Case Studies

Case Study No. 4 – Indemnity Agreement Stalls Sale of Chemical Plant

A U.K.-based chemical company wants to purchase an active manufacturing site in Texas from a Japanese company that has excess capacity in its U.S. operations.  A sale agreement is negotiated for a purchase price of $450 million.  As the fine points of the deal are being worked out, both sides get stuck on environmental issues that are unresolved.  The plant being sold is contaminated from historic releases of hazardous materials used to manufacture pesticides.  An engineering report prepared by the seller indicates that cleanup costs will be approximately $5 to $7 million.  The buyer’s technical consultants disagree and think that the cleanup of this site may cost as much as $30 million.  They are also concerned about possible third party claims from offsite migration of pollutants.  As a result of these concerns, the purchaser has insisted on a 20-year indemnity agreement in the amount of $100 million.  The seller is unable to provide this indemnity since it will impair its access to capital to finance future acquisitions and continued operations.

Insurance Solution for Case Study No. 4

To solve this contaminated property problem, an insurance program is developed that addresses many of the risks that are jeopardizing the deal.  Cost Overrun insurance is the first component of the program.  It is written for a limit of $30 million excess of $16 million.  This is the amount that is to be spent on remediation as a result of an agreement between the parties, based on an independent estimate of cleanup costs to comply with state regulatory requirements. 

The policy also covers the indemnity agreement provisions with a limit of $100 million for a twenty-year term.  Coverage is provided for Natural Resource Damage claims and for diminution of property values (of third party properties). The policy also covers additional remediation of the same contaminants after the initial cleanup is completed, as well as the discovery of new contaminants that were not addressed in the remedial action plan.  This policy covers both onsite and offsite remediation costs for the same term of twenty years.

The premium for the twenty-year term is $2.2 million.