in the future.   
The EPA has created a table outlining the various types of environmental liability insurance.
Accessing Coverage 
After insurance companies figured out how to underwrite pollution risk they started writing separate environmental policies. A significant difference between older conventional policies and environmental insurance is that conventional policies cover “per occurrence” events, meaning a claim can be made even after the policy expires. Today, environmental insurance is typically written on a “claims made” basis meaning that the insurance only covers events while the policy is in force. 
Property owners may be able to access insurance coverage purchased by someone else, for example by being listed as a co-insured or when contamination has resulted from problems at neighboring sites. 
As a general matter, policies do not cover purely voluntary undertakings, so the client should be careful if it elects to proceed with voluntary clean-up efforts and may have to take extra steps to ‘trigger’ the insurance’s cover obligations.
Environmental Consultants and Insurance
All environmental consultants do not necessarily specialize in environmental insurance – understandably so, because it’s not an area of expertise for many.  However, it is often an important component in environmental due diligence and environmental remediation, which means that many of us have become quite savvy about it.  
Clients benefit from an environmental consultant that understands both insurance and the relevant regulatory frameworks that can come into play, and really we benefit too because insurance is often how we get paid during cleanups!  
But of course, there’s some obligatory disclaimer language: to be absolutely sure you’re choosing the right type of insurance, you should seek the advice of a qualified specialist in environmental insurance. The specialist can either be an attorney schooled in insurance who is experienced in obtaining environmental insurance, or a specialist environmental insurance broker with credentials relating specifically to environmental risk management insurance.  Each situation is unique and often complicated, and sound advice from qualified practitioners can be priceless.
The bottom line is that many environmental investigation and cleanup costs may be covered by insurance, but it may require a bit of creative detective work.