INSURANCE: Sharing the Risks of an Environmental Cleanup

“Additional costs are incurred at many environmental clean up projects when higher concentrations of contamination are discovered or more of the site is contaminated than originally anticipated.”

Most companies that own contaminated property just “sit on it.” This prevents the reported liability from changing, and the problem is “managed” for a time through regulatory negotiations.

However, Birmingham Steel, Birmingham, Ala., along with Emsource, Portland, Maine, chose a different route to manage a contaminated site. In 1997, Emsource acquired the environmental liability of a site once operated by Norfolk Steel, a division of Birmingham Steel, which rests on 65 acres of commercial property in Virginia. To spread out the potential liabilities of this site's cleanup, the two companies used a rapidly growing risk management approach, known as environmental risk transfer, that allows cleanup liabilities to be “sold” to another company.

Birmingham Steel began studying its options when it closed Norfolk Steel in 1986. The company first began its negotiations with regulatory authorities to close a number of waste management units on the property. During the next several years, Birmingham Steel investigated the extent of the waste management problems and its cleanup options.

When Emsource took over the site's management, the company assumed all uncertainties accompanying the cleanup and long-term care. In exchange, Birmingham Steel capped its potential cleanup costs while cleaning up its balance sheet.

Typically, Emsource transfers all the environmental risks from a contaminated site, or a portfolio of sites, to a special purpose entity, in this case — Emsource Chesapeake. To make the Birmingham Steel deal work, Emsource purchased an environmental insurance program specifically designed to cover contaminated property. The policy insured both companies, which gave Birmingham Steel the added assurance it needed to transfer the problem and the real estate to Emsource.

The companies also purchased a specialized policy covering Pollution and Remediation Legal Liability (PARLL), Remediation Stop Loss (RSL), and Legal Defense. PARLL protects against the cleanup cost of any previous, unknown contamination.

Likewise, RSL coverage addresses any unknowns occurring during the remediation, thus enabling Emsource to “cap” the project's maximum cost. Additional costs are incurred at many environmental clean up projects when higher concentrations of contamination are discovered or more of the site is contaminated than originally anticipated. Insurance carriers offer RSL coverage only after careful consideration and seeing a proposed cleanup plan. These policies work best when there is ongoing communication and cooperation between the insurance company and the insured. In this case, Emsource provided its insurance company with monthly reports detailing all aspects of the remediation activities.

In addition, during the property's remediation phase, Emsource and Birmingham Steel were protected against third-party bodily injury or property damage claims caused by contamination migration. Also, legal defense costs from any environmental claims were covered. And Emsource was protected for any financial or legal exposures from managing the waste including its disposal.

To avoid cost overrun claims, it's in the best interest of the insurance company to carefully monitor expenses. In this case, the insurance company's environmental consulting staff reviewed Emsource's contractors' bids and proposals, helped them evaluate different cleanup options, advised on contractor selection and monitored all expenses from the cleanup.

With the help of its insurance company, Emsource's costs were contained. The project was completed under budget, and the site has moved to a phased monitoring program. Additionally, Virginia has given the property its environmental seal of approval, declaring it clean in Dec. 2000. In 1998, part of the site was sold to a yacht builder; the balance is for sale as well.

Insurance companies can play a large role in transactions such as these. In the Birmingham Steel and Emsource project, the insurance company's primary job was to capture and eliminate the many unknowns that accompany environmental cleanups.

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