environmental risk management and the role of environmental insurance

ENVIRONMENTAL QUALITY MANAGEMENT / Autumn 2000 / 3

Environmental Risk Management and the Role ofEnvironmental Insurance

James W. Broderick, Daniel R. Lavoie, and Andrew J. Perel

Environmental insurance—especially the newer types of coverage introduced in recent years—can help protect your company from a range of potential liabilities. © 2000 EnvironmentalInsurance Underwriters Agency, Inc. Used with permission.

The recent increase in the breadth ofavailable customized environmentalinsurance products offers today’s profes-sional risk managers many valuable risktransfer tools in their battle against pol-lution-related liabilities. Small and largecompanies alike face the same dauntingchallenge: the complex web of federal,state, and local laws, rules, and regula-tions, as well as common law theories ofenvironmental liability. Traditional riskmanagement techniques often focusmore closely on environmental risk con-trol, rather than on merging effectiverisk control with prudent risk financingand transfer.

This article provides a basic frame-work and understanding of environ-mental insurance and its practicalapplication in a commercial businessoperation for the environmental riskmanagement professional.

THE EVOLUTION OF ENVIRONMENTALINSURANCE

Over the past 20 years, environmen-tal insurance has evolved from a narrowspecialty into a more mainstream product

© 2000 Environmental Insurance Underwriters Agency, Inc. Used with permission.

with general business applications.During the 1980s, the demand for suchinsurance arose from a growing numberof strict government regulations control-ling mainly treatment, storage, and dis-posal facilities and transporters of haz-ardous substances. In fact, the marketevolved as a result of the perceived“gaps” that traditional CommercialGeneral Liability (CGL) and property cov-erages left behind. Absolute pollutionexclusions have now been standard inmost CGL and property policies for near-ly 15 years; therefore, the market forcedinsurance companies to come up withproducts that filled the void.

Sensing the potential for a tremen-dous market opportunity, numerousinsurance companies responded by offer-ing various types of EnvironmentalImpairment Liability (or EIL) insurancecoverage. This coverage was often veryexpensive and carried high self-insuredretentions or deductibles, as well asrestrictive terms and conditions.

By the mid-1980s, most insurancecompanies had dropped out of the marketdue to severe losses. The reasons for such

James W. Broderick, Daniel R. Lavoie, and Andrew J. Perel4 / Autumn 2000 / ENVIRONMENTAL QUALITY MANAGEMENT

losses included the fact that this was abrand-new field and virtually no one inthe industry had any experience in prop-erly underwriting and pricing environ-mental risks. No historic information oractuarial statistics existed on which tobase sound underwriting and pricingdecisions. In addition, in the midst of anevolving environmental regulatory infra-structure, environmental engineeringwas still in its relative infancy and wasunreliable at best.

Over time, insurance companiesbecame more knowledgeable about prop-er underwriting methods and had thebenefit of a more highly developed regu-latory climate. This resulted in ongoinginnovations in coverage and stabiliza-tion of pricing. Consequently, many riskmanagers now include environmentalinsurance products as a part of theircompany’s overall risk managementstrategy—complementing traditionalCGL and property/casualty coverage.

RISK CONTROL VS. RISK FINANCINGA constant tug of war occurs for

most risk managers between the levelsof environmental risk to finance (eitherthrough risk retention or risk transfer)and the level of risk control techniquesto employ (such as risk avoidance, lossprevention, and loss reduction). Strikingthe right balance between these twocompeting corporate interests is a mon-umental task. Concentrating more timeand capital on one to the detriment ofthe other is a recipe for disaster. Noamount of risk control, other than per-haps avoidance, can completely elimi-nate the potential for environmentallosses; thus, a well-planned combina-tion of risk control and risk financeshould be employed to maximize theultimate benefit for the company.

Effective environmental risk financ-ing may be achieved in several differentways depending upon whether a riskmanagement professional is concerned

about an ongoing operation, a purchaseand sale, a merger or acquisition, or arefinancing deal.

