Excess of Indemnity

Assumption of environmental liabilities is common in a purchase and sale agreement (PSA), with an associated indemnity provided by the indemnitor (buyer) to the indemnitee (seller). Shifting liabilities to another party is a major accomplishment and relief; however, fulfilling the terms of the agreement by the counterparty (the buyer) is not always a guarantee. An excess of indemnity endorsement to a pollution legal liability (PLL) policy can help address this counterparty credit risk.

The excess of indemnity solution

When engaging in a transaction, both parties typically enter into the deal in good faith with expectations that indemnities will be honored, and that stated liabilities are gone from the seller at deal close. However, there is always the risk that a buyer will fail to meet its indemnity obligations.

This can happen for multiple reasons including, but not limited to:

Financial distress, which could cause an indemnitor to delay or put off performance.
Bankruptcy.
An indemnity from a limited liability corporation (LLC) or similar structure that is underfunded or is relying on non-liquid assets on its balance sheet (such as real estate) to support the indemnity.

If an indemnity obligation fails, claimants may attempt to tender claims back to the original owner of the liabilities. Further, under joint and several liability legal provisions, regulators could seek to have cleanup obligations revert back to the seller.

To manage this counterparty credit risk when selling assets, you could apply an excess of indemnity endorsement to your PLL policy. Benefits of such an endorsement typically include:

Seller is the first named insured.
Buyer is not an insured on the policy, as it cannot benefit from its own failure.
Coverage is provided in the event of a “failure to perform” on a covered risk in the environmental indemnity section of the PSA.
Pollution conditions can include unknown and even known pollution conditions.

Coverage can include cleanup, third-party bodily injury, third-party property damage, natural resource damages, and legal defense expenses.

The specialists in Marsh’s Environmental Practice can help you navigate indemnity provisions, identify factors that could give rise to material counterparty credit risk, and effectively use excess of indemnity to provide an additional level of protection in the event of a failure to perform.

Why Marsh

As an industry leader in providing environmental placement and claims solutions, our team handles more than 500 claims annually and has advocated on more than 2,500 claims in the past five years. Among our 40 dedicated environmental colleagues, nearly half have received Risk & Insurance’s Power Broker award, a designation given to risk management professionals based on demonstrated excellence in solving insurance-related issues, per client testimonial.

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Excess of Indemnity

Protection

Confidence

Customization

The excess of indemnity solution

Why Marsh

Our people

James Vetter

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Excess of Indemnity

Protection

Confidence

Customization

The excess of indemnity solution

Why Marsh

Our people

James Vetter

Doing a deal and worried about what will happen if there is a contractual default?

Related insights

Understanding and addressing PFAS: Risks, regulations, and mitigation strategies

Mitigating potential environmental risk to facilitate asset sale

Effective risk management in the clean energy transition

Supporting the transition to clean energy