VideoIf regulators choose to require that corporations report their environmental risks more conservatively, finite-risk environmental programs might become even more prominent. Currently, users of finite-risk arrangements most often seek "to create an insurance asset that is used to offset environmental liabilities," Anderson wrote in a recent unpublished paper. It follows that if companies are reporting greater expected future costs, they'd want to show investors that they've also set up effective ways to fund them.
Hot Property
While pollution insurers are hoping that pressure for more accurate reporting will translate into corporate demand for their products, one area of environmental insurance is hot right now. As it has for a number of years, experts observe, this coverage is playing a key role in the transfer of polluted land via mergers, acquisitions, divestitures, property sales, and outright donations.
Environmental coverage can be used as a way to get the buyer and seller to agree on future cost estimates. Unlike unsold polluted sites, for which the true cleanup costs won't be known for many years, "in a merger or sale, the buyer forces the actual reflection of the expected costs," according to Dybdhal.
Despite the often wide range of estimates for future cleanup costs on a site, the buyer and seller have to lock in on a fixed price, says Dybdhal. Exacerbating the problem is that in preparing their estimates, the parties tend to perch on polar extremes. "The seller will always gravitate toward the best-case scenario...to maximize the sales price," he adds, while the buyer will hire engineers to scour the terrain for the gloomiest possible outcome.
The purchase of insurance by the seller can help bridge the gap between the two estimates by covering the contingency that the seller's estimate is too low. Environmental impairment liability insurance, for instance, "provides comfort to buyer and seller that a third party will come in and deal with any unknowns," says Robert Colangelo, executive director of the National Brownfields Association in Chicago.
A brownfield, according to the Website of the Environmental Protection Agency, is "a property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant." Brownfield sites — typically abandoned, idle, or underused — often show good potential for upgrading and for other uses, say advocates for their development. And indeed, both EIL and cost-cap coverage are being used in many brownfield transactions.
A particular challenge for companies in brownfield programs is managing the future liability risks of a site they no longer own. To assure buyers and sellers that the land will be clean and that unexpected legal costs will be covered, some insurers are offering "liability buybacks." In such arrangements, the insurer acts in tandem with environmental consultants and engineers to take over the assessment of a site, manage its ongoing cleanup, and insure the company's liability. In the case of Quanta Capital Holdings, the technical pollution people work for divisions of the company.
Early this year, for example, a Quanta unit agreed "to assume environmental liability" from Acordis Cellulosic Fibers Inc. for a rayon plant in Axis, Alabama, that had been shut down in 2001. With profits in the rayon business in the United States and Europe flagging because of stiff competition from Asia, the company wanted to achieve "an elegant exit" from the Axis plant, says Wayne Currie, the health, safety, and environmental director of Acordis Group, the Netherlands-based parent company of Acordis Cellulosic.
The company's solution was to enter the approximately 580-acre site into the Alabama Department of Environmental Management's brownfields program, remediate its pollution, and donate it to Mobile County.
Cleaning up the plant and its grounds under the state's voluntary remediation program provided the company with a way of divesting itself from the site "in an open and transparent manner," says Currie. And if the state productively redevelops the land, he believes, it could provide jobs for some of the 400 workers the company laid off when it shut down the plant.
Mobile County coveted the 10-million-gallon-per-day wastewater treatment plant and other buildings on the site, according to a Quanta summary of the project. Up until 2000, however, the rayon mill "was the biggest producer of toxic air emissions in Alabama and one of the top producers of toxic air emissions in the country," the Mobile Register reported in 2002. To be sure, toxic air releases dropped from about 11 million pounds in 2000 to under 4 million pounds in 2001, when the mill ceased operating, according to EPA figures. Further, Environmental Strategies Corp., now a Quanta subsidiary, found that the risk of ground and groundwater contamination was low, notes Currie.
Mobile County officials, however, didn't want to assume any pollution liability or plant-contamination costs, according to Quanta. "Having donated the site to Mobile County and entered [it] into remediation, we needed to deal with those risks of which were aware," says Currie. After Environmental Strategies assessed the site, Acordis placed "multimillions" of dollars into a trust fund to finance the entire anticipated cost of the cleanup, he adds. (Currie would not specify the exact amount the company placed into the fund.) Quanta Liability Transfer of Alabama contractually assumed the responsibility for managing the remediation. Acordis also bought cost-cap coverage from Quanta and pollution legal liability coverage from AIG.
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