ENVIRONMENTAL RISK FINANCINGTHROUGH INSURANCE

Alternative Risk Transfer Theories forEnvironmental Liabilities

Risk management professionals arenow looking at risk financing tech-niques (e.g., risk retention and risktransfer) from new perspectives.However, managing expense volatility isstill a main concern for most companies.“Expense volatility means an unplannedincrease in operating costs, which trans-lates into lower profits or exceedingbudget.”1 One benefit of utilizing envi-ronmental insurance as part of an over-all risk financing strategy is that it canbe used to manage expense volatilityregarding environmental contingencies.This is particularly important from anaccounting perspective given the fairlyrecent changes in accounting rules forenvironmental liabilities.

In 1996, the American Institute ofCertified Public Accountants issuedStatement of Position (SOP) 96-1,Environmental Remediation Liabilities:

SOP 96-1 creates a presump-tion of an unfavorable outcome iflitigation, a claim or an assess-ment has been asserted, or is prob-able of assertion, and if the entityis associated with the site. Theentity would then need to accrueat least the amount that can rea-sonably be estimated as thecleanup liability.2

The Securities and ExchangeCommission also requires publicly trad-ed companies to disclose in their SEC fil-ings “any material effects that costs ofenvironmental compliance may have onearnings, capital expenditures and com-

A constant tug ofwar occurs for most

risk managersbetween the levels

of environmentalrisk to finance

(either through riskretention or risktransfer) and the

level of risk controltechniques to

employ (such asrisk avoidance, lossprevention, and loss

reduction).

Environmental Risk Management and the Role of Environmental Insurance ENVIRONMENTAL QUALITY MANAGEMENT / Autumn 2000 / 5

petitive position.”3 In addition, a “keybenefit of insurance is that premiums aretax deductible, while contributions to aself-insurance fund, generally speaking,are not deductible.”4

Given these important financialpoints, environmental insurance, whenproperly incorporated into an overallrisk management plan, can act as amechanism to reduce expense volatilityand comply with new accounting andSEC requirements, while providing a taxbenefit at the same time.

The Art of Environmental ScienceTo this day, environmental engineer-

ing continues to be as much an art as ascience. However, it remains the mostreliable means of investigating the envi-ronmental conditions of a site.

Typically, in the context of a pur-chase and sale or a merger or acquisi-tion, risk management professionalswill initially request a Phase I siteassessment. Phase I site assessmentparameters are set forth by the AmericanSociety for Testing and Materials(ASTM) and ensure a consistent bench-mark for initial investigation. Standingalone, however, a Phase I site assess-ment cannot 100 percent guarantee arisk management professional that a siteis free from contamination.

Accordingly, a Phase II site assess-ment will also generally need to be per-formed. Typically this includes soil bor-ings and groundwater analysis.Laboratory methods used will detect cer-tain kinds of targeted chemicals. Onemethod used to detect gasoline con-stituents will not detect solvent con-stituents, and vice versa. Therefore, it isimportant to properly scope the Phase IIsite assessment.

Even with the best of investigations,there remains an element of uncertainty.Enter environmental insurance, whichmay be utilized in addition to traditionaldue diligence.

UNDERSTANDING ENVIRONMENTALINSURANCE

The new environmental insuranceproducts available in today’s market-place offer businesses more types of cov-erage than ever before. The followingdiscussion outlines some of the typicalcoverages currently offered.

Specific policy language usually dif-fers among insurance companies and,thus, should be carefully analyzed with-in the context of the specific needs of thecontemplated transaction. Risk manage-ment professionals should consult withan experienced environmental attorneyand a qualified environmental insuranceagent or broker when structuring theirorganization’s insurance program.

Pollution Legal Liability Insurance

• First-Party and Third-Party Liabilities Pollution legal liability (or PLL) poli-

cies are generally intended to providecoverage for both first-party and third-party liabilities. Included within the tar-geted domain of PLL policies are envi-ronmental cleanup costs incurred as aresult of pollution conditions at, on, orunder the policyholder’s property; pollu-tion conditions that migrate onto the pol-icyholder’s property from an off-sitesource; and off-site bodily injury, proper-ty damage, and cleanup costs incurred asa result of pollution conditions emanat-ing from the policyholder’s property.5

Business interruption coverage is alsogenerally available to protect the policy-holder in the event a catastrophic pollu-tion loss causes a shutdown of its opera-tions.

