PLL is typically purchased due to regulatory, contractual, financial, and/or risk management requirements. PLL provides coverage for bodily injury and property damage resulting from third party claims, on- and off-site clean-up, and legal defense expense resulting from pollution conditions. A contaminated property refers to any parcel of land or building that is polluted by a release of an irritant or contaminant that has an adverse environmental effect on air, water, or soil.

There is a common misconception in the private equity community that PLL coverage is not available for liability, including remediation, associated with known contaminants. This is simply not true. The amount and extent of PLL coverage available for a property that has a known contaminant can depend on the answers to the following questions:

• Has the contamination migrated off-site?
• Is ground water contaminated? If so, is ground water utilized as a potable source?
• Is the geology of the area such that the contamination can travel off-site quickly?
• Is a residential area a potential off-site receptor of the contamination?
• Are the contaminants in question chlorinated solvents?

It is unlikely that an insurer will provide remediation coverage for known pollution conditions on a traditional PLL policy if the answer is “yes” to too many of the aforementioned questions. However, remediation coverage in some form can be procured for known conditions if:

• The contamination on and around the site is well characterized, the surrounding area is well documented, and concentrations are below actionable levels (i.e., commercial to industrial vs. residential with potable drinking water wells).
• The trigger to activate the coverage is changed from discovery to a government-mandate. In other words, a federal, state, or local governmental body requires the clean up of the contamination. This can only happen if the property has a release (No Further Action (NFA) letter or covenant-not-to-sue) from a regulatory agency.

Clean-up Cost Cap (CCC) coverage could be a viable alternative if an NFA is not available and “known” contamination still exists at the property site. CCC (or remediation stop loss) provides risk transfer insurance above the known contamination and a deductible layer (which is set between 10% and 30% of the remediation cost). CCC protects an insured from cost over runs associated with the remediation and liability of a known contaminant. CCC can be a viable option if the remediation cost for the known contamination is approximately $2.0 million; however, coverage can be purchased for remediation costs as low as $1.0 million depending on the type of contamination. The minimum premium for CCC coverage ranges between $150,000 and $300,000. Coverage can be secured for up to a 10-year policy term, and limits are available up to $50.0 million. A PLL policy is usually purchased in conjunction with CCC in order to extend coverage for the “unknown” conditions at the site.

There is another alternative that combines various elements of the above programs - Environmental Finite Risk (Finite Risk). Finite Risk is typically the only alternative in cases where the contamination is so great that CCC coverage is not a viable option. Finite Risk blends risk transfer and the power of the net present value of money allowing an insured to pre-fund a clean-up, in today’s dollars, and transfer the risk and the potential liability to a third party. The cost of remediation is typically transferred to an “A rated” insurer and placed into a conservative interest bearing commutation account. The insurer manages the account and provides remediation oversight.

Finite Risk is usually cost prohibitive since the estimated cost to the buyer can be as much as 70% - 100% of the estimated remediation cost. However, there are benefits in that the insurer will apply a limit of up to 200% of the remediation cost therefore capping the insureds liability. Also, the insured should be able to remove the known environmental liability off of their balance sheet as soon as coverage is bound; however, the applicability should be determined by an accountant or tax attorney.

Equity Risk Partners utilizes direct market relationships and specialized intermediaries in order to negotiate the best possible environmental coverage for our clients. We also work closely with third-party advisors such as environmental attorneys in order to manuscript policy endorsements that dovetail with specific acquisition objectives. When an intermediary is necessary we rely on firms like Tri-City Brokerage, DVUA, and New Day Underwriting Managers (New Day).

Recently, New Day secured coverage for the seller of an industrial property where a chlorinated solvent was used in the company’s manufacturing process for almost 40 years. In this case, the private equity firm wanted to purchase the manufacturing facility and sell it in approximately five years. In order to move forward with the transaction, the private equity firm required the seller to procure PLL that included them as an Additional Named Insured on the policy, and provided coverage for legacy environmental liabilities and new conditions.

The underwriting process was complicated by the fact that the seller would only permit non-intrusive due diligence (Phase I). Phase II (soil and groundwater sampling) was not conducted at the property. Multiple PLL insurers were approached and all but one quoted with chlorinated solvent contamination exclusions. After several meetings with attorneys (buy and sell side) and the environmental consultants, a ten year policy was successfully negotiated covering legacy environmental liabilities, which included three years of coverage for new conditions. Also, a “site investigation exclusion” was removed from the policy which allows a future buyer to conduct Phase II testing without negative ramifications related to the in force policies. The underwriting process took a little over four months, and the premium was approximately $425,000 with a $250,000 self-insured retention. The policy included a limit of $10.0 million per occurrence and a $10.0 million aggregate.

Here are some other important facts to keep in mind when considering PLL:

1. A PLL underwriter will still provide coverage for liability, third party bodily injury or property damage, at a contaminated location approximately 70% of the time even if they will not extend coverage for remediation.
2. The underwriting process for CCC or Finite Risk can take several months. This should be taken into account when determining your deal timeline.
3. A PLL policy can be listed as an asset if the company is sold prior to the natural expiration of the policy since policies can be issued for up to 10 years.

PLL should be strongly considered on every deal where property is purchased even if there are no known contaminants at the site. A PLL policy for a single parcel of property with a five-year term and $1,000,000 limit will cost approximately $35,000 - $50,000.

Josh Warren is Director, Marketing at Equity Risk Partners. Equity Risk Partners is the only full service insurance brokerage and risk management advisory firm dedicated exclusively to the needs of the private equity industry and its portfolio companies. For more information, visit www.equityrisk.com. Mr. Warren can be reached at 415-874-7129 or jwarren@equityrisk.com.

The following individuals also contributed to this article: John Heft, Vice President, and Jeff Slivka, Senior Vice President at New Day Underwriting Managers. Adrien Robinson, Midwest Regional Manager, AIG Environmental.

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