Potentially costly environmental risks often present difficult obstacles for parties purchasing or selling real estate or engaging in corporate mergers, acquisitions or divestitures. While environmental liabilities are sometimes easily quantifiable, the differing perceptions of opposing parties regarding such risks can at other times present deal threatening issues. Traditional tools to allocate risk in transactions, including indemnification clauses, representations and warranties and escrows, cannot always resolve disputes over environmental risks. Furthermore, outside of the transaction context, property owners and other parties are increasingly seeking methods of defining and limiting their exposure from known and unknown environmental conditions. The insurance industry has gradually developed a broad range of risk-specific environmental insurance products in an attempt to meet these needs.
Numerous factors, including the insurance industry's growing experience in underwriting environmental risks, the expansion of the market, and the regulatory trend favoring risk-based clean-ups, have increased the availability of broader insurance coverages for reduced premiums. These insurance policies can be tailored to specific situations and, particularly when used in conjunction with more traditional risk shifting tools, can be very useful in transferring certain types of environmental risks.
This issue of the Environmental Law Update will briefly summarize the range of currently available environmental insurance products, identify several companies offering these policies, and discuss a number of issues to be considered in evaluating and negotiating environmental policies.
Available Products. The environmental insurance products available today differ from the traditional comprehensive general liability (CGL) policies that spawned decades of litigation over coverage for environmental risks. Environmental-specific coverages currently available include: Pollution Legal Liability (PLL) policies, which can cover the cost of clean-ups required by law and injury or property damage claims arising out of known and unknown environmental contamination; Cleanup Cost Cap (CCC) policies, which are designed to cap the cost of remediating known contamination; and Contractors Operations and Professional Services (COPS) policies, for risks associated with work performed by contractors, consultants and architects. Within these broad categories of products, policies can be issued with distinct coverages for risks including onsite and offsite contamination, known and/or unknown contamination, and pre-existing and/or new conditions.
Multiple Insurers Sell Environmental Policies; Solicit Multiple Proposals. A growing number of companies sell environmental insurance policies, including: American International Group Inc., Chubb Corp., the ECS Companies, Kemper Insurance Co., and Zurich North America. While many of these companies offer similar types of policies (including PLL, CCC, COPs and other policies), distinct variations exist in the standard language (or "specimen" policies) used by different companies. Furthermore, individual companies make different underwriting decisions, which can affect the breadth of coverage offered, the level of premiums charged, and the insurers' relative willingness to "tailor" policy language to meet the needs of a particular purchaser. Accordingly, prospective purchasers of environmental policies generally should obtain and evaluate proposals from more than one insurance company.
Specific Issues To Consider In Evaluating Policies. The value of any environmental insurance policy is, by definition, limited to the coverage provided by that policy. The "term" of the policy, the monetary "limits" of the policy, the amount of the "premium" and any "deductible" or "co-insurance" provisions are among the basic criteria typically used in marketing and reviewing policies. Numerous other terms and conditions can also dramatically affect the coverage provided. Significantly, insurance companies selling these types of policies are often willing to negotiate modified policy language in an attempt to minimize ambiguities and address concerns raised by potential policyholders. As with any other type of contract, when evaluating a proposal, a prospective purchaser should review the provisions that can limit coverage and undertake to clarify or modify potentially problematic contract language. Examples of policy provisions and related issues to review include the following:
- Policy Term/Extended Reporting Provisions: Claims Made and Reported Issues. Because environmental policies typically are issued as "Claims Made" or "Claims Made And Reported" policies (rather than on an "occurrence" basis as historically was the case with CGL policies), coverage generally is provided only for claims made against the policyholder and reported to the insurance carrier within the policy period and/or an extended reporting period. Therefore, the policy term, any extended reporting period(s), and the policyholder's right to renew the policy are extremely important in analyzing the extent of the coverage provided.
- Exclusions. Environmental policies often specifically exclude from coverage certain types of liabilities related to environmental matters. Examples of frequent exclusions include: liabilities arising from pre-existing conditions known to the policyholder but not disclosed to the insurance company at the time of the application; liabilities assumed by the insured by operation of contract (unless the contract is specifically identified in an endorsement); liabilities arising from the willful misconduct of the insured; and liabilities arising from specific hazards such as asbestos, lead paint or known (but not disclosed) leaking underground storage tanks. The known but not disclosed pre-existing condition exclusion underscores the need for policyholders to be extremely thorough in completing applications, and in documenting the materials provided to the insurance company during the underwriting process.
- Future Site Investigations. Some policies attempt to restrict a policyholder's right to perform site investigations in the absence of a directive from a regulatory authority. Potential policyholders should carefully consider whether this is practical given the possible changes in the use of the property, future expansion or development, or the likely demands of the policyholder's lender(s), potential purchaser(s), or tenant(s).
- Change in Operations. PLL policies frequently purport to terminate coverage if there is a material change in operations at a covered site.
- Additional Insureds/Knowledge Issues. Particularly in the transaction setting, parties frequently desire to enable more than one party to make a claim against an environmental policy. This can be accomplished by identifying "Additional Insureds" or "Additional Named Insureds," with each title carrying different rights and responsibilities under insurance policies. However, in such situations, the policyholder should also consider seeking a "Severability of Interests Endorsement" to minimize the possibility that a claim by the policyholder could be jeopardized by something known or done by the Additional Insured(s).
- Earned Premium Provisions. Most environmental policies are written so that all or substantially all of the premium is deemed to be earned as of the start of the policy period, and the insurance company typically will not refund any of the premium if the policy is later cancelled.
- Interaction With Traditional Risk Transfer Mechanisms. In the transaction context, it often is necessary to coordinate the interaction between environmental insurance and traditional risk transfer mechanisms. For example, if an escrow is to be established as part of a transaction or if a potential policyholder may have a right to recover cleanup costs from other responsible parties, the policyholder should consider (a) seeking an endorsement designed to maximize the policyholder's flexibility to pursue different alternatives (i.e., recovery under the policy, from the escrow and/or from other responsible parties) and (b) explicitly limiting the insurance company's recourse against the escrow.
- Tax treatment. The premiums paid for certain types of environmental policies may be tax deductible as an insurance expense; therefore, potential policyholders should analyze the potential tax consequences in evaluating the purchase of specific environmental policies.