• Duty to DefendAnother standard coverage addresses

legal defense expenses, which are usual-ly included within the applicable limit ofliability. This coverage is now typicallyphrased in terms of a carrier’s “right andduty to defend” the policyholder. By con-

Typically, in thecontext of a pur-chase and sale or amerger or acquisi-tion, risk manage-ment professionalswill initially requesta Phase I siteassessment.


trast, several years ago the policies statedthat the carrier had the “right but not theduty to defend.” This is an importantaspect of the new coverage forms sincelegal fees and expenses can be significantand can have an adverse impact on acompany’s cash flow.6

• “To Pay on Behalf of” LanguageMany environmental policies have

“pay on behalf of” language that requiresthe insurance company to directly pay, onbehalf of the policyholder, all loss, costs,and expenses associated with a coveredclaim, rather than making the policyhold-er incur the expense first. A policy withtraditional “indemnity” language requiresthe policyholder to pay the loss orexpense up-front and then be “indemni-fied” or reimbursed by the insurancecompany. The “pay on behalf of” cover-age enhancement allows the policyholderto maintain a predictable cash flow in theface of an environmental loss.

• Policy PeriodIn previous years, the policy period

was almost always limited to one year,with a “claims made and reported” trigger.Now, insurance companies routinely offerfive-year terms, and in some cases up toten years or more. However, the reportingtriggers are usually still claims made andreported. This means that a claim must bemade against the policyholder and report-ed to the insurance company during thepolicy period or the extended reportingperiod. Most insurance companies offeran automatic extended reporting period,as well as an optional extended reportingperiod of up to three years, for an addi-tional premium charge. These longer poli-cy terms are more attractive for policy-holders due to the “long-tail” nature ofmost environmental claims.

• Preexisting and New Pollution ConditionsSeveral years ago, insurance compa-

nies would offer coverage only for new

pollution conditions discovered duringthe policy period. Any known, preexist-ing contamination would be excludedfrom coverage. Now, insurance compa-nies are more willing to entertain therisk of a future claim from a preexistingpollution condition if that condition isunknown or disclosed to the carrier dur-ing the application process.

Typically, this underwriting consid-eration comes into play where contami-nation at a former industrial facility hasbeen cleaned up, but may still be higherthan the state’s acceptable action levels.Depending upon the intended future useof the site and other factors, the statemay be willing to provide the policy-holder with a qualified “No FurtherAction” letter even if the cleanup fallsshort of technical standards. In such acase, provided there is no active siteremediation planned or ongoing, and nothird-party claims pending, insurancecompanies will consider covering therisk of a future claim from a known, pre-existing pollution condition. This riskmay arise from a so-called governmental“re-opener” or from the ever-presentthreat of a third-party lawsuit. If a site isthe subject of planned or ongoing reme-diation, insurance companies will usual-ly offer a “cost-cap” policy, discussed inmore detail below.

Coverage is also generally granted fornew pollution conditions that arise dur-ing the policy period and after the realestate transaction closes.

Remediation Cost-Cap InsuranceThe cost-cap policy is designed for

sites where an active cleanup is antici-pated. This is essentially “stop loss”insurance that covers the potential costoverruns of a cleanup project.

Insurance companies will generallyentertain this type of risk when a reme-dial action work-plan (RAW) is finalizedand cost estimates for implementing theplan are proposed. The scope of coverage

Now, insurancecompanies are more

willing to entertainthe risk of a future

claim from a preex-isting pollution con-dition if that condi-tion is unknown or

disclosed to thecarrier during the

application process.


is directly related to the scope of remedi-ation as outlined in the RAW. Coverageis usually provided for remedial activi-ties at or adjacent to a specified location,as more fully defined in the RAW.

