Case Studies

Case Study No. 2 – Purchase of Nine Contaminated Chemical Plants

A small chemical company offers to sell nine manufacturing plants to a larger chemical company.  The sites are known to be contaminated and engineering estimates indicate that, in the aggregate, $24 million of cleanup will be required at these sites.  The buyer’s experts agree with these estimates.  The properties are offered on an “As-Is” basis with no environmental indemnity.  While the purchaser is relatively comfortable with what they know about these sites, there is a concern that unknown pollution conditions might cause cleanup costs to exceed the experts’ estimates.  There is also a possibility of third party claims that could arise from either known or unknown site conditions.  In addition to these risks, there are also a number of related sites that were either owned or operated by the seller and also where hazardous wastes were sent for treatment or disposal.  While both parties want to go ahead with the deal, it has stalled due to the financial uncertainties described above. 

Insurance Solution for Case Study No. 2

On the basis of the existing environmental information available for these sites, an environmental insurance program is developed to provide protection to the parties to this transaction.  Coverage is written on a blanket basis for the nine properties for a ten-year term.  Cost overrun protection is written for remediation of known contamination excess of $25 million in the aggregate with a limit of $50 million per occurrence and in the aggregate.  The policy also covers re-openers once the initial remediation has been completed as well as the discovery of new contaminants that were not described in the site characterization reports.  Third party claims are also covered excess of a $50,000 per occurrence self-insured retention.  All known and unknown related sites are covered for offsite cleanup and third party liability claims.

The premium for the ten-year term is $950,000