By Diane R. Butler
Getting a firm handle on environmental insurance can be a tricky and complex maze. Fortunately, “Brownfields: A Comprehensive Guide to Redeveloping Contaminated Property, Third Edition,” written by Todd S. Davis and Scott A. Sherman has been thoroughly refreshed to provide stakeholders with a pre-eminent source for putting brownfields redevelopment into action.
This excerpt from the 1150-page book provides a tutorial on how to navigate one's obligation for environmental insurance needs—in this context it deals with how to deploy old—or legacy—insurance as a Brownfields funding tool.
Insurance Coverage Issues Raised by Brownfield Projects
Insurance issues related to the purchase and redevelopment of contaminated property fall into two categories: prospective, relating to obtaining new coverage or retrospective, relating to payments under previously issued insurance policies. This chapter will address the latter aspect of insurance-related issues. However, specialized insurance brokers have expertise related to the ever-changing insurance products available to those seeking to purchase coverage to protect their projects going forward, and should be consulted before decisions are made.
Insurance Archaeology: What Is It?
In order to determine whether historical insurance policies may be a useful tool in funding a brownfield project, the first step is to gather and analyze all of the potentially applicable historical coverage that relates to the site. Insurance archaeology is the systematic recovery and analysis of insurance policies as far back as records will allow. Environmental liabilities that arise out of past business operations on a site may be offset by insurance coverage purchased at the time the pollution was taking place.
This is the case because most general liability policies written prior to 1985 did not exclude coverage for pollution. Once overlooked because they had long since expired, old policies are now recognized as vital assets worth millions of dollars that can make or break a real estate deal. Successful business managers are beginning to understand the significance of taking advantage of brownfields statutory schemes while at the same time pursuing insurance proceeds to assist in funding site cleanup.
The first step is to look at the history of the site to identify all of the past owners. If the developer is purchasing from a seller who has owned the property for decades, the developer should include a clause in the purchase agreement explicitly stating that it is acquiring the right to pursue coverage under the sellers' old insurance policies.
If the developer already owns the property or if there were multiple owners prior to its purchase, it is necessary to identify each of the past owners as far back in time as the first industrial operations on site. The developer should contact the past owners and request that they assign the rights to the insurance proceeds of the historical liability policies to help pay for the cleanup of the site. Past owners may not agree to this request, and their policies may prohibit assignment without the insurer's consent, but this request may initiate a dialogue. If the company has an ongoing business, it may be reluctant to assign rights to its historical coverage if they face any additional environmental liabilities and may need to tap into that coverage for remediation costs at other sites.
The best solution in this case is to persuade past owners to join with the developer in making an environmental claim to their historical carriers that would include the site in question, as well as any other sites at which they retain liability.
This approach works surprisingly well once prior and current owners and operators realize that if they fight over rights to the historical policies, the insurance company wins. The longer the predecessor(s) and current owner dispute rights to the insurance proceeds, the longer the insurance company keeps its money. Therefore, developers and past owners should agree to find a way to split the proceeds of the historical policies that is fair and equitable, then unite to present a compelling claim to the carriers so that they will pay some or all of the costs to remediate the site in question and any others that get wrapped into a comprehensive environmental claim.
Will the Insurance Company Agree to the Assignment of Insurance Rights?
There is ample case law examining when one corporation can be held the successor-in-interest to another corporation. A corporation that merges with or purchases assets of another corporation may be deemed to have assumed the liabilities of the corporation with which it merged or from which it purchased assets. This raises two issues: whether the successor corporation has the right to claim coverage under the predecessor corporation's policies and (2)whether the successor corporation can recover under its own policies for liabilities that arose out of activities of the predecessor.
Many insurance policies contain a term providing that any assignment of interest under the policy does not bind the insurance company until the insurance company provides consent. Even with this "no assignment clause," courts have found that the clause does not prevent a successor from recovering under a predecessor's policies in the event of a statutory merger or consolidation.
Courts have held that the no assignment clause contained in the predecessor's policy will not bar coverage for liability transferred to a successor if the predecessor's policy would have provided coverage had the transaction not taken place. A major rationale in these cases has been that the insurance coverage should follow the underlying liability, in spite of a no assignment clause, where there is no increase in risk to the insurer.