When there are remediation activi-ties, new conditions are sometimes notdiscovered until after the project isunder way. Therefore, coverage may beextended to unforeseen pollution condi-tions first discovered during the courseof performing the cleanup pursuant tothe RAW, as well as to change ordersrequired by governmental authorities. Inaddition, coverage is available for caseswhere contamination is found to bemore extensive than originally antici-pated (for instance, where a contaminat-ed groundwater plume is deeper and/orwider than originally thought).7 The pol-icyholder is required to provide theinsurance company with regular statusreports, including cleanup work com-pleted and costs incurred.

Most such policies include both a“self-insured retention” (or SIR) and a“coinsurance provision.” An SIRrequires the policyholder to expend a setamount of funds before the insurancecompany will respond. An SIR is distin-guished from a “deductible” in that anSIR is generally part of the coveragelimit. For example, a cost-cap policywith a $1 million limit and a $100,000SIR would require a policyholder toexpend the first $100,000; the remaininglimit on the policy would be $900,000. A“coinsurance” provision generallyapplies after the SIR is satisfied. Itrequires the policyholder to participatedollar-for-dollar with the insurance com-pany (according to certain preset per-centages) in paying the remainingcleanup costs up to the applicable limitof liability.

Some insurance companies offercoverage only for actual remediation,while others also offer coverage for thecosts and expenses of investigation and

monitoring. No coverage is generallyafforded for attorney fees or other costsand expenses associated with litigation,arbitration, or dispute resolution, or forcosts associated with preparing theRAW. Further, no coverage is affordedfor any third-party liability (includingbodily injury and property damage), forfaulty workmanship or defective materi-als, or for time delays in operations dueto such issues, including labor disputes.

Secured Creditor InsuranceSecured creditor policies (SCP) are

tailored to provide coverage to banksand other lending institutions thatfinance commercial real estate transac-tions. These insurance products aredesigned for all types of lenders,including local and regional banks, aswell as multinational investment hous-es and banks.

Different types of coverages areavailable to lenders depending upon thenature of the financial institution. Somelenders, called “portfolio lenders,” holdtheir commercial real estate assets ontheir books as a long-term investment.Other banks, called “securitizedlenders,” sell their portfolio of loans as abond issue in the commercial mortgagebacked securities (CMBS) market.

• Outstanding Loan Balance vs. “Lesser of” PoliciesInsurance companies offer two dif-

ferent types of environmental policydepending upon the type of lenderinvolved. One option is a policy thatprotects the bank’s outstanding loan bal-ance (OLB) in the event a borrower issimultaneously in default on its loan andpollution conditions exist at the insuredproperty. Other insurance companiesoffer only what is termed a “lesser of”policy, which provides coverage only forthe lesser of the OLB or the estimatedcleanup costs. This “lesser of” coverageoption is more often favored by portfolio

Some insurancecompanies offercoverage only foractual remediation,while others alsooffer coverage forthe costs andexpenses of investigation andmonitoring.


lenders who wish to retain the real estateasset in their portfolio.

The distinction in available cover-age becomes significant when invest-ment bankers purchase environmentalinsurance in the CMBS market.Investment bankers and other “conduit”lenders pool various commercial realestate mortgages together. The securitiesrating agencies, such as Standard &Poor’s and Moody’s, rate the pools intodifferent classes or “traunches” for salein the CMBS market. All of the ratingagencies require the OLB type of envi-ronmental insurance policies since theyprotect the full OLB, and thus the corre-sponding bond rating and investor prin-cipal of the security.8 Environmentalinsurance policies are designed to pro-tect the ratings of these bond issues inthe event of both a default on the mort-gage and accompanying pollution con-ditions at the insured property.

• Dual Trigger of Coverage ConceptSCP policies have what is called a

“dual trigger of coverage.” The dual trig-ger concept means that a prerequisite fortriggering the OLB payoff coverage underthe policy is the default of a qualifiedloan scheduled onto the policy and thediscovery of pollution conditions at theinsured property. The default and dis-covery must both take place during thepolicy period or the extended reportingperiod. Another dual trigger applies tofirst-party discovery of pollution condi-tions after the bank forecloses on theinsured property.

