Enron, WorldCom and other entities have helped to create a new standard for corporate accountability and disclosure. Regulators and investors are now demanding full disclosure of all liabilities that an organization faces.

While mandatory disclosure of environmental liabilities is not new (SEC regulation S-K requires the disclosure in SEC filings of any material effects that the costs of environmental compliance may have on earnings, capital expenditures and competitive position), many firms in the past have chosen to ignore or understate this exposure. With investor awareness raised to a new level, complete and accurate information is now a necessity.

The Sarbanes-Oxley Act of 2002, with corporate officers subject to fines of up to $5 million and 20-year prison sentences, is causing the old “don’t ask, don’t tell” approach to potentially contaminated sites to be re-evaluated.

In the past, many corporate managers felt that if an investigation of contamination is not performed (don’t ask), then there is nothing to report to government agencies (don’t tell). With Sarbanes-Oxley in effect, many experts are questioning whether this practice is wise or even legal.

Environmental liability insurance can be an excellent tool to protect the assets of the firm and to assure all stakeholders that the environmental risk has been addressed and controlled. These special policies are necessary because standard general liability policies have for years excluded virtually all pollution exposures.

Further, a new market for contaminated property, including brownfield redevelopment, has been facilitated by the security that environmental insurance provides. The key to these redevelopment transactions is the transfer of the environmental risk from the buyer and seller to the insurance company.

Transaction Coverage

Manufacturing companies routinely buy and sell properties as business needs change and evolve. When a company is on either side of a property transaction, many financial institutions (and stakeholders) will require some form of protection against environmental “surprises.” This usually takes the form of an environmental insurance policy required by the bank or lending institution, and naming the bank as one of the insureds.

If the property has not been inspected for pollutants in the past, a Phase I Environmental Site Assessment (a due diligence report on the environmental condition of the property) or Phase II Environmental Site Assessment (a more extensive evaluation that includes samples of soil and ground water) may be required.

These inspections serve to establish the condition of the site for all involved parties, and are used to develop the terms and pricing of any insurance coverage that would be put in place. Many times the transaction requirements imposed by the lending institution dictate the terms of the policy, with five- to 10-year policies not uncommon.

Brownfield Redevelopment

But what if your company owns a location that you know is contaminated? Years ago, this location would sit on the books as a liability because no one would dare buy the property.

Today, however, there is an excellent chance that this type of location may be safely sold and converted into cash. Federal, state and local officials have all realized the benefits that can result from the redevelopment of contaminated properties.

Laws and standards in many states have been revised to encourage the sale or transfer of these properties to new owners who will use the properties to create jobs, build tax revenue,or simply reduce blight.

Also, the redevelopment of these properties reduces the need for new land and helps eliminate suburban sprawl. There has even been a growth of institutional investment in brownfield sites. Private and public groups are now focusing on the acquisition of these once forgotten properties. There are also lending institutions that specialize in the funding and redevelopment of contaminated sites.

Unless pollution coverage was in effect before the contamination was discovered, insurance will not pay for the initial cleanup of the site. The degree of cleanup required will depend on the laws in effect and the final use of the property.

Environmental insurance can be used to guarantee that the cleanup will not cost more than a certain amount (called Cost Cap or remediation stop loss coverage), and to protect the insured for the cost of remediating (cleaning) any previously unknown contamination discovered later (called Remediation Legal Liability).

The insurance company will normally inspect the site and review all previous facts relative to the clean up, then price and issue a policy that protects the organization from any future liabilities. This protection “closes the loop” on the problem and avoids any future surprises on the balance sheet.

One caveat: You need to be working with financial institutions, attorneys and insurance professionals who understand these transactions and the tools needed to complete them.

Pollution Legal Liability

While the transfer of property may be the most conspicuous use of environmental liability insurance to protect the balance sheet of a firm, other forms of environmental coverage play a more traditional insurance role — protecting against a future pollution incident that may occur on your property.

Pollution Legal Liability insurance, also referred to as Environmental Impairment Liability Coverage, covers the insured for cleanup costs incurred from the discharge, dispersal or release of contaminants at the insured’s property.

The insured is also protected against suits brought for bodily injury or property damage resulting from pollution incidents.

In its broadest form, pollution legal liability can provide coverage for on-site and off-site cleanup costs, bodily injury claims from outside parties and damage to property of others.

A strength of companies that specialize in writing environmental insurance is their highly trained engineering and risk management staff.

These professionals will visit the manufacturing site and analyze the true environmental exposure. That risk analysis will directly effect the pricing and coverage features of any environmental policy.

The benefit of fully evaluating the company’s environmental exposure, and having insurance in place to cover that exposure, are obvious; all parties — including government, shareholders, employees and customers — are assured the firm has addressed this critical issue.

Don’t Go It Alone

The benefits of environmental liability insurance are many. Unfortunately, the number of insurance professionals who truly understand this coverage are few. The insurance agent who handles your other coverage needs, such as property and workers compensation, may have little understanding of environmental insurance and the role it can play to protect the firm.

For this reason, NAM members are invited to contact Intercorp Inc., a leader in the analysis and placement of environmental insurance. Your current agent is welcome to work with Intercorp on your behalf, or you can contact Intercorp directly.