A common concern in many mergers and acquisitions (M&A) is potential exposure to environmental risks, which can adversely impact an M&A transaction at multiple points, including:
Controlling risks during M&A transactions has been facilitated by the evolution of insurance solutions tailored to M&A needs. For environmental risks, these insurance solutions include pollution legal liability (PLL) insurance and representations and warranties (reps and warranties) insurance.
For decades, PLL insurance has been the traditional solution for managing M&A related environmental risks. However, more recently, reps and warranties insurance has evolved to cover some transactional environmental issues. Implementing a sound environmental risk management program requires an understanding of both these solutions and how to dovetail coverage to maximize protection.
Specific representations and warranties regarding environmental matters are made in the purchase and sale agreement. The parties’ due diligence and disclosure exercises may include obtaining Phase I due diligence reports (site assessments) and other environmental documentation that describes known conditions, or may include specific disclosures of environmental issues.
Reps and warranties insurance covers certain environmental risks under the definitions of “loss” and “breach.” For coverage to be triggered, there must be a loss associated with a breach of an underlying representation and warranty. From an environmental perspective, a breach would be the discovery of a pollution condition that was previously unknown to the buyer or seller, depending on the type of policy acquired. The insurer then would typically pay for losses associated with such unknown pollution conditions.
When using reps and warranties coverage for environmental risks, the following should be taken into account:
Although reps and warranties insurance provides some environmental coverage, PLL is the primary insurance for environmental risks since it is explicit, broad, and defines environmental coverage, such as cleanup (pre-existing and new), third-party bodily injury, property damage, natural resource damages, business interruption, nonowned disposal sites, divested properties, and legal defense with duty to defend. Other PLL coverage benefits include:
Several reps and warranties carriers have indicated that they are not looking to replace the broad PLL policy coverage and would prefer that it sit in excess of an existing environmental policy as representations and warranties insurance is generally viewed as an excess policy for environmental matters.
PLL and reps and warranties insurance should be used together to cover high-risk industries where no reps and warranties insurance is available for environmental matters. However, PLL is best applied as primary coverage where there is a need to provide: