Researching the Right Insurance Policy Can Save Your M&A Deal

The Bottom Line

• Tailored insurance policies take work but offer a strong safety net to protect against hazards in mergers and acquisitions.
• Pollution concerns have changed since the 1960s, with “forever chemicals” dominating the current conversation and forcing careful consideration of what kind of policy is necessary.
• Because insurance law depends on the jurisdiction, results and coverage principles can vary widely.

Environmental contamination is a perennial concern in transactions involving real estate, one that has only worsened in recent years due to fears surrounding per- and polyfluoroalkyl substances, or PFAS. Fortunately, insurance presents a means to remove environmental risks as deal-closing roadblocks.

However, to leverage insurance successfully—either by relying on existing insurance policies or by procuring new ones—it’s important to understand the complex coverage issues that arise with respect to environmental liabilities. Such an understanding, in turn, is often further complicated by the ever-changing legal landscape of pollution-risk coverage. Nevertheless, the potential benefits gained at the negotiating table by eliminating or reducing concerns about environmental contamination often make this necessary due diligence worth the effort.

Available Coverage

Prior to the late 1960s, companies relied heavily on general liability policies to protect against third-party liability arising from environmental risks. That’s because general liability policies were interpreted to provide coverage for a wide range of harms, including those caused by pollution.

By the early 1970s, however, the insurance market was changing. The establishment of the US Environmental Protection Agency coincided with a surge of environmental claims that caused insurers to rethink pollution coverage under their general liability policies.

Insurers responded by tightening general liability coverage through the inclusion of pollution exclusions. This began with the inclusion of the so-called “qualified” pollution exclusion, which allowed coverage for pollutant releases that were “sudden and accidental,” such as storage tank ruptures, but excluded releases that were more gradual in nature (subject to certain exceptions and idiosyncrasies in applicable law).

By the mid-1980s, most general liability policies included “absolute” pollution exclusions, which bar coverage for damage caused by the release of pollutants regardless of whether the release was “sudden and accidental.”

Further adding to the variation in pollution coverage, jurisdictions haven’t uniformly given pollution exclusions the same scope of effect. For example, in certain jurisdictions, pollution exclusions have only been applied to “traditional” instances of pollution, such as a release from a facility.

Other jurisdictions have applied them more broadly, including excluding claims involving exposure to harmful substances in products, including those that contain PFAS, such as personal protective equipment, food packaging, and fire-fighting foam.

These two overarching schools of thought regarding the pollution exclusion are comprised of countless variations on a state-by-state and even court-by-court level.

It should be no surprise, then, that the pollution exclusion remains one of the most litigated issues for environmental coverage, and the outcome often turns on which state’s law applies to the insurance policy.

Pollution Legal Liability

To fill the gap left by pollution exclusions in general liability policies, insurers developed Pollution Legal Liability insurance (and for contractor operations, Contractors Pollution Liability insurance). These standalone policies offer customized coverage for a range of environmental exposures that would generally fall outside modern general liability coverage.

PLL policies are typically sold on a claims-made basis and are highly customizable. Depending on need, policies can include coverage for:

• Third-party bodily injury and property damage claims resulting from on-site contamination, including where on-site contamination migrates off-site
• Cleanup costs, whether ordered by the government or voluntarily undertaken
• Both pre-existing and future contamination
• Both unknown and, to some extent, known contamination
• Business interruption losses caused by pollution events
• Legal fees and costs associated with environmental claims and investigations
• Claims for natural resource damages and environmental degradation

Because of their flexible structure, PLL and CPL policies are often used in connection with mergers, acquisitions, and real estate transfers involving properties with known or potential contamination to shift environmental risks away from the parties and onto an insurance company.

PFAS Risk

PFAS are a family of synthetic chemicals used in products such as firefighting foam, water-repellent fabrics, non-stick cookware, and other industrial and consumer products, as well as industrial processes. These chemicals are persistent in the environment and in human bodies, earning PFAS the nickname “forever chemicals.”

Concerns over PFAS’ affect on human health and the environment have led to a barrage of lawsuits and enforcement actions, ranging from property damage claims, to product liability claims, to claims involving adverse impacts on natural resources and drinking water. As such, PFAS contamination is a prime example of a multi-faceted environmental risk that defies off-the-rack coverage solutions—standard policy forms rarely affording coverage for all risks under all applicable law. Instead, coverage depends on a variety of factors.

Policy type and liability theory. Some general liability policies written before the widespread use of pollution exclusions may still provide coverage for PFAS-related bodily injury or property damage. In jurisdictions that only apply pollution exclusions to “traditional” pollution, certain PFAS contamination may not be excluded under later general liability policies—for example, where contamination results from the use of PFAS-containing products.

Conversely, just because there is a PLL policy doesn’t mean PFAS will be covered. Some insurers now include PFAS-specific exclusions in their PLL policies when a site has a history of PFAS use. Further, PLL policies typically contain product liability exclusions—albeit with varying scopes.

