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International environmental coverage

As companies look to purchase assets internationally, they need to consider the potential environmental implications and take the necessary actions to secure the appropriate environmental coverage for these transactions.

Focus on global environmental conditions increases need for adequate coverage

Global mergers and acquisitions reached an all-time high in 2021, with deals amounting to US$5.9 trillion. As companies look to purchase assets internationally, they need to consider the potential environmental implications and take the necessary actions to secure the appropriate environmental coverage for these transactions.

Properties and business activities across all industries have potential environmental exposures. Liabilities can arise either from pre-existing pollution conditions due to historic operations that can remain undiscovered for a long period or new pollution conditions, such as spills, that occur after the transaction date.

An enhanced focus on environmental, social, and governance (ESG) issues is also leading to increased scrutiny by both regulators and lenders, underscoring the importance that companies secure the necessary coverage to facilitate the transaction process.

Finally, there is increased “social inflation”, as individuals and communities scrutinize and react more strongly to environmental matters.

When is international environmental coverage needed?

As the focus on global environmental conditions continues to evolve, companies are seeking to understand their multiple potential exposures, which may include:

  • Transactional exposure. This is a factor when purchasing sites that may have pre-existing pollution conditions that are in place and unknown at closing. Coverage can be retroactive with supporting environmental diligence. 
  • Operational exposure. The potential for new pollution conditions resulting from spills or releases due to daily operations could threaten the viability of a deal. Pollution legal liability (PLL) coverage can cover this risk once the policy is issued. Typically, it will not cover previous events or pre-existing pollution conditions during the policy period if specific coverage has not also been purchased.
  • Contractual requirements. M&A transaction contracts or lenders may require environmental coverage in order for a deal to move ahead.
  • Mandatory, country-specific requirements. Some countries require environmental insurance to be in place due to site operations and associated potential exposures. Since these regulations are country-specific and may apply to particular industries, it is important to work with your broker or insurance compliance department to understand whether these requirements apply to any of your actual or acquisition target operations overseas.

Addressing international environmental risk

A PLL policy can help protect an international merger or acquisition against losses related to the discovery of pollution conditions, including legacy pollution conditions in place at the time of the transaction. PLL policies typically cover losses related to:

  • On and off-site environmental cleanup costs
  • Third-party bodily injury
  • Third-party property damage
  • Legal defense expenses
  • Environmental damage (Europe)/natural resource damage  (United States)
  • Business interruption

There are two main types of international PLL policies available in the market:

  • A global policy that is designed to cover all locations within a portfolio.
  • A local policy that is issued by a local insurer to cover individual locations within specific countries.

Buyers acquiring sites in different countries as part of the same deal often purchase a global policy that provides coverage for all of the locations within the transaction, with specific exclusions and limitations for each site. A global policy can reduce the risk of coverage gaps or overlaps and streamline the renewal and claims process. A global policy typically includes a parental indemnity, meaning claims will be paid to the parent company, which will then need to determine how to disperse the funds to the affected locations.

On the other hand, local policies pay claims directly to the affected locations, reducing payment lags. But managing multiple policies can create administrative difficulties, especially at renewal.

While most companies prefer to purchase global policies, some countries may require a PLL policy underwritten by a local insurer.

Insurer appetite remains but scrutiny has increased

There is insurer capacity and appetite for addressing legacy and new environmental conditions in the United States. To underwrite legacy-related coverage for international placements, carriers typically will, at a minimum, want to see a Phase I environmental site assessment of the site (or equivalent reports) — that provides an overview of the site history, operations, and the associated environmental risks — preferably carried out within the last year. For high-risk industries, such as oil and gas, or locations with extensive exposures, including sites with a heavy industrial history, insurers may be able to provide broader coverage if a Phase II environmental assessment is available.

Appetite for international environmental risk remains strong, although it varies per country. For example, while insurers are typically comfortable underwriting operational and legacy exposures in Canada, Europe, and Australia, exposures in locations such as Brazil, China, India, and Mexico have a more limited appetite and will likely require more discussion around the risk. In these instances, the amount of available and current environmental diligence plays a direct role in securing maximum coverage.

However, insurers may still be willing to underwrite risks. For example, a company purchasing an industrial facility in Brazil was facing some challenges with securing coverage for pre-existing conditions due to the site’s location and long industrial history. The purchasing company, with the assistance of Marsh's specialists, approached several markets and was able to secure quotes for the desired coverage with no known pollution conditions exclusions. The most competitive quote offered the needed coverage — including on- and off-site cleanup costs, third-party bodily injury, property damage, legal defense expenses, non-owned disposal sites, and business interruption — for both new and pre-existing conditions with no retroactive date: Given the industrial nature of the property, a third-party trigger was applied for on-site cleanup resulting from pre-existing conditions, as well as a capital improvements exclusion, providing the purchasing company with the coverage it required to manage its risks.

Note also that US-based insurers are typically not able to cover risks in countries subject to sanctions by the US Department of Treasury’s Office of Foreign Assets Control (OFAC).

Understanding compulsory, country-specific requirements

Environmental risks are inherent in all industries and loss potential exists in countries around the world.  It is critical to understand environmental risks, whether transactional or operational, across your entire portfolio. 

Whether your site is located in a country that requires a local policy or you can cover all locations through a global policy, it is critical to understand country-specific regulations where insurance may be required by law, and purchase coverage that is responsive to pre-existing and new environmental conditions. 

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Corinne Dougherty

Corinne Dougherty

Assistant Vice President, Environmental Practice

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