Environmental risk insurance matures. (Liability).

Environmental liability, once a legal and regulatory tar baby, has become a lot more developed in recent years and is no longer the frequent nightmare it was a decade or so ago. As a result, companies are finding it far easier to get environmental liability insurance -- and the policies themselves are more sophisticated.

"Going back a number of years, there was some regulatory uncertainty about what was going to be required," Helen Eichman, a product line manager with Chubb Environmental Solutions, said in an interview. "Now, there is much more certainty -- we've flushed out a lot of issues, and now there is a national experience bank. Many sites have been remediated successfully, and there is a liability history. This has been a maturing area."

With that, more coverage is often available. Gulf Insurance Group, a division of Travelers Property Casualty, recently announced that it was increasing its available environmental policy limits to $25 million. The company says it offers "monoline environmental coverages to 'non-environmental' businesses," as well as a package approach to environmental businesses.

Lending institutions, which once shied from environmentally risky sites that might come to them in foreclosure, are now turning to environmental insurance for commercial real estate loans. The insurance can speed up the application process, cover future events over the life of the loan and help credit treatment in the mortgage-backed securities market, says Charles Perry, president of Environmental Warranty Inc., an environmental insurance broker. Lenders now using environmental insurance include Wachovia Corp., J.P. Morgan Chase and Wells Fargo & Co.

Actually, liability coverage has evolved beyond simple environmental site liability (ESL) to remediation cost cap (RCC) coverage and "finitestructured risk" programs. ESL, the first widespread type of coverage, typically responds to bodily injury and property damage at a specific site, though it covers both operational and transactional liability. The latter comes up during mergers and acquisitions and property transfers and covers issues such as: Who now has liability? If the buyer retains it, does that reduce the purchase price? Is the seller confident that the level of indemnification is sufficient? "[The coverage] wraps around the transaction," Chubb's Eichman says. "You can structure it around a purchase and sale."

Chubb, like Gulf and other insurers, covers contractors' environmental liability, should a pollution incident take place during work at a site. RCC coverage, on the other hand, is a "risk transfer" type of program that addresses cost overrun protection on cleanups. Eichman offers an example:

"Let's say you have a 'brownfields' area that is being redeveloped on a waterfront, and want to do a mixed commercial and residential development," she says, referring to a term commonly used for abandoned industrial sites with known contamination. "With remediation cap coverage, once a site is characterized, and you've done an investigation and understand the contamination, you can draft a remediation action plan and submit that to the insurer.

"We look at the plan, review it and do the underwriting. We establish a self-insured retention that represents a cost estimate for the cleanup, plus a buffer of 10 percent. During the remediation, if this retention [amount] is breached, or additional contamination is found, the insurer pays that amount."

The "finite risk" programs are more complex; while the engineering review is similar, the underwriting takes into account the timing of when the remediation costs are incurred. The insured company provides a lump sum payment to the insurer, which covers the retention, but Eichman says that "a lot of accounting issues are involved in developing the funding structure. If the time estimate of the cleanup is five to 10 years, for instance, the lump-sum amount needs to take into effect remediation timing patterns and present value calculations.

A California company called TRC offers an even more radical solution. Its Exit Strategy program allows companies to transfer liability for a contaminated site to TRC, removing it from the balance sheet and providing a tax deduction for the full estimated cleanup costs in the first year. TRC claims to have more than 40 sites in the program and says it can pare a company's cleanup costs by at least 25 percent.