How Coverage Nuances Can Make or Break the Success of a New Project or Transaction
As the year draws to a close, many are thinking about the progress they have made toward the goals they have set and are looking for positive momentum to carry into the coming year. At this time, capitalizing on new projects and merger & acquisition (M&A) transactions is a critical focal point for many organizations.
With that in mind, it is noteworthy that the proportion of failed M&A deals has increased over the past three years, reaching an eight-year high in 2016.1 This increased failure rate underscores the complexity of modern deals, which generally include more details for all involved to manage.
Because pollution losses are highly infrequent, there has historically been some level of uncertainty and inconsistency surrounding the use of environmental insurance to support transactions and projects. Adding to the current “noise-level”, some insurers have communicated tightened underwriting on transactional placements, citing claims and profitability challenges, especially on longer policy terms.
For many prospective purchasers, the coverage language is less familiar, which creates uncertainty and increased dependence on brokers for guidance. This is when and where the substantial separation among the experience and capability levels within the insurance underwriting and brokerage communities can become most apparent.
Despite proclaimed profitability struggles by some insurers (and the overall insurance industry’s experience with hurricanes and fires in 2017), transactional environmental coverage is still readily available in the marketplace at very reasonable costs. Securing terms early in the deal process can help ensure that pollution legal liability concern is not one of the details that cause the financing and/or terms of the deal to fall apart.
The Nonstandard-Standard Pollution Policy
There is no standardized (i.e., ISO or otherwise) pollution legal liability form broadly accepted and used by environmental insurers. This is not a dissimilar challenge to so-called follow-form excess products that exist in the marketplace for a variety of coverages. However, environmental policies have not been tested as frequently as other types of insurance, such as casualty or property, due to the inherent infrequency of pollution losses. Still, most major insurers have been communicating increased claims frequency for more than five years.
Instead of using a standard policy suite of insuring agreements as a starting point, every insurer has developed their own version of the various coverage parts, some of which are available via a “menu-style” policy form, and others that start with a broader coverage grant reminiscent of the CGL structure, which then pull back certain coverages via the exclusions section and/or endorsed exclusions.
Several years of increasing numbers of environmental insurance claims coupled with the availability of many nonstandard policy forms, has left insureds seeking comfort and confidence that their coverage will respond if and when it is called upon.
Read Your Policy & Ask Questions
Reading a policy form tends to rank extremely low on anyone’s “want to do list” (and is perhaps a tie for last place, along with the joys of filling out an insurance application). However, with environmental insurance and other specialty insurance lines, this is a critically important step for insureds to take.
For the most fundamental of differences among insurers, one can look first at how the policy defines insureds, named insureds, and additional insureds. Some of the major insurers’ forms have varying degrees of broad form language built into the base form, while others seek to schedule each and every entity. Further, endorsed additional insured language can be limited, or otherwise subjected to counterintuitive conditions, and can be unlike insureds or named insureds language. In short, don’t assume your environmental policy will work just like a CGL policy.
In the case of insuring a property transaction, it is noteworthy that some transactions are immediately followed by development/redevelopment activities. In these cases, more than one policy could be needed (e.g., owner-controlled contractor’s pollution with site-pollution, or possibly one site-pollution policy for pre-existing conditions and one for new conditions). It is important to consider if exposures exist from a variety of sources arising from site ownership, or if exposures are really limited to development/redevelopment activities and/or other “work” at the site.
As part of development/redevelopment or routine services, many contractors have a Products-Pollution exposure from products installed as part of the work. Unfortunately, many contractors have a tendency to base their Contractor’s Pollution Liability (CPL) selection on best-bid (i.e., where the best bid equals the lowest cost). Cost or who has the easiest application are rarely the best selection criteria for an environmental insurer, especially considering that some major environmental insurers still do not provide for installed products in their standard form. In these cases, it’s imperative that the need and any absence of this language be identified, so the appropriate modification can be requested and endorsed to the policy.
Business Interruption/Loss of Rents/Extra Expense coverage on site-pollution forms is yet another coverage area where there can be drastic differences among the major insurers. This is typically viewed as a non-core coverage that can be endorsed on many site-pollution forms. While market competition has generally reduced deductibles or “waiting periods” down to three days, there is a vast range of differences regarding the availability of limits. Reviewing a sampling of the terms and conditions among some of the major insurers, you may see indemnity periods capped at 30 to 365 days. Insurers may use a co-pay, or may employ reporting or other limitations that can be buried within the endorsement language; language that is not apparent when picking up the policy or looking at the Policy Declarations.
Reporting restrictions, conditions and sub-limits are also frequently buried in endorsement language, and are usually not summarized on the Declarations page. For example, in the current environmental insurance market, it would not be unheard of to see the following different reporting requirements/ restrictions:
- 96 hours for emergency response claims
- 14 days for crisis management expenses
- 30 days for business interruption claims
- 90 days reporting for newly added locations
Such differences that cannot be better harmonized or negotiated must at a minimum be identified and clearly understood by the insured.
The above are just a few examples of the potential pitfalls that an insured may encounter among the various insurers’ policy forms. Again, while there are often similarities among insurers’ language and the general scope of coverage, there can be tremendous differences that impact actual coverage.
As a prospective buyer or current insured, it is critical that you engage in the process with your broker by reading policy language and asking questions that help improve your understanding of what is there, and what is not there. What works for one insured may not necessarily be the best approach for another insured, transaction or project. As alluded to earlier, an experienced and skilled insurance broker can help you understand the details of your environmental policy to support the ultimate success of your new project or transaction.
1 Law360, November 16, 2017, “Why More M&A Deals Are Being Cancelled Before They Close”