If the bank decides to foreclose on theinsured property rather than take the OLBpayoff, then the insurance company willpay (on behalf of the policyholder) theenvironmental cleanup costs, and in somecases the associated legal defense expens-es. The dual trigger in this case would beforeclosure and discovery, along withreporting of pollution conditions to allappropriate governmental agencies.

“MERGING” EFFECTIVE RISK MANAGEMENT AND ENVIRONMENTALINSURANCE

According to the Mergerstat website(www.mergerstat.com), which postspublicly announced merger and acquisi-tion statistics for the last 37 years, 1999was a record breaking year, with 9,278“total deals” and a “total deal value” ofover $1.425 trillion.9 Through the firstseven months of 2000, 5,413 total dealshad already been reported.10 Keep inmind that this includes only public com-pany announcements, and does not takeinto account the countless private dealsthat go largely unreported in the newsmedia. With this type of merger andacquisition “mania” going strong, envi-ronmental insurance is playing anincreasing role in helping facilitate oth-erwise unworkable transactions.

CASE STUDY: ENVIRONMENTAL INSUR-ANCE IN A CORPORATE ACQUISITION

Two privately held manufacturingcompanies were recently on the verge of a$75 million acquisition deal that involvedthe transfer of 28 properties. The compa-ny being acquired had leased and ownedproperties that spanned the entire rangeof commercial usage, from light industri-al to warehousing, from wholesale toretail, as well as office buildings.

All of the properties had their ownunique set of environmental conditions,as revealed in the Phase I or Phase IIenvironmental site assessments per-formed. Some facilities had newlyinstalled underground storage tanks(USTs). Others had existing or aban-doned USTs, which, depending upontheir age, posed a threat of leaking. Someof the industrial facilities had existingcontamination. Several had active reme-diation ongoing, while others hadgroundwater monitoring programs inplace from completed prior cleanupactions. The manufacturing processesthat had taken place on some of the

SCP policies havewhat is called a“dual trigger of

coverage.”


properties involved various chemicals,including dyes, acids, solvents, and fueloil. Some facilities had wastewater andair discharge permits.

The Buyer’s Motivation The buyer’s motivation for purchas-

ing environmental insurance in thiscase arose from several factors, includ-ing its general environmental risk man-agement strategy.

The buyer wanted protection fromundisclosed and/or undiscovered haz-ards. This included not only pollutioncaused by the sellers, but also any pollu-tion caused by previous owners andoperators. Obtaining historical environ-mental information on some of the olderindustrial facilities and former industrialsites proved difficult. Thus, the buyerlooked to a PLL insurance policy to pro-tect itself from unknown first-party pol-lution conditions, as well as from third-party lawsuits.

Environmental insurance was alsoused to support the buyer’s corporateindemnity agreements and personalguarantees. The purchase and sale con-tract, as well as the mortgage documents,required corporate indemnity agree-ments and personal guarantees from thebuyer’s individual principals to pay forthe cleanup of any pollution conditionexisting at the sites. The buyer wasaccepting the 28 properties “as is” andhad agreed to indemnify the seller forany future claims arising from the divest-ed properties. This was somewhatunusual, but the buyer was eager toacquire several key facilities and waswilling to accept the added risk, which itpassed on to the insurance company forthe cost of its insurance premiums.

Indemnity agreements and guaran-tees are limited by the good will andfinancial ability of the party granting theindemnity. For this reason, the sellersought to be named as an additionalinsured under the buyer’s PLL policy for

third-party claims; in exchange for thiscoverage, the seller agreed to post anegotiated sum of money into an escrowaccount to pay for existing pollutionconditions. In this case, environmentalinsurance was used in conjunction withagreements to protect the indemnifiedparty (that is, the seller) from the risk ofcollecting on the indemnities, as well asto protect the buyer from any unexpect-ed pollution conditions.

The buyer also received several con-ditional “No Further Action” (NFA) let-ters from three state environmental agen-cies that essentially relieved the sellerfrom performing any additional govern-mental required cleanup. However, thebuyer wanted protection in the event ofa “re-opener” that could potentiallyforce the buyer to investigate and cleanup some previously undetected pollu-tion condition. In addition, the buyerknew that a state NFA letter does notaffect the federal government’s or a pri-vate party’s right to seek recovery ofcleanup costs.

