VideoLombard's policy is designed to provide expanding coverage as it acquires other metals-finishing companies. "We've got a security blanket for now, and have set the stage for the future," Chapman says.
Columbia Energy Group is in the process of negotiating a similar master pollution program to transfer the EIL risks of its future acquisitions. The novel policy would provide up to $100 million in coverage above a self-insured retention layer, a deductible of sorts that Columbia manages through its corporate-owned captive insurance facility, Columbia Insurance Group Ltd., in Bermuda. "EIL insurance is an important tool for us in our ongoing acquisition strategy to protect against [targets'] known and unknown environmental exposures," says Michael O'Donnell, senior vice president and CFO of the Herndon, Virginia-based diversified energy company.
Columbia's captive is used to manage the known environmental risks of acquired companies. "If we agree that the known environmental liabilities are, say, $6 million, our captive will insure that for a $6 million premium," says Nick Parillo, Columbia vice president of risk management. "If losses develop favorably over time, we will credit back the seller a specific percentage of the premium paid." Above the captive sits the $100 million insurance policy for unexpected pollution losses.
Prior to inking the master program, Columbia used EIL insurance in several acquisitions, including the purchase last year of Carlos Leffler Inc., a Harrisburg, Pennsylvania-based heating oil and propane distributor. Columbia's outside environmental consultant, Chicago-based Dames & Moore, had analyzed Leffler's eight facilities for environmental contamination and found several with significant migration issues; that is, hazardous materials beginning to seep onto other properties.
The cost to remediate was estimated at $7 million, the figure ECS used as the deductible for a $100 million policy covering third-party personal- injury and property damage. The cost for the insurance was only 3 percent of the coverage limit — a great bargain, says Parillo. "We were so pleased by what we got that we decided to go full bore with a master program," he adds.
Parillo is most amazed at the rapid maturation of the EIL market. "Five years ago, I searched for insurance to cover our environmental risks, and there was nothing, absolutely nothing, there worth a dime," he says. "Each year, I take another peek and am amazed at the improvement. Who knows what I'll see next year?"
Russ Banham is a contributing editor of CFO.
Old Ways Die Fast
Insurers now scramble for business where once they feared to tread.
Five years ago, the environmental impairment liability (EIL) market was a no-man's-land of insurance. Not only was the insurance rarely considered a deal-saving alternative to escrowed funds, it was barely considered at all. Few companies bought the insurance, other than those that were in the business of environmental services, such as landfill operators and waste transporters. These companies were required by federal and state regulations, including the Resource and Conservation Recovery Act; the Comprehensive Environmental Response, Compensation, and Liability Act; and the 1980 Superfund law, to show evidence of financial responsibility for pollution liability. Insurance often was the simplest recourse.
More mainstream companies, including manufacturers, real estate firms, oil and chemical companies, and myriad smaller concerns, from dry cleaners to hospitals, elected to forgo the coverage. Instead, they relied on their comprehensive general liability (CGL) insurance policies to pick up pollution risks. When the environmental movement was born in the 1980s, following the Love Canal debacle in upstate New York, these companies began filing claims against their CGL insurers alleging property damage and bodily injury losses attributed to pollution causes. Lots of litigation followed, much of it won by insureds. The result: CGL insurers carved an absolute pollution exclusion into their policies beginning in 1985.
Although this development compelled companies to cover environmental exposures with stand-alone EIL insurance, introduced by American International Group (AIG), in 1979, the underwriting requirements were so restrictive few gave it serious consideration. Hundreds of forms had to be filled out, and applicants had to pay for an audit of their pollution exposures by environmental engineers before insurers would even pick up the phone. Such surveys typically cost $10,000 per site, a sum worthy of Croesus for a multisite manufacturer.
What's worse, companies could buy no more than $5 million in coverage limits to absorb their environmental exposures, a pittance compared to the overall risk, and only after a hefty deductible and a 20 percent premium were paid. No wonder few plunked down the pennies. Given the high cost, onerous underwriting requirements, and scant coverage, who could blame them?
Along the way, however, other insurers entered the EIL market, and injected a dose of competition into the stagnant business. As these insurers gained underwriting experience, distinguishing the differences between risk classes, EIL insurance limits perked up. The underwriting requirements, such as the need for buyers to conduct and pay for their own environmental assessment studies, gave way. Insurers now routinely perform these analyses at their own cost. Meanwhile, the few hundred forms to fill out have dwindled to a four-page report, and, most important, prices have avalanched, down 70 percent in the past five years.
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