E nvironmental remediation projects have a also allow businesses to - - PDF document

Environmental Alert

March 2005

Insurance Issues for Environmental Consultants

By Franklin W. Boenning, Esq.

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nvironmental remediation projects have a reputation for taking longer and costing more than expected, and property owners run the risk of third party claims for personal injury and property damage until the remediation is

• complete. All of these factors combine to make an

environmental project a very costly and, potentially risky, endeavor. Fortunately, a wide range of insurance products are available to spread this risk and protect property owners and

• consultants. Understanding the various types of

products available, both old and new, can make the difference between a huge success and a crushing failure on a remediation project. Because they

• ften deal with property owners and developers

with very little experience in the environmental arena, environmental consultants are in a unique position to assist their clients in understanding, and profiting from, these insurance products.

Using Insurance to Offer Fixed Price Remediation Contracts

There are several insurance products which can be used by consultants to cap environmental remediation costs for their clients and offer fixed price remediation contracts. Using these products can often assist clients by providing certainty that remediation costs will not exceed budgeted estimates or reserves, and in certain instances can allow clients to transfer risk to third parties and remove environmental liabilities from their balance

• sheets. Remediation cost certainty/certainly will

also allow businesses to undertake financing of environmental liabilities, allow transactions to proceed with a reserve, and cap unknown

• liabilities. Two types of policies available that can

assist these projects are known as remediation “cost cap” and “finite risk” policies. A cost-cap policy provides insurance coverage for the cost of remediation above the estimated remediation cost plus a “buffer” or retained

• amount. The cost of these policies depends on the

certainty of cleanup costs, the amount of the buffer, and the term and limits of the policy. The buffer, which in many cases can be viewed as a typical contingency in engineering estimates, is typically 10 - 25% of the estimated remediation cost. Although the term and limits available on these policies has been somewhat restricted in recent years, the term can be up to 20 years and the limits can be up to several multiples of the estimated remediation cost. With a cost cap policy, the insured retains the obligation to complete the remediation, and it is only when the remediation costs exceed the estimated cost plus the buffer that the insurance company begins to pay out on the

• policy. The insurer will then pay remediation costs

up to the limits of the policy purchased. Of course, if the remediation cost exceeds the limits on the policy, liability reverts to the property owner. A “finite risk” policy combines a cost-cap policy with a “pollution legal liability” policy to effectively transfer the risk of environmental contamination to

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This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. 65 Livingston Avenue www.lowenstein.com

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Roseland, New Jersey 07068-1791 Telephone 973.597.2500 Fax 973.597.2400

a third party. The property owner pre-pays the entire estimated present value of the remediation cost, plus a premium representing the risk transfer and uncertainty on the expected remediation cost. The pollution legal liability policy provides protection from third party claims against the insured for damages caused by the contamination, including off-site property damage, personal injury and the like. The property owner thereby pre-pays his entire remediation cost and the insurance company hires the contractor to perform the

• remediation. If the actual remediation cost exceeds

the estimate, the cost-cap policy kicks in to cover the overrun. If actual remediation costs are less than anticipated, a portion of the difference can

• ften be refunded to the property owner. So long as

the ultimate remediation cost does not exceed the estimated cost of the cleanup, plus the amount of the cost-cap insurance purchased, he is absolved of all responsibility for the remediation and any third party claims related thereto.

Using Insurance to Finance Remediation

Most property and business owners historically have procured commercial general liability (CGL) insurance to protect their business from the risk of damage to the property of others. In New Jersey, the groundwater underlying your own property is

• wned by the State, and is therefore considered the

property of others. When contamination is discovered that has, or has the potential to, impact groundwater, you have damage to the property of

• thers. At least until roughly 1986, when the

“absolute pollution exclusion” was added to the standard terms of these policies, CGL policies covered environmental contamination that impacted groundwater. So long as you can document that the release or contamination commenced prior to the imposition of the absolute pollution clause in your clients’ insurance policies, it is likely that coverage will be available. Given the often exorbitant cost of environmental investigation and remediation, knowledge of the potential availability of insurance coverage can very often mean the difference between a site being remediated promptly and efficiently and a company going bankrupt. Needless to say, an environmental consultant that can point a property owner to a source of funding for an otherwise crippling liability will likely be a friend for life. Knowing when to search for historic policies, where to find them, and how to demonstrate the age of contamination will allow consultants to guide their clients through the difficult insurance process and can make the difference in a claim paid and a claim denied. In New Jersey, most CGL policies issued prior to 1986 contained a pollution exclusion which was ineffective in excluding claims for pollution events so long as they occurred gradually and were not

• intentional. Under New Jersey's “continuous

trigger” of coverage, all CGL insurance policies in effect during the period that pollution existed respond to a cleanup. Remediation costs are prorated among the policies based upon the time

• n the risk as well as the limits of coverage. Of

course, any periods when coverage cannot be shown, or the existence of policies cannot be determined, may be picked up by the insured. Fortunately, however, New Jersey law is very favorable when it comes to lost policies. So long as some evidence of coverage exists, including cancelled checks, renewal notices, policy summaries, brokers’ records or other evidence, the existence of insurance coverage will be found. In some cases, an “insurance archaeologist” can be very useful in determining the existence, and terms,

• f lost policies.

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To sum it up, your client can expect to be provided coverage for its environmental cleanup costs so long as: 1) contamination commenced prior to 1985; 2) groundwater must be cleaned up; and 3) the property owner can identify its pre-1985 insurers.

Conclusion

Using cost-cap and finite risk insurance policies, an environmental consultant can offer a fixed price remediation contract to his client, allowing the client the peace of mind that comes with certainty

• f remediation costs. These insurance products

can be invaluable to the client looking to clean up a balance sheet or transfer a piece of contaminated property by assuring that the future environmental costs are capped or eliminated. In addition, the existence of historic CGL policies may provide much needed funding for your client’s environmental problem, and your next project. If you would like to discuss the issues addressed in this Alert, please contact Franklin W. Boenning, Esq. of Lowenstein Sandler’s Environmental Law & Litigation Practice Group at 973.597.2430

• r

fboenning@lowenstein.com.