E nvironmental remediation projects have a also allow businesses to - PDF document

G Environmental Alert March 2005 Insurance Issues for Environmental Consultants By Franklin W. Boenning, Esq. E nvironmental remediation projects have a also allow businesses to undertake financing of reputation for taking longer and costing environmental liabilities, allow transactions to more than expected, and property owners proceed with a reserve, and cap unknown run the risk of third party claims for personal injury liabilities. Two types of policies available that can and property damage until the remediation is assist these projects are known as remediation “cost complete. All of these factors combine to make an cap” and “finite risk” policies. environmental project a very costly and, A cost-cap policy provides insurance coverage potentially risky, endeavor. Fortunately, a wide for the cost of remediation above the estimated range of insurance products are available to spread remediation cost plus a “buffer” or retained this risk and protect property owners and amount. The cost of these policies depends on the consultants. Understanding the various types of certainty of cleanup costs, the amount of the buffer, products available, both old and new, can make the and the term and limits of the policy. The buffer, difference between a huge success and a crushing which in many cases can be viewed as a typical failure on a remediation project. Because they contingency in engineering estimates, is typically often deal with property owners and developers 10 - 25% of the estimated remediation cost. with very little experience in the environmental Although the term and limits available on these arena, environmental consultants are in a unique policies has been somewhat restricted in recent position to assist their clients in understanding, and years, the term can be up to 20 years and the limits profiting from, these insurance products. can be up to several multiples of the estimated remediation cost. With a cost cap policy, the Using Insurance to Offer Fixed Price insured retains the obligation to complete the Remediation Contracts remediation, and it is only when the remediation There are several insurance products which can costs exceed the estimated cost plus the buffer that be used by consultants to cap environmental the insurance company begins to pay out on the remediation costs for their clients and offer fixed policy. The insurer will then pay remediation costs price remediation contracts. Using these products up to the limits of the policy purchased. Of course, can often assist clients by providing certainty that if the remediation cost exceeds the limits on the remediation costs will not exceed budgeted policy, liability reverts to the property owner. estimates or reserves, and in certain instances can allow clients to transfer risk to third parties and A “finite risk” policy combines a cost-cap policy remove environmental liabilities from their balance with a “pollution legal liability” policy to effectively sheets. Remediation cost certainty/certainly will transfer the risk of environmental contamination to This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G a third party. The property owner pre-pays the pollution clause in your clients’ insurance policies, entire estimated present value of the remediation it is likely that coverage will be available. Given cost, plus a premium representing the risk transfer the often exorbitant cost of environmental and uncertainty on the expected remediation cost. investigation and remediation, knowledge of the The pollution legal liability policy provides potential availability of insurance coverage can protection from third party claims against the very often mean the difference between a site being insured for damages caused by the contamination, remediated promptly and efficiently and a company including off-site property damage, personal injury going bankrupt. Needless to say, an environmental and the like. The property owner thereby pre-pays consultant that can point a property owner to a his entire remediation cost and the insurance source of funding for an otherwise crippling liability company hires the contractor to perform the will likely be a friend for life. Knowing when to remediation. If the actual remediation cost exceeds search for historic policies, where to find them, and the estimate, the cost-cap policy kicks in to cover how to demonstrate the age of contamination will the overrun. If actual remediation costs are less allow consultants to guide their clients through the than anticipated, a portion of the difference can difficult insurance process and can make the often be refunded to the property owner. So long as difference in a claim paid and a claim denied. the ultimate remediation cost does not exceed the In New Jersey, most CGL policies issued prior to estimated cost of the cleanup, plus the amount of 1986 contained a pollution exclusion which was the cost-cap insurance purchased, he is absolved of ineffective in excluding claims for pollution events all responsibility for the remediation and any third so long as they occurred gradually and were not party claims related thereto. intentional. Under New Jersey's “continuous trigger” of coverage, all CGL insurance policies in Using Insurance to Finance Remediation effect during the period that pollution existed Most property and business owners historically respond to a cleanup. Remediation costs are have procured commercial general liability (CGL) prorated among the policies based upon the time insurance to protect their business from the risk of on the risk as well as the limits of coverage. Of damage to the property of others. In New Jersey, course, any periods when coverage cannot be the groundwater underlying your own property is shown, or the existence of policies cannot be owned by the State, and is therefore considered the determined, may be picked up by the insured. property of others. When contamination is Fortunately, however, New Jersey law is very discovered that has, or has the potential to, impact favorable when it comes to lost policies. So long as groundwater, you have damage to the property of some evidence of coverage exists, including others. At least until roughly 1986, when the cancelled checks, renewal notices, policy “absolute pollution exclusion” was added to the summaries, brokers’ records or other evidence, the standard terms of these policies, CGL policies covered environmental contamination that existence of insurance coverage will be found. In some cases, an “insurance archaeologist” can be impacted groundwater. So long as you can document that the release or contamination very useful in determining the existence, and terms, commenced prior to the imposition of the absolute of lost policies.

G To sum it up, your client can expect to be provided coverage for its environmental cleanup costs so long as: 1) contamination commenced prior to 1985; 2) groundwater must be cleaned up; and 3) the property owner can identify its pre-1985 insurers. Conclusion Using cost-cap and finite risk insurance policies, an environmental consultant can offer a fixed price remediation contract to his client, allowing the client the peace of mind that comes with certainty of remediation costs. These insurance products can be invaluable to the client looking to clean up a balance sheet or transfer a piece of contaminated property by assuring that the future environmental costs are capped or eliminated. In addition, the existence of historic CGL policies may provide much needed funding for your client’s environmental problem, and your next project. If you would like to discuss the issues addressed in this Alert, please contact Franklin W. Boenning, Esq. of Lowenstein Sandler’s Environmental Law & Litigation Practice Group at 973.597.2430 or fboenning@lowenstein.com.