EIL can bridge environmental coverage gaps for M&As

Environmental risks have become critical in mergers and acquisitions (M&A) but most warranty & indemnity (W&I) policies have a blanket exclusion for any claims related to pollution, and these gaps can leave large exposures that are not covered by any existing insurance policy, according to WTW. But the broker says environmental impairment insurance (EIL) can help transfer the risk, remove sticking points, and bring benefits for both sellers and buyers, and the cost of EIL premiums for M&A is dropping as there is more competition for this type of business. In a recent update, Managing environmental risks in mergers and acquisitions, WTW notes that environmental risks are liabilities that can be passed on with property and assets in M&A transactions which, if they are not allocated properly, could hold up or endanger a deal. Historic pollution is a particular concern in M&A and land deals as the liabilities can be passed on through the transaction, together with other types of pollution such as industrial, soil, air, surface water, odour, dust and biodiversity. “Environmental liabilities can affect the warranties and indemnities in M&A contracts and potentially get in the way of deal completion. For example, if a site involved in an acquisition has a known pollution source and there is a potential pathway for it to migrate to a receptor, such as a river, that’s a significant risk. There can also be unknown pollution risks, not identified in the sale and purchase agreement (SPA), which may only emerge post-transaction,” says WTW. It adds that sellers will want to pass on the environmental liabilities for the pollution so they can have a clean exit, while buyers need to be fully aware of what these pollution liabilities are so they can decide whether to take them on. EIL can cover both known and unknown future pollution liabilities, WTW explains, and transferring these environmental risks can remove complications and prevent them getting in the way of a deal. “By capping off potentially complex liabilities, buyers can improve their bidding position in a competitive bid situation, and sellers make a clean exit and increase the pool of buyers who might otherwise be put off by those liabilities,” it says. Policies are available covering periods up to ten years so that any historic pollution discovered during the previous ten years can be claimed for, which can give buyers more confidence that all liabilities will be covered. WTW warns that more and more general liability and property policies are actively excluding cover for emerging risks, and unlike these policies, EIL can include climate-related environmental damage caused by long-term gradual emissions, which has been an increasing source of claims and legal cases in recent years. It adds that EIL can also cover biodiversity loss whether the loss is caused by pollution or the impact of a company’s activities. This, says the broker, is an increasing source of public concern, with regulations developing quickly in many countries.

EIL can bridge environmental coverage gaps for M&As

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