Coverage for liabilities arising from environmental contamination is generally excluded under the standard form Comprehensive General Liability ("CGL") insurance policy in use since 1985. The text of the so-called "absolute pollution exclusion" runs on for about three pages, but essentially precludes coverage for bodily injury, property damage, clean-up costs, and government contribution claims arising from the actual, threatened, or alleged release of "pollution." The breadth of this clause has persuaded many insureds that environmental insurance is simply not available.
(Anyone confronted with an unexpected environmental liability should not overlook the possibility that a current or prior CGL policy may provide coverage. There is considerable litigation about the interpretation of pollution exclusions, and pre-1973 policies without pollution exclusions may provide coverage in the case of historic but newly-discovered contamination.)
In fact, over the last 20 years, the insurance industry has been developing and refining a large variety of environmental insurance products that are now widely available. As their experience with environmental claims has grown, insurers have gained a clearer understanding of the risks of these products, and as a result, many of these policies are offered with attractive premiums.
This article describes the most common types of environmental insurance policies and presents examples of business situations in which these tools may be appropriate.
The problem: XYZ Buyer, Inc. is contemplating an asset purchase from ABC Seller, LLC. involving several small strip malls. Phase I environmental assessments of the properties reveal no specific contamination, but past uses of the properties (e.g. former gasoline station, automobile painting and detailing) are potential sources of contamination, and the surrounding neighborhoods have industrial histories. ABC Seller, LLC insists the properties be transferred "as-is." XYZ Buyer, Inc. is concerned over potential environmental liabilities, particularly as it plans to raze the properties and will be excavating for new foundations.
The tool: Pollution liability insurance. This type of policy typically provides coverage for third-party claims for remediation costs, property damage, and bodily injury, and coverage for first party (the policy holder) claims for remediation costs required by regulators. Legal defense costs may also be covered. Coverage is generally available for unknown environmental liabilities, or for newly-discovered pre-existing conditions. Coverage may be available on a blanket basis for multiple properties. In the example above, a pollution liability policy could "close the gap" between the parties and allow the transaction to go forward. Of course, allocation of the cost of the premium will be subject to negotiation.
The problem: Ms. Buyer has negotiated a purchase agreement with Joe Seller LLC for the purchase of a car wash, gasoline station, and repair shop complex. Joe Seller LLC is willing to provide an indemnity for environmental claims. Ms. Buyer's lender laughed at her when she asked for a loan, particularly after it looked at Joe Seller's financial statement.
The tool: Lender pollution liability insurance. A lender policy typically protects a lender in the event of a default of a commercial real property loan caused by environmental remediation costs, and will cover the lesser of the outstanding loan balance, or the clean-up costs. A reluctant lender may be less reluctant when provided with this type of protection.
Another tool: Industry-specific environmental policy. Ms. Buyer might also allay the concerns of her lender by purchasing an environmental insurance policy designed specifically for retail gasoline facilities. Since most of the environmental remediation exposure for underground storage tank petroleum releases is absorbed by state petroleum funds, like Nevada's, these policies are surprisingly affordable, and can be designed to complement the coverage available from a state fund.
The problem: Owner Corp. has discovered a plume of groundwater contamination apparently resulting from a release of HazMatX from business operations on its property. The state is requiring that it conduct a corrective action, including on and off-site remediation. Owner Corp.'s consultant estimates the clean-up cost to be approximately $1.5 million. Owner Corp. can absorb the cost of the clean-up, but wants to insure against unforeseen cost overruns.
The tool: Cost cap insurance. Cost cap or "stop loss" policies are generally tailored to a specific clean-up project, and may cover costs that exceed a certain percentage overrun, or may be designed to be triggered by certain unforeseen events, such as a change in regulatory requirements or a failure of the chosen remedial technology.
Other tools: Contractor's pollution liability insurance, error and omissions insurance. Since Owner Corp. will be placing great reliance on its environmental contractors, Owner Corp is requiring its environmental contractors and consultants to obtain pollution liability insurance and E&O insurance that will provide coverage for environmental damage created or exacerbated by their actions.
Although many of the types of policies described above are available as standard form policies, manuscripted policies, such as policies designed for a specific property or circumstance, are also available. In addition to the service station policies discussed above, many industry-specific policies are available, and anyone engaged in operations with a high degree of known environmental risk should investigate the cost and availability of environmental coverage. Most environmental policies have relatively high deductibles or required self-insured retentions. Premiums are generally paid up-front, and cover variable periods of risk, usually ten years or less. Anyone contemplating the purchase of one of these products should carefully examine the policy, including key definitions and the covered and excluded risks. Finally, descriptions of these products are not intended as recommendations, and every situation requires a thoughtful analysis of actual environmental risk versus the cost of this protection.
Sylvia Harrison, a former geologist, is co-chair of McDonald Carano Wilson's energy, environment and natural resources group. Contact her at www.mcdonaldcarano.com.
