By: Bruce Martin
In transactions where significant environmental issues are a concern, it is important for dealmakers to understand how best to control associated risks. While common mechanisms for doing so may include purchase price reductions, escrow accounts and indemnification agreements, these tools sometimes fail to provide the comprehensive protection that may be necessary. Another mechanism used to control environmental risks associated with a transaction is the use of Pollution Legal Liability (PLL) insurance. PLL policies protect policyholders against third-party claims for property damage, personal injury and cleanup costs relating to environmental contamination.
During the Redevelopment Institute’s recent webinar entitled Tidal Wave of Change: What you should know about PLL insurance today, Scott Houldin and Karl Touet of Twin Elms Environmental cite the following risks that may remain in a deal:[1]
- Redevelopment and capital improvements
- Changes in federal and state regulatory standards
- Limited environmental assessments
- Financial solvency of indemnitor
- New releases from ongoing operations
Parties involved in a transaction with these types of environmental risks often look to PLL policies to protect against these risks. Increasingly, lenders are requiring such coverage in property transactions. Property owners may also face regulatory cleanup requirements related to underground storage tanks or other environmental hazards. Other drivers for the purchase of PLL insurance include contractual requirements and general risk management.
How can you protect yourself from these potential risks on your next deal?
A PLL policy is designed to address the numerous environmental exposures for the insured with one expansive policy solution. PLL insurance is broader and offers more thorough buyer protection than traditional transaction tools including on-site and off-site cleanup of historical and new environmental conditions, third-party claims for bodily injury and property damage and even natural resource damages, among others. In addition to highly effective environmental risk management, other benefits include:[2]
- Provides coverage for past, current, and future environmental issues
- Provides assurance for unknown environmental liabilities in asset transactions
- Commonly accepted in lieu of environmental indemnities or can be structured to wrap around indemnities
- Insures against business interruption losses resulting from pollution conditions
- Enhances financing prospects by allowing creditor protections – Buyer, seller, lender and/or tenant can be named insureds
- When broadly structured, can fill the gap in General Liability policies
When is PLL insurance is the best choice?[3]
There are several considerations that interested parties should evaluate when looking at using a PLL policy as a risk mitigation tool for environmental risks.
PLL policies are typically issued as claims made or claims made and reported policies, rather than on an occurrence basis. With a claims made PLL, 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.
Another important consideration is timing. A prospective insured will want to ask: What time period is covered by the policy? Policies have differing requirements concerning (1) when a claim must be made against the policyholder to be covered under the policy, and (2) when a policyholder must ask its insurer to provide coverage. Extended “reporting periods” can sometimes be purchased for an additional cost.
Finally, the definition of what constitutes a “covered event” is critical, and must match the company’s specific risks and exposure. Whether the risks relate to leaks, spills, fumes, a specific factory, or surrounding geographic features like bodies of water, they should be carefully analyzed and compared to the language in the policy.
What are we seeing in the industry?
PLL coverage has expanded over the years, and parties involved in acquisitions in all types of industries are looking at some form of coverage to address a variety of environmental liabilities. Whether it is to comply with state underground storage tanks (UST) regulations; address Natural Resource Damage (NRD) claims or Securities and Exchange Commission (SEC) issues, mold issues, property transactions; or protect assets from day-to-day environmental risk, many organizations are looking to PLL to serve as a financing mechanism for mitigating environmental risk.
The key to the successful use of PLL insurance is thorough and ongoing communications between all parties involved including the insured, the insurers, brokers, lenders, and consultants. Careful review and understanding of the environmental risks associated with a transaction through in-depth environmental due diligence allows for the design and structure of a PLL policy that benefits all and protects against environmental risks in mergers and acquisitions. For more information on PLL insurance or other transaction mechanisms to manage deal risk, contact Bruce Martin.
[1] Tidal Wave of Change: What you should know about PLL insurance today, Scott Houldin and Karl Touet of Twin Elms Environmental
[2] Tidal Wave of Change: What you should know about PLL insurance today, Scott Houldin and Karl Touet of Twin Elms Environmental
[3] https://www.marsh.com/us/insights/research/managing-risks-in-ma-representations-and-warranties.html
ABOUT THE AUTHOR As a certified professional environmental auditor (CPEA), Bruce Martin has 23 years of varied experience in environmental management consulting, including environmental, health and safety auditing; merger and acquisition environmental due diligence; environmental management systems; site assessments, training, and environmental investigations… Read More
