Environmental Protection on Properties That Came Back from the Dead? That’s ‘Zombie’ Coverage

Aon broker Max West is a pioneer in developing environmental liability coverage for unknown formerly owned and operated properties long after they have been sold.
By: | May 9, 2019

Max West’s interest in environmental issues began in his youth, when a storm triggered a release from a local sewage plant into the harbor in the south of England where he liked to windsurf.

The next day, after he got intravenous fluids to replace the ones he lost to the bacterial contamination he picked up while windsurfing, he read the headlines announcing the accidental release from a broken pipe.

Decades later, the memory still makes him sick, but it launched his study of environmental management in his native UK and then a 21-year career selling environmental insurance. “I thought, this can’t happen again,” he said.

“I wanted to help clean up.”

West now helps his clients prepare financially for the cleanups that make contaminated sites right again and helps protect them against environmental liabilities on their property.

Often the sites in question are former industrial locations with known or suspected contaminations that impede their redevelopment.

A 10-time Power Broker® award winner, West’s goal is to “never let an environmental issue get in the way of a real estate transaction.” Stakes for the client can be high because transactions could include an outright purchase, a merger or acquisition, a stock sale or IPO, the failure of which could derail the company’s growth and development plans.

Since each site has a unique history, say, a chemical manufacturing operation, which West would “underwrite around,” and a unique redevelopment future, say, office or residential use – West expects to customize each contract and to code switch between the buyer, seller, the lender, the attorneys and the underwriter.

Each of these parties may be educated in some but not all of the environmental, contractual and financial issues necessary for the transaction to proceed with all parties’ full confidence. When there’s an information gap, West fills it.

For example, in an “upside-down” deal in Pennsylvania involving a more than 100-year-old industrial site with known contaminations, the seller paid the buyer to take on the environmental liabilities. In return, the buyer indemnified the seller.

Working on the seller’s behalf with both buyer and seller, West customized and negotiated environmental insurance – $15 million limits for 10 years – that would protect the seller against future environmental liabilities and third-party liability claims.

Max West, senior vice president, Aon

“It was important to show the underwriter that the buyer was responsible for any environmental obligations,” he said.

Given the known contaminations, seeking insurance without the indemnification agreement “would have been the equivalent of saying to an underwriter, ‘My building is on fire. Insure it,” West said.

Still, the seller worried that liabilities would revert to it if the buyer ever walked away from its obligations. Not only did West have to think like the buyer and seller, he also had to bring the underwriter up to speed on a lot of issues that wouldn’t typically cross an underwriter’s transom.

“The underwriter had to understand the environmental issues specific to the property, the contractual obligations and the buyer’s ability to clean up the property,” West said.

“Does the buyer have experience with environmental remediation? Does it have the financial backing for a cleanup? Does it have a cleanup plan?”

Zombie Locations

Some of the fears that haunted the Pennsylvania seller – that liability for contaminations at sites it owned in the past would return from the dead – prompted West to pioneer what he calls “Zombie Insurance,” which protects the seller against contamination in previously owned locations that the seller might have no data on, or that they operated on but didn’t own.

“If you said to a business owner, ‘Tell me about the sites you used to operate,’ they’d stare at you with a blank face,” West said.

“Clients say, ‘Thank you, I couldn’t have closed the deal without it.’ It’s a deal facilitator, a transactional tool.” — Max West, senior vice president, Aon

Under the chain of title provision in environmental law, liability for these sites could come back to the company, since the insured is a former owner/operator at the site. Historically, this exposure on historic properties the company operated on or had no data on has been a gap in the insurance market. Coverage for properties the owner knows and has data for is far more common.

He works with clients to research environmental conditions at sites they’ve formerly owned and operated, then summarizes the findings and organizes them into a memo or report for the underwriter, who prices the coverage, even for properties that the company has no current data on.

Close the Deal

A nice thing about environmental insurance, West said, is that clients say ‘Thank you, I couldn’t have closed the deal without it.’ “It’s a deal facilitator, a transactional tool.”

Essential to the success of the policy, he said, are clarity, experience and transparency. The three are interrelated. He strives to make the complex simple – a very tough call when the complexities involve the scientific, contractual and financial principles behind the risks – which is where experience kicks in. He frequently interrupts himself to ask ‘Does that make sense?’ It usually does.

Over the years, his vigilance around clarity helped earned underwriters’ trust. He aims for transparency, and promptness, in communications. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected].