Transferring environmental liability

Transferring environmental liability

Britt, Scott

In the past, environmental liabilities were notorious for killing business deals. Most businesses didn’t know how to handle their own liability issues, much less take on someone else’s. With the abundance of merger and acquisition activity taking place across all industries, it may seem that environmental liability is not a big concern. It still is, though. Only now, with advances in risk management strategies, the presence or possibility of hidden environmental exposures is no longer squashing deals.

Environmental insurance is playing a more integral role in mergers and acquisitions, providing a financial safety net and allaying concerns for buyers and lending institutions. Because of the potentially high cost of settling environmental claims, lenders may charge more on debt or choose not to issue a loan at all when liabilities are suspected. With increased availability and affordability of insurance programs, lenders now see environmental coverage as an effective risk transfer tool that is less risky than relying merely on due diligence, and are more often requiring it as part of a loan agreement. In fact, a recent Moody’s Investor Services report went so far as to cite environmental insurance as an acceptable substitute for environmental due diligence that could, in some cases, have the potential to provide credit support benefit for certain commercial mortgage-backed security transactions.

Worrying about all the details of the transaction, it may be easy to overlook potential environmental concerns, but that wasn’t the case when The United Company of Bristol, Virginia was selling off a mining-supply company and purchasing a roofing-supply firm. United, which is privately held and generated some $351 million in revenue in 1998, owns a variety of diverse businesses, among them golf course management, construction supplies, financial services, oil and gas, and merchant banking. The company takes environmental risk management seriously, and didn’t lose sight of its importance during this transaction. Instead, it purchased an environmental insurance policy with a $4 million aggregate liability limit. The United’s vice president of risk management, Tom Griffin, its broker, Charter Insurance & Consulting of Atlanta, and ECS Underwriting of Exton, Pennsylvania, designed one comprehensive policy to transfer the risks of the mining company and the roofing business. The policy not only offered protection against future environmental claims for both businesses, it also assured the buyer of the mining division that it would not be held accountable for pollution caused by The United Company in the past.

The cushion of protection that insurance gives buyers has been an effective deal-closer in other instances. Take the case of one petroleum company. Years after the owner’s death, his estate sought to sell off the company’s assets, including twelve bulk storage facilities and four propane distribution centers. A major power utility soon showed interest in acquiring them.

As the sites required $10 million in cleanup and the buyer obviously did not want to assume this liability, it suggested the estate place $10 million in escrow to assure availability of the money for the cleanup. Anxious to sell the property, rid itself of any liability associated with it and liquidate the company’s assets in a timely manner, the estate sought another solution.

Under the guidance of its broker, the Graham Company of Philadelphia, the estate purchased a finite risk program that combined insurance with a funding mechanism for known and unknown environmental liabilities. The insurance policy, with a $75 million liability limit, offered several kinds of coverage, including first and third-party coverage for on- and off-site bodily injury, property damage, remediation expenses, legal defense and remediation stop-loss coverage to help cap the costs of known cleanup activities. Instead of restricting $10 million in an escrow fund, the company set aside $4 million toward the remediation. Its insurance provider took on the responsibility of overseeing the $4 million dollar fund, from which it will pay expenses toward the remediation of the distributor’s properties for the new buyer. The additional $6 million of the anticipated $ 10 million cleanup expenses was fronted by the insurer, which will work to collect the additional money entitled to the company from other sources. In this case, money will be sought from the petroleum company’s existing insurance policy and from the Pennsylvania Underground Storage Tank Indemnification Fund, established in 1994 to help UST owners pay the cost of cleanup, remediation and third party damages resulting from product release.

Exercising the same business sense that helps grow a business, more risk managers are taking advantage of innovative insurance programs that keep environmental concerns from ever becoming deal breakers.

Scott Britt, ARIM is vice president and Jane DeRafelo is assistant vice president of ECS Underwriting’s Industrial and Commercial Facilities Business Unit. Headquartered in Exton, Pa., ECS, an XL Capital Company, is an underwriting manager providing integrated environmental risk management solutions worldwide.

Copyright Risk Management Society Publishing, Inc. Feb 2000

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