Taking a Closer Look at Environmental Insurance

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!)