Everyone on commonground uses insurance in their personal lives and in business.  However, no-one expects to have a fire or die tomorrow.  Why then do you have fire and life insurance insurance?  Either because it’s required – or because it provides a benefit!  Every environmental consultant has (or should) have environmental insurance in the form of professional liability insurance. 

 

Accordingly we can start with the 1 of the 3 major forms of environmental insurance – (1) Environmental Professional Liability Insurance for contractors/consultants (including remediation, lead & asbestos abatement).   Why do you individually; or does your firm have environmental insurance?  Because it’s both required by your clients and the government (see SBA requirements) and it protects you from unwanted liability.  Do you expect to make a mistake, error or omission?  No.  But you still carry the insurance. 

 

Environmental insurance is not a panacea; but rather it a tool to be implemented in various situations – most of which include a use in conjunction with environmental due diligence. 

 

So where does the “transactional environmental insurance” fit in to the environmental due diligence industry?   Namely, where does (2) Pollution Legal Liability (“PLL”) and (3) Environmental Lender Insurance fit in?  Also who are the players and what are the limitations to environmental insurance?  [Sidebar: environmental insurance is an approximately $2-3 billion premium industry with presently 30 insurance companies and has been around for over 30 years.  Policy exclusions typically include mold, naturally occurring radon, lead, radioactive material – and existing environmental conditions above reportable levels.  However, that being said – coverage can be procured for each of these named risks on a case by case basis].

 

Applications & Benefits (Mitigant to Risk); and Who Accepts It

We all know that each and every transaction is unique and there are numerous stakeholders involved and therefore this list, while factual and accurate to this day, does not proclaim that in every situation environmental insurance can be implemented.  It is simply a list of its current uses and applications:

·        Replace Phase I (mostly confined the environmental lender insurance policies for low risk properties), replace Phase II, in lieu of indemnification (borrower’s or in a purchase & sale agreement), in lieu of an escrow, provide protection for “reopeners” (see Vapor Intrusion), change in regulations, coverage for ongoing operational activities (USTs, ASTs, drycleaners, bulk fuel facilities, manufacturers, indoor air pollution), and in some cases - for existing contamination (i.e. just above reportable conditions in a risk-based state where monitoring only is required);

·        Time element: if a portfolio of properties is being sold or refinanced and there is no time to update and/or order new Phase Is on all the properties – environmental insurance can be procured;

·        EPA (see attached spreadsheet – provided by the EPA - which specifically acknolwedges enivronmental insurance: they do not endorse it), SBA, state Brownfield (the state of Massachusetts will subsidize the premiums of environmental insurance in conjunction with a Brownfield redevelopment), rating agencies; financial institutions, property owners, manufacturers, facilities - all recognize the application of environmental insurance.  [Sidebar: numerous federal laws require Financial Assurance - and commercial insurance can be one acceptable form - they include: OPA, CERCLA, RCRA, OCSLA, FLPMA, AEA, TSCA, SDWA, SMCRA.  Financial Assurance is required for vessels carrying oil or hazardous substances, USTs (some states ASTs), solid & haz. waste landfills, industrial oil and gas wells, offshore oil-drilling facilities and pipelines, nuclear power plants and coal/mining operations].

 

Insurance Brokers.  Insurance brokers are regulated by their state of domicile, are required to have a license (several in some cases) and are under a duty to represent the Insured’s interest.  See Johnson & Higgins v. Bloomfield, 907 P.2d 1371 (1995) – where an insurance broker was held liable for negligently performing his services to the tune of $600,000 for failure to procure environmental insurance for a client that owned a building that had “sick building syndrome.”   Environmental insurance is a specialty insurance not unlike Directors & Officers, Fiduciary, and other insurance where the underlying risk needs to be known by the broker that owes you – the Insured (property owner, bank) a duty to procure the correct coverage.  Would you ask your life insurance agent to procure an environmental insurance policy for your most trusted client?  [Sidebar: insurance broker v. agent.  Insurance broker works for the Insured; an insurance agent works for the insurance company].   Consequently, like Environmental Professionals and any other service provider – there are more qualified insurance brokers than others.

 

Insurance Underwriters.  The vast majority of environmental insurance underwriters started their career in the environmental due diligence industry and typically have a technical background (geology, engineer, chemistry).  Again, like every industry – there are better more experienced underwriters than others.

 

Insurance Carriers.  The insurance industry is a highly regulated industry (regulated by the each individual state and not the federal government; although there is federal legislation as well).   A failure of an insurance company to pay a valid claim can result in numerous penalties, punitive damages, cease & desist orders and – if bad enough – jail time!  During the “Elliot Spitzer” crackdown – more than a few insurance people (brokers and insurance company employees) when to jail!

 

As stated earlier – environmental insurance is not the panacea of environmental risk and requires expertise to procure the appropriate coverage.  Common complaints that insurance carriers deny claims and exclude risk (even go insolvent) – have validity (however, please remember that you would look a little silly asking for fire insurance when your house is already on fire!).   But is this valid criticism unique to environmental insurance - or does it apply to the insurance industry in general?  I believe it's the latter and that is the 'nature of the beast.'  Insurance companies are no doubt in the business of making money and paying claims puts a dent in profits.  And there is just criticism of a broker who is trying to get his/her commission - rather than providing a value-added service.  Again, I believe that can be said about any service industry.

 

Regardless of whether one accepts the use of environmental insurance or not - the trend in environmental risk is increasing in most states which presents challenges to the best of the environmental service providers (EPs, attorneys, insurance brokers).  Risk-based states like Massachusetts are 'reigning in' the acceptable levels of contamination (VOCs) and enforcement is still a big priority.  A recommendation that a site is 'closed' with a state (especially in a risk-based state) with a 'sign-off' or a no further action letter is by no means a guarantee that environmental risk won't rear its ugly head in the future.  In the courtrooms, plaintiffs are winning more environmental liability cases under the common law theories of nuisance and trespass.  This presents another challenge to environmental professionals in providing expert advice on how to manage a client's environmental risk. 

 

Perhaps environmental insurance is a tool to be considered, perhaps it is not ....  Whether it is or not, hopefully it comes from a vantage point of understanding what environmental insurance is - and just as importantly - what it is not.   

 

I hope this helps a bit and welcome all questions and constructive criticism.  Thank you for reading.

 

Ed Greene