NU Online News Service, April 13, 3:00 p.m. EDT

Any number of risks can doom a merger or acquisition, including the often hidden exposure of environmental risks, such as underground storage tanks, according to an industry white paper.

Environmental liabilities encompass a broad range of perils, including pollution, contamination, mold, hazardous waste and toxic chemicals in water, air or on land, William P. Hazelton, executive vice president, ACE Environmental Risk, writes in a report, “M&A Risk Management: Avoiding Pitfalls, Finding Solutions.”

Proper due diligence in investigating the target company’s environmental liabilities must account for the changing legal and regulatory landscape globally. The United States, Hazelton writes, was the first country to implement strict liability regimes for pollution, enacting the Clean Air Act in 1970, followed by the Clean Water Act two years later.

Other laws include the 1976 Resource Conservation and Recovery Act and the 1980 Superfund law, promulgated after the Love Canal toxic waste disaster.

Now, he adds, foreign countries have embraced the principles underlying these laws for their own purposes, leading to stiffer environmental regulations worldwide.

Hazelton tells NU Online News Service that identifying these exposures and then assembling an effective insurance strategy to transfer the liabilities is a vital part of an M&A transaction process.

In fact, “One of the major drivers for purchases of premises pollution liability coverage in the environmental spectrum is M&A activity,” he says

“Essentially, what usually happens is you have a buyer and you have a seller, and at the end of the day one of the discussions is who is going to maintain the environmental liabilities?” he explains.

Whether those liabilities are transferred to the buyer or remain with the seller can impact the price of the overall acquisition, he says.

“We’ve insured a diverse group of portfolios,” he says, including manufacturing facilities and commercial real estate that could contain underground storage facilities.

An issue that comes up regularly during an M&A is the discovery of underground storage tanks. “We refer to them as phantom tanks,” he says. “Tanks at a property that nobody knew were there.”

During the M&A process, when a building is part of the deal, he says, typically environmental consultants will come in on behalf of the buyer and the seller and do their own environmental assessments.

“Those phase-one and phase-two environmental assessments are essentially the environmental underwriter’s tools of the trade,” he notes.

Hazelton advises risk managers going into an M&A to make sure any potential risks are covered with a premise pollution liability policy. “This caters to the M&A because it provides pre-existing and new conditions coverage for a pollution incident that results in bodily injury, property damage or remediation,” he says.

Since a target company’s environmental liability policies typically expire following the close of an M&A transaction, or are placed in a runoff mode, it is imperative for acquirers to address these voids with new policies before the deal is closed, he adds.

Special Reports /

Addressing Environmental Risks Key To Successful M&As, ACE Says

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