The buyer understood that expendi-tures to clean up an unexpected pollu-tion condition, or to pay legal fees anddamages to third parties, would impairprofitability and cash flow, and, ulti-mately, its ability to cover the debt serv-ice on its mortgage. Therefore, environ-mental insurance was purchased to limitthese unexpected liabilities.

The Seller’s Motivation The seller’s motivation for purchas-

ing environmental insurance stemmedfrom its desire to protect the sale pro-ceeds and to relieve itself and its succes-sors of contingent liability after the clos-ing. In the absence of other protections,including environmental insurance, theseller will generally retain the environ-mental liability associated with its his-torical operations and/or ownership.

In the purchase and sale agreement,the seller was required to provide the

The buyer wantedprotection fromundisclosed and/orundiscovered hazards.


buyer with representations and war-ranties about the environmental qualityof all properties in the transaction. Ifthese “reps and warranties” are inaccu-rate, they can form the basis of a subse-quent lawsuit for breach of contract inthe event that pollution conditions arelater found to exist, or if they exist in adifferent form than was represented andwarranted. The seller purchased PLLinsurance as financial backup in case itsreps and warranties were later chal-lenged and unknown pollution condi-tions were found to exist on an insuredproperty. In this context, the buyer alsobenefited from its PLL policy, knowingthat all it had to do was present a claimto the insurance company, rather thanwaste time and resources enforcing thereps and warranties provisions.

Other motivations also spurred theseller to purchase environmental insur-ance. The seller, of course, wanted toreceive as much money as possible fromthe sale of its properties. However, sever-al sites with known or potential environ-mental conditions appeared quite unat-tractive to the buyer unless the selleragreed to part with the properties at adeep discount. The availability of envi-ronmental insurance helped the sellerprotect the true value of the properties byeliminating the environmental “wildcard.” In this case, the seller agreed to paythe insurance premium for the buyer’sPLL policy, thus taking any perceived bar-gaining power over the true value of theproperties out of the deal’s equation.

Several sites with known pollutionconditions were to be cleaned up prior to,or shortly after, the real estate closing.The seller established escrow accounts topay for this cleanup, and was alsorequired to continue the remediationoperations after the closing. Cost-capinsurance was purchased to limit the sell-er’s potential risk on those sites withknown pollution conditions. The sellerwanted stop loss protection in the event

the escrow amounts negotiated wereinsufficient for the planned remedialwork. In the absence of environmentalinsurance, underestimating the scope ofcleanup costs could have significantlyimpaired the cash flow of its operation. Inaddition, the seller was able to negotiate alower escrow amount because the cost-cap policy was in place. For the price ofits insurance premium, the seller couldfix its potential exposure and accuratelyaccount for the liability on its books.

The seller also purchased environ-mental coverage as a form of “sleep”insurance. Being a private company, theseller wanted to walk away from the dealfree and clear to the greatest extent pos-sible. The availability of environmentalinsurance allowed the seller’s principalsto sleep soundly at night knowing theirinterests were protected from an envi-ronmental liability standpoint.

The Lender’s MotivationThe lender in this case was a large

regional investment bank that held a 70percent security interest in the transac-tion, with the 28 properties held as col-lateral for the loan. This portfoliolender’s motivation for purchasing envi-ronmental insurance stemmed from itsdesire to protect the value and mar-ketability of the collateral.

The value and marketability of anenvironmentally tainted piece of proper-ty held as collateral for a mortgage maybe severely impaired. In the event ofdefault on the loan, the lender could bestuck with properties that have dimin-ished in value and could only be resoldat a deep discount. A SCP policy wasused to protect the bank’s investment byindemnifying the bank for the outstand-ing loan balance in the event of default,or paying for cleanup of the impairedasset after foreclosure.

