Environmental Insurance Can Address Liability Problems, if You Lay the Groundwork

• By Carol Press
• 10/01/03

Insurance companies are offering a relatively new type of policy that may give college administrators a way to address liability for environmental cleanup. The complexity of environmental issues and the size of the liabilities make these policies different from off-the-shelf products. Before buying an environmental liability policy, administrators should:

-- identify the risks they want to cover;

--understand the history of the site and the technical issues relating to contamination and remediation; and

-- rely on someone familiar with insurance coverage, environmental statutes and case law under the Superfund Act (CERCLA).

The new environmental insurance policies fall into two broad categories.

1. Cost-cap policies typically provide coverage when a claim requiring the insured to incur cleanup costs has already been made. They usually cover cost overruns and other cost increases resulting from unexpected factors (e.g., a change in law or the failure of a remedy) up to a limit beyond a self-insured retention.

2. Pollution legal liability policies provide coverage for a broader range of environmental exposures, provided that claims are first made during the policy period.

Here are examples of situations in which these environmental liability policies may prove effective.

-- Capping CERCLA liability: A college-owned land that was previously the site of a manufacturing facility, the owners of which are now insolvent. Administrators, facing large environmental liabilities under CERCLA, want to cap its exposure and reduce unknown liabilities for planning and balance sheet reasons.

-- Buying facilities with environmental problems: A school is interested in purchasing a facility with environmental liabilities. It does not, however, wish to obligate itself to unknown environmental costs and does not feel that standard indemnity and liability-shifting contract provisions would be effective.

-- Selling contaminated property: Administrators want to sell an environmentally contaminated site, but are unwilling to establish an escrow fund to cover unknown liabilities.

-- Providing settlement protection: The potentially responsible parties (PRPs) at a Superfund site wish to enter into a final settlement agreement although potential cleanup costs have not yet been fully quantified.

Some of the most common issues include the following.

-- What risks do you want to insure? Once administrators have identified the risks, they should review the policy to determine whether they come within at least one of the coverage sections and to ensure that they do not come within any of the coverage exclusions.

-- Is cost-cap insurance appropriate? Cost-cap insurance is most frequently used when a remedy has already been selected for the site. However, if there is enough information available for the insurer to underwrite the risk, it is possible to get cost-cap insurance even before remedy selection. If administrators are undertaking a cleanup and want to limit the college's exposure, cost-cap insurance is worth considering. If administrators want to insure against both the increased costs of a cleanup and possible future claims, they should consider a combined cost-cap/PLL policy.

-- How much risk is a college willing to retain? The higher the deductible or self-insured retention, the lower the premium.

-- Will claims made during the policy period be "claims first made?" If administrators are considering PLL coverage, which typically provides insurance only for claims first made during the policy period, they should be sure there are no existing claims to preclude coverage.

-- What policy period is appropriate? Unlike a typical Commercial General Liability (CGL) policy, cost-cap and PLL policies often have a relatively long term - five or 10 years, or even more. For cost-cap coverage, costs must be incurred during the policy period.

-- How much will the policy cost? It is difficult to predict how much an extra $20 million or $100 million in coverage will cost or how much it will save by increasing its self-insured retention. A college should get several premium quotations from each insurer for different levels of coverage and self-insured retentions.

Environmental insurance offers an opportunity to address difficult problems. With sufficient planning and caution on the part of the college, it can be a powerful tool in controlling exposure, settling a seemingly unsettleable claim or closing a difficult transaction.