Other policy language. Beyond the pollution exclusion, any other number of exclusions or coverage-limiting terms may apply. A PLL policy may exclude releases from underground storage tanks, specific substances, or contamination discovered during capital improvement projects.

Rather than attempt to identify every potential coverage-defeating term that may apply to any given situation, we offer instead this admonition: To employ insurance against environmental risks successfully, it is essential to vet proposed coverage for terms that may defeat coverage in potentially relevant circumstances. That level of due diligence is generally only possible through the coordination of environmental counsel (to identify the risks), coverage counsel (to assess the legal effect of the proposed policy’s terms), and a broker (to seek the best terms the market can provide).

Whether contamination is known to exist on site. Standard pollution policy terms typically exclude known conditions, and it’s becoming increasingly difficult to find insurers willing to expressly underwrite the risk of known conditions broadly. Still, there remains market appetite to insure such risks, even if to a limited degree (such as only insuring against claims for bodily injury and property damage).

Even when policy terms are written to cover such risks, certain states’ laws can interfere with coverage. For example, a state may have a “known loss” doctrine that renders such conditions uninsurable as a matter of law (again, subject to much variation on a state-by-state basis). In the end, insuring against known conditions is possible and worthy of investigation. Success, however, depends on close coordination between broker and coverage counsel to ensure the policy being procured adequately covers the known condition.

Whether the policy is a new policy or a pre-existing policy. Parties looking to purchase a new policy to cover a risk have the flexibility to choose the terms that suit them (subject to market availability) and to insure the entities they wish to insure. This isn’t the case when parties hope to avail themselves of existing coverage (such as a buyer hoping to avail itself of the seller’s insurance).

Not only are those terms set, and must be evaluated for potential coverage, there can be issues with policies’ anti-assignment provisions. Like so many other issues, state law varies on the effect of anti-assignment provisions in insurance contracts. As such, one must evaluate whether existing coverage can be leveraged for the benefit of the desired party.

Applicable law. As discussed above, the law that applies to a policy can have tremendous ramifications for coverage. Applicable law may be determined by a policy’s choice of law provision or, absent that, by other factors such as the insured’s address listed on the policy or the insured’s location during the application and policy procurement process. In the end, policyholders are always encouraged to investigate the effect of applicable law in a proposed policy before binding coverage.

This list is far from exhaustive. Complex environmental risks, such as PFAS, present a tremendous number of coverage issues. It is essential that the parties to a potential real estate transaction perform the required due diligence when investigating insurance as a potential solution to an environmental risk.

Insurance Due Diligence

In the past, companies commonly tasked their environmental counsel and their broker to perform all insurance-related due diligence. While environmental counsel and brokers are excellent resources, this strategy wasn’t always sufficient to get to the bottom of complex legal issues related to insurance coverage for environmental risks.

Insurance law is jurisdiction-dependent, and results can vary widely from jurisdiction to jurisdiction. Further, even within the same jurisdiction, coverage principles often remain in flux.

For instance, in April, the US Court of Appeals for the Tenth Circuit in Chisholm’s Village Plaza v. Cincinnati Insurance Co. reversed a district court’s policyholder-friendly “Erie guess” regarding the scope of pollution exclusions under New Mexico law in favor of a less coverage-expansive interpretation.

The Tenth Circuit’s decision is far from the final word, however. The New Mexico Supreme Court could weigh in at any point, recasting what we currently understand of New Mexico law regarding the pollution exclusion. As New Mexico law illustrates, it is critical not only to understand the latest developments in the law, but to understand where the law may be headed. Changes in the law can reshape the contours of the coverage purchased—sometimes in ways that aren’t desirable for the policyholder.

Practical Implications

Today, buyers, sellers, lenders, and developers do themselves a disservice by not considering insurance as a potential solution to environmental risks. Procuring the correct insurance, however, can present its own challenges. To maximize the chance of success, it is critical to consider the availability of historical coverage and be open to negotiating new insurance coverage.

In transactions involving legacy commercial properties, old policies may provide a source of defense and indemnity—especially if they pre-date the pollution exclusion. It is nearly always worth investigating what coverage may already exist and may be leveraged, even though that task can sometimes be an intensive one.

PLL insurance is highly customizable and can even be tailored to provide coverage for liabilities associated with known contamination. General liability policies too can provide some limited assurance, assuming favorable law applies.

However, it is essential to perform due diligence on how proposed policy terms are construed under applicable law in addition to shopping around for the best terms available in the market. Brokers are proficient at the latter but can lack the legal expertise necessary for the former. That is why in modern deals, it is common to see coverage counsel retained to work with the broker and environmental counsel to ensure the coverage procured is sufficient for the risk identified.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Reese Letourneau is an associate in the Insurance Recovery Practice Group at Haynes Boone.

Storm Lineberger is an associate in the Insurance Recovery Practice Group at Haynes Boone.

Andrew P. Van Osselaer is an insurance coverage and environmental litigator at Haynes Boone.

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