The SCP policy also protected thebank from lender liability in the event offoreclosure. Although the lender liability

Other motivationsalso spurred the

seller to purchaseenvironmental

insurance.


laws now generally shield a securedcreditor from environmental liabilities,if the creditor acts like a property owneror operator, it may risk liability forcleanup costs. In addition, the SCP poli-cy would also protect the bank in theevent that third-party claims were assert-ed against it for bodily injury and/orproperty damage.

Practical ConsiderationsThe parties to a corporate or com-

mercial real estate transaction can oftenbenefit from the use of environmentalinsurance. From asset protection to cov-erage of legal defense expenses, theavailability of environmental insurancemay be able to facilitate an otherwiseunworkable deal.

The lender, the buyer, and the sellermay all gain added protection fromunknown environmental risks whenthey utilize environmental insurance asa supplement for traditional due dili-gence. Due diligence activities such astransaction screens and Phase I andPhase II site assessments attempt to iden-tify environmental risk. However, as dis-cussed earlier, due diligence may fail touncover the entire universe of potentialenvironmental issues at a site.

Given the complexities of any corpo-rate purchase and sale transaction, ade-quate information and time is essential toensure a smooth process for all partiesinvolved. In addition, environmentalinsurance underwriters need as muchinformation on the insured locations aspossible, including all environmentalreports and real estate closing documents,such as indemnity agreements. Environ-mental insurance underwriters also needadequate time to review all the informa-tion and to ask relevant questions.

Keep in mind that most environmen-tal insurance policies are structured with“manuscript” endorsements, which aretailored to each client’s specific require-ments. Environmental risk management

professionals should make sure that allinterested parties and their counsel havean adequate amount of time to reviewand comment on the “manuscript” poli-cy language. Some give-and-take is gen-erally required, and the environmentalrisk management professional shouldcertainly consult with an experiencedenvironmental attorney and insuranceagent or broker while negotiating policyterms and conditions.

CONCLUSIONManaging the potential environmen-

tal liabilities facing your organizationmay mean the difference between suc-cess and failure. Environmental insur-ance can play an important role here.With recent innovations in coverage andpricing, now may be the right time toconsider whether your organization canutilize environmental insurance as a pru-dent risk-transfer tool. The integration ofeffective risk management and environ-mental insurance can enhance a compa-ny’s ongoing operations and value, aswell as facilitate the transfer of property.

NOTES1. Clark, B. (2000, March). State of the “ART”—new

trends in financing risk. International Risk Manage-ment Institute.

2. Mandell, R., & Gerrard, M.B. (2000, March/April).Financial Executive at 32.

3. Id.4. Id.5. Contractual liability coverage is available for contracts

scheduled onto the policy. 6. Some insurance companies offer this coverage only

for third-party claims, while others offer it for first-party claims as well.

7. This coverage typically needs to be purchased viaspecial endorsement.

8. Environmental insurance may also provide CMBScredit enhancement and a reduction in subordinationrates on lower rated traunches of CMBS securities. Afull discussion of environmental insurance in theCMBS market can be found on the S&P website atwww.standardandpoors.com.

9. DeBerry, D.S. (1999). Seal the deal: Bridging the gapbetween buyer and seller. Global Reinsurance at 34, cit-ing www.mergerstat.com/free_reports/free_reports_m_and_a_activity.html.

10. Id.


James W. Broderick is cofounder, president, and CEO of Environmental Insurance Underwriters (EIU) in Dedham,Massachusetts. He is a chemist by training, and has worked as an environmental compliance manager for achemical manufacturer and as an environmental consultant with Ecology & Environment. Most recently, he wasthe northeast regional manager of AIG Environmental’s underwriting operations in Boston. Daniel R. Lavoie, Esq.,is vice president and general counsel for EIU. He is the former general counsel of Navigators Insurance Company,as well as an environmental attorney at the firm of Rosenman & Colin LLP, both in New York City. He has also man-aged environmental coverage claims for both CGU and Travelers. Andrew J. Perel, Esq., is a partner with the lawfirm of Rosenman & Colin LLP in New York City. He is the managing partner of the firm’s Charlotte, North Carolina,and Newark, New Jersey, offices and chairman of the Real Estate Structured Finance Department.

environmental risk management and the role of environmental insurance

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