Potential investors into Europe and particularly the UK face many problems with respect to the environment. Quite often the fears and concerns about environmental liabilities appear to focus on the state of the site or sites that are being acquired or divested and in particular on past land use, either from the immediate use or more often from the land uses of many years ago together with liabilities associated with changing environmental legislation.

Due diligence investigation covering such diverse areas as tax, future and past sales and of course the environment usually precede any investment, and for environmental concerns it is usually the case that an environmental consultant is employed to undertake what is known as a phase I survey. A phase I survey will report on any previous site surveys or reports that may have been undertaken, and will provide a commentary on past land use, its significance with respect to the potential for contamination, together with any obvious issues with respect to ongoing manufacturing operations (if there are any).

Environmental consultant reports are often very technical and it is not uncommon for the readers of the reports to find them difficult to understand. After the efforts and expense in undertaking the appropriate due diligence investigations this can be frustrating and can lead to increased and often unfounded concern. Even when problems are identified it is not always possible to understand the significance of the problems. Additional concerns over changing legislation and understanding is often ignored in such reports.

Some of the fears that have an impact on a transaction are very real whereas others arise more from a lack of knowledge or the inability to fully understand the information that is presented by environmental professionals during the due diligence procedure. Changing legislation and standards is, perhaps, a good example of a valid concern which an inward investor is unable to make a considered assessment and hence remains concerned about the associated future liabilities. Environmental legislation is always being modified and developed throughout the world, but no more so than that in the UK and Europe. Not only are there changes in legislation arising from national governments, but also changes that are instigated from the Commission of the European Union, which when implemented apply across the whole Union.

Neither can one assume that legislation produced on behalf of the European Union will be applied in a consistent manner across the whole Union. It may well be that two countries will implement a European Directive (which requires member states of the Union to implement their own legislation to achieve the aims and objectives of the Directive) in different ways. Also it is entirely possible that two countries will not only implement the provisions of the Directive in different ways, but will also enforce it to different degrees of effectiveness.

These differences make investment into Europe very difficult and require a thorough knowledge of the local legislation and the custom and practice of the various countries.

Does this sound at all familiar? Have any potential investment opportunities been lost because of fears over potential environmental liabilities? Has a potential vendor refused to provide any indemnities for environmental liabilities that may become apparent in the future? Have you as a current owner of a site or company in the UK or Europe been forced to provide indemnities for potential environmental liabilities that may become apparent in the future? How can potential investors into Europe complete satisfactory acquisitions or divestments without shouldering significant potential environmental liabilities and protect themselves against changes in legislation?

Environmental liability insurance can be used to provide answers to some of these intractable problems in a cost effective and understandable manner that effectively ring fences the environmental problems in a manner that is clear, transparent and sustainable for a long time. How can insurance be used and what does it do?

Seldom do investors seem to take into account the liabilities associated with the ongoing operations undertaken on the site(s) or in the potential for damages being caused to off-site targets such as rivers, people, geography, etc. Insurance can handle all of these issues and more in a cost effective manner.

Most environmental insurance consists of basic risk transfer and provides indemnity for liabilities associated with some or all of the following:

• On-site clean-up costs of contamination,
• Off-site clean up costs of contamination,
• Off-site bodily injury
• On-site bodily injury to visitors and their property,

all of which arise from pollution conditions (contamination) in on under or emanating from any of the insured location – i.e. those that are the subject of investment or divestment. The policies are written in a manner which ensures that they are able to respond to claims arising from pre-existing contamination only, or can also be used to respond to new contamination caused by on-going manufacturing activities.

In addition to the above, the policies can be extended to provide indemnity for business interruption costs associated with the need to remove contamination from the insured locations and can also be extended to provide a wide range of additional areas of indemnity depending upon the needs of the insured.

Of particular note is the ability of these insurance policies to continue to be effective in situations where there are changes of legislation or standards during the policy period. This is of particular value with the pace of legislative change appearing to be continuing and showing no sign of abating.

The policies usually refer to the terms mentioned above and are very specific about what they are covering and what they do not cover. It is also possible to purchase insurance that is designed to match the warranties and indemnities contained within a sale and purchase agreement. These policies are often referred to as “representation and warranty” insurance (reps and warranties). They are linked directly with the wording of the sale and purchase agreement and limit to indemnity to these only. The attempt to link the insurance policy with the wording of the sale and purchase agreement ensures that there are fewer gaps between the retained or accepted liabilities and the insurance product that is being relied upon to ring fence them.

During an investment into the UK, an inward investor often seeks indemnities from the vendor of the facility or business against any and all liabilities that may arise from the past operations of the site. Long and hard negotiations are undertaken between the two sides in a negotiation to ensure that both parties leave the negotiating table with a mutually acceptable position.

If as an investor, you obtain an agreement from the vendor that they will provide indemnities for past environmental liabilities, have you ever thought about the ability of the vendor to be able to fulfill these obligations in the future? Will they have the financial strength to discharge their obligations and provide the necessary indemnity when liabilities arise? Often, it is the case that significant time is taken to negotiate very extensive indemnities under the sale agreements, without getting adequate comfort about the long term financial strength of the company providing the indemnities.

Obtaining insurance for the liabilities arising from the transaction rather than relying on the indemnities provided within a sale and purchase agreement reduces this risk if appropriate insurance is obtained from a financially secure insurer with a credit rating superior to the other party in a transaction (i.e. the one giving indemnities that will have to be relied upon in the future).

In conclusion, there should be NO investment opportunity into the UK that should be allowed to founder because of concerns over environmental liabilities. Serious consideration should be given to the use of environmental insurance as a tool to manage liabilities, imagined and real, arising from investment within the UK and throughout Europe.

XL Environmental Ltd is part of XL Insurance, which is comprised of the insurance operations of XL Capital Ltd. XL Insurance meets the complex business risk management needs of its worldwide customers through distinctive expertise in a wide range of industries. The extensive insurance capabilities of XL Insurance provide customers with a truly integrated approach to managing and transferring risk.