INSURANCE: Policy Insures Remediation Risks

Joseph Catanese

In recent years, more reasonable cleanup standards and improved remediation technologies have made cleaning up contaminated properties more economical, and even profitable for some companies. But, what happens when the project costs more than is anticipated and there's simply not enough money to finish the cleanup? A new insurance coverage, called Remediation Stop Loss (RSL), is available as a safety net - but only under certain conditions.

In preparing remediation proposals, environmental consultants and contractors make several assumptions to develop their cost estimates and to provide a legitimate case for the reimbursement of potential cost overruns, if necessary. Typically, remediation proposals are written and presented presuming that additional contamination will not be discovered and environmental regulations won't change during the scope of work (SOW).

While environmental consultants base their proposals on past experience and their remediation expertise, assumptions can be dangerous. Successful remediation, therefore, requires considerable attention to managing the risks and project costs while preventing additional expenses. Some environmental contractors, who are operating in a highly competitive market, have come to rely on RSLs.

Insurance carriers provide RSL coverage only after including their own careful evaluation based on site-specific information including:

* Final SOWs/RAPs (Remedial Action Plan), with a discussion on the proposed remedial technologies;

* A tentative schedule of the identified tasks;

* Detailed cost estimates with supporting documentation (i.e., subcontractor fees, contingencies, assumptions, volumetric estimates, etc.); and

* Regulatory approvals from the appropriate state or federal environmental agency. With the increasing demand by property owners to implement voluntary cleanup programs, regulatory approvals may not be available before the proposed activities begin.

Therefore, as a substitution for regulatory approvals, a review of the appropriate guidelines and/or regulatory remediation standards unique to that jurisdiction would need to be presented and evaluated along with the consultant's RAP.

After reviewing this documentation, an insurer can calculate an insurance premium quote. The premium typically is quoted as a percentage of the total overall remediation costs (usually excluding costs for extended monitoring activities) and depends on the liability limits (usually one to two times the total remediation costs); familiarity with the remediation strategies and technologies proposed; duration of the proposed remediation (up to 10 years); and the self-insured retention (SIR) or deductible.

An SIR or deductible is the project costs plus a buffer or attachment point, generally 10 percent to 30 percent of the total remediation costs. For example, if remediation costs are projected to be $1 million, a buffer could be 10 percent, leading to an attachment point of $1.1 million. The insurance carrier has to have some degree of comfort with the attachment point, based on the documentation and the planned remediation approach. But the more comfortable the insurance company is with the information, the lower the attachment point is likely to be.

Once total remediation expenses have exceeded the SIR, the insurance company then covers the remaining costs up to the policy limits.

Underwriting this type of insurance program has its challenges and potential pitfalls. As prevention, insurance carriers often rely on their most experienced environmental underwriters to review RSL coverage requests. An insurance company's greatest fear is the moral hazard associated with this type of coverage.

The sole intent of the RSL program is to cover the known issues in the approved remediation plan. However, after the fact, it can be difficult to determine whether a consultant overlooked something or intentionally did not include it in the overall cost estimate.

Some environmental contractors bid low for a job because they know an insurance policy is available as a "safety net" to cover cost overruns. Consequently, to properly address these types of exposures, insurance carriers offer various attachment point options and many require a co-payment provision.