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Preparing for acquired environmental risks at the time of sale

Joseph Madigan, Head of Environmental, East Zone

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Head of Environmental, East Zone

In an active M&A environment, organizations are doing what they can now to head off potential environmental losses later.

In July 2019, a realty group in New Jersey purchased property in Camden, NJ. Two years later, the company found itself named in a suit alleging the company had failed to remove waste and contamination on the property that had accumulated onsite for years by the previous owner.

Nearly all business deals come with some element of environmental exposure. Particularly as merger & acquisition (M&A) activity heats up, organizations could find themselves inheriting a liability that could negatively impact business going forward.

M&A activity has picked up considerably post-pandemic. According to recent data, so far this year, 35,128 deals have been announced, a 24% jump over 2020’s activities.

Pre-sale Concerns
Acquiring new business is a risky undertaking. Environmental exposures may not appear until years after the merger, leaving organizations with an unwanted liability that could be costly. For example, in 2016 an agricultural biotech company was acquired by one of the world’s largest pharmaceutical companies. Two years later, a jury determined that a chemical in one of the biotech’s products caused a plaintiff’s non-Hodgkin’s lymphoma. The jury awarded the plaintiff $289 million and opened the floodgates for litigation for the acquiring company.

With comprehensive due diligence, existing environmental issues can be uncovered. But what about future environmental exposures? Fortunately, more robust risk management strategies have identified the presence of or the possibility of hidden environmental exposures.

And there are plenty of risks to consider. Soil contamination, air quality, water quality, food-borne contaminants, toxins used in manufacturing, and residual wastes could be present, and some could be overlooked or not yet fully developed into an environmental risk. An environmental exposure can do more than damage the environment: it can impact communities, workers, reputation, and the bottom line.

Yet even more exposures lie in wait. Vapor intrusion, emerging contaminants, and a changing regulatory framework can create new loss areas. These are all environmental hazards that often fly under the radar.

With comprehensive due diligence, existing environmental issues can be uncovered. But what about future environmental exposures?

Assessing the Acquisition
A thorough assessment of the entity can help uncover these and other hidden environmental risks. Start with a specialized team of experts, including environmental attorneys, real estate attorneys, mergers and acquisition attorneys and consultants, environmental specialists, a specialized insurance carrier and your own internal team. During the due diligence process, your organization should be considering the following:

  • Assess the site: This can help you understand the immediate environmental concerns on the property.
  • Research property history: Has the property had any claims that could indicate an environmental issue, such as: water intrusion; third party bodily injury claims; complaints from the community regarding air, soil, or water quality, or; legal action? Has the company been sued successfully for public health or contamination violations? How many owners has the property had, and what is their environmental history?
  • List of hazardous substances: What hazardous materials are present on the premises? How are they used and stored? Do employees wear proper protective clothing when handling these substances? Have there been any claims involving hazardous materials exposure?
  • Interview neighbors: Are there outstanding concerns? Do neighboring businesses have any issues or insights into operations?
  • Review compliance history: Look for proper permits and any violations or unpaid fines. Obtain copies of environmental permits. Have there been any citations, violations, or requests for information from regulatory bodies?
  • Obtain site audits: The selling company should have a record of all environmental management and internal reporting processes. Have there been internal or external audits? If so, obtain copies of those audits.
  • Review of other company locations: Look at the operations under the organization’s management. Request summaries of activities, including any claims, fines, violations, or litigation.
  • Determine insurance: Does the organization have a history of carrying environmental liability insurance on the location? Does the policy cover legacy claims and if so, for how long

Insuring the Sale and Beyond
Protecting against unforeseen losses is essential. Environmental liability insurance can help companies protect their financial interests and allay any concerns from buyers and lenders. It also protects the sale - lenders may charge more for debt or decide not to issue the loan where uninsured environmental liabilities are suspected.

The amount of coverage you will need will depend on the requirements of your lender and stakeholders. Work with a specialized insurance carrier to determine the level of risk your company is taking on, and how best to mitigate the exposures.

AXA XL specializes in environmental liability issues and can help you put protections in place that can reduce exposures now and going forward. For those risks that can’t be mitigated fully, our Environmental Insurance for M&A Transactions can cover those losses that your organization cannot absorb. Our coverage includes access to underwriting risk consulting and claims handling expertise, as well as emergency response services.

Acquiring with Confidence
Acquiring another organization comes with unknowns. In many cases, environmental exposures are present, and the liability your organization takes on could prove to be more than first expected.

As M&A activity increases, so too do the odds that hidden environmental liabilities will surface at some point in time. Doing what you can now to head off potential, costly environmental losses and protecting your investment takes on greater importance. A full review of the property, including history of claims and violations, can help uncover any potential for costly loss.

Mitigating those exposures in advance can protect your organization’s investment. With insurance programs more available and affordable, lenders now see environmental insurance as an effective risk transfer tool that is less risky than merely relying on environmental due diligence and are more often requiring it as part of a loan agreements.

Environmental liability insurance can help your organization finalize the sale by meeting lender requirements and can be there to ensure that your operation going forward is protected from the unexpected.

 

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