Taking a Closer Look at Environmental Insurance

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

Prior to the mid-1970s General Liability Insurance, the mostcommon type of commercial risk insurance, made no mention ofenvironmental damages. Then in the wake of the environmentalmovement and numerous regulations, insurers began to writeenvironmental exclusions into the General Liability Policies, whichled 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 lawestablished the goals of eliminating releases of high amounts oftoxic substances into water by 1985. Two years earlier, Congress passed amendments thatstrengthened the scope of the 1967 AirQuality Act with new regulations such as national air qualitystandards and statutory deadlines for compliance. In 1976, the Resource Conservation and Recovery Act (RCRA) wasenacted. It is now most widely known for the regulationspromulgated under RCRA that set standards for the treatment,storage and disposal of hazardous waste in the UnitedStates. The Comprehensive Environmental Response, Compensation, andLiability Act (CERCLA), generally known as the Superfund Act, waspassed in 1980. The law provides broad federal authority toclean up releases or threatened releases of hazardous substancesthat may endanger public health or the environment. The law authorized the Environmental Protection Agency (EPA) toidentify parties responsible for contamination of sites and compelthe parties to clean up the sites. There are liability exemptionsfor innocent landowners who conduct AllAppropriate Inquiry for lenders who do not participate in themanagement of the facility, and also for Bona Fide ProspectivePurchasers. However attorney fees may be considerable toaccomplish these arrangements and some of the environmentalpolicies available can cover this risk. Where responsible partiescannot 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 ofproperty transactions, became second nature in propertytransactions. More investigations meant more environmentalrisks were being identified, and more environmental claims filed.As a result, insurance companies began to exclude environmentalcontamination as a covered loss. Always looking for new areas ofbusiness, many insurance companies, after underwriting the risk,started writing environmental policies. Different Kinds of EnvironmentalInsuranceToday, there are a wide range of different environmentalinsurance types. Some of the key policies are described below (notethat these are broad, generalized definitions to provide anoverview only - for legal definitions please contact specificservice providers and as always, be sure to read the fineprint!)

Pollution Legal Liability (PLL) or Site PollutionLiability

This covers third-party claims for cleanup, bodily injury andproperty damages. Several coverage extensions are availableincluding business interruption.

Cleanup Cost Cap (CCC)

An owner pays an agreed-upon amount for cleanup costs ofidentified contamination and the insurance company pays anyadditional costs up to an agreed upon amount. There is very limitedinsurance market for this coverage.

Property Transfer/ Property Owner's Policy

Property transfer liability insurance covers the seller andbuyer of a property for third-party bodily injury (BI) and propertydamage (PD) claims and cleanup costs arising out of the property,but only for contamination that had not yet been detected as of thepolicy's inception date.

Contractor's Pollution Liability

Insurance for third-party claims for bodily injury and/orproperty damage and remediation costs stemming from pollutionincidents resulting from the contractor or consultant's coveredoperations.

Errors and Omissions Insurance

Professional liability insurance for consultants' work.

Finite Risk

Transfers the financial liabilities associated withcontaminated properties from the legally Responsible Party to aninsurance carrier.

Lender Liability

CERCLA Section 101(20) contains a secured creditor exemptionthat eliminates Owner/operator liability for lenders, who hold ownership in aCERCLA facility primarily to protect their security interest inthat facility, provided they do not “participate in the managementof the facility. While CERCLA liability exempts the lender from EPAliability, the property has a decreased value and the CERCLAexemption 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) theoutstanding covered loan balance due on the date of default withrespect to the insured real property that s found to becontaminated; (ii) the cost to clean up such property or (iii) thefair market value of the covered location at the time the loanclosed. State and third-party bodily and property claims againstthe lender can be covered.

Institutional Controls and Post Remediation Care Insurance

This type of insurance is directed at property buyers orowners who undertake the remediation of a site under an EPA“Brownfields” or state Voluntary Cleanup Program with the goal ofmaking the site safe. These programs often havepost-remediation responsibilities for the owner. A recurring issueat sites in the program is the responsibility of the participantsin maintaining land use restrictions and performing long-termoperation and maintenance that may be part of an approved remedialaction. Concern over these contingent risks and responsibilitiescould deter a party otherwise willing to proceed with a brownfielddevelopment. An insurance program to transfer the riskassociated with these long term responsibilities to a financialentity would reduce the owner's concern. It is possible to includea "reopener" clause if more contamination is discovered orenvironmental regulations change in the future. The EPA has created a table outlining the various types ofenvironmental liability insurance. Accessing Coverage After insurance companies figured out how to underwritepollution risk they started writing separate environmentalpolicies. A significant difference between older conventionalpolicies and environmental insurance is that conventional policiescover "per occurrence" events, meaning a claim can be made evenafter the policy expires. Today, environmental insurance istypically written on a "claims made" basis meaning that theinsurance only covers events while the policy is inforce. Property owners may be able to access insurance coveragepurchased by someone else, for example by being listed as aco-insured or when contamination has resulted from problems atneighboring sites. As a general matter, policies do not cover purely voluntaryundertakings, so the client should be careful if it elects toproceed with voluntary clean-up efforts and may have to take extrasteps to 'trigger' the insurance's cover obligations. Environmental Consultants and InsuranceAll environmental consultants do not necessarily specialize inenvironmental insurance – understandably so, because it's not anarea of expertise for many. However, it is often an importantcomponent in environmental due diligence and environmentalremediation, which means that many of us have become quite savvyabout it. Clients benefit from an environmental consultant thatunderstands both insurance and the relevant regulatory frameworksthat can come into play, and really we benefit too becauseinsurance is often how we get paid during cleanups! But of course, there's some obligatory disclaimer language: tobe absolutely sure you're choosing the right type of insurance, youshould seek the advice of a qualified specialist in environmentalinsurance. The specialist can either be an attorney schooled ininsurance who is experienced in obtaining environmental insurance,or a specialist environmental insurance broker with credentialsrelating specifically to environmental risk management insurance. Each situation is unique and often complicated, and soundadvice from qualified practitioners can be priceless. The bottom line is that many environmental investigation andcleanup costs may be covered by insurance, but it may require a bitof creative detective work.

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Mr. Grossman has 40 years experience years of experience in architecture, construction and due diligence consulting throughout the United States. A respected veteran in the due diligence industry, Mr. Grossman has provided engineering and environmental services to major corporations both as an internal resource and as a third-party consultant.