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When it comes to mergers and acquisitions, risk managers' help in assessing and mitigating exposures is particularly important where environmental risks are concerned.
Cleaning up environmental pollution can drive up costs and undermine proposed deals. To mitigate the risk, risk managers need to conduct careful due diligence and consider risk-shifting via insurance, experts say.
“Environmental risk been a sticking point for a long time and has been addressed in a lot of purchase and sale agreements,” said Rod Taylor, New York-based managing director of Aon Risk Solutions' environmental services group. “The problems happen when people don't ask the right questions.”
The nature of the business being acquired or divested should largely determine the scope of an environmental inquiry, said Jeff Kingsley, Buffalo, N.Y.-based partner in the global insurance services group and the environmental litigation and regulatory practice at law firm Goldberg Segalla L.L.P.
When assessing a company for environmental risk, knowing whether it discharges any materials regulated by federal or state governments is a paramount concern, Mr. Kingsley said. Whether it generates any industrial, nonhazardous waste is another.
Risk managers also need to understand the selling company's environmental protocols.
“Take a look at their audit books,” Mr. Kingsley said. “How do they dispose of waste? How do they document their relationships with third parties? It's one thing to be good in terms of doing things properly, but you also need a documented chain of events that is succinct and consistent.”
Sheila Small, New York-based managing director of consultant Alvarez & Marsal Insurance & Risk Advisory Services, agreed that proper due diligence is a must.
“Risk managers need to dig a little deeper and peel the onion a little further,” Ms. Small said. “Otherwise, you may be in for a surprise.”
Being thorough means vetting both current and past operations, she said. Risk managers should examine discontinued operations, both owned and sold, and existing operations, Ms. Small said. “You have to go back and look at the contract terms of prior sales to see who is really left with the liability for environmental issues.”
Other measures to consider include inserting indemnity agreements into contracts and buying environmental liability insurance.
Indemnification provisions are worthwhile, but may not be worth as much if the firm being acquired has sold all its assets, Mr. Kingsley said.
Mr. Taylor said indemnification clauses can be combined with environmental liability insurance.
Even the most conscientious risk managers, however, can be surprised by environmental liabilities. He said he was aware of a defense contractor that accounted for an environmental liability when purchasing another firm. The contractor estimated the remediation cost at $200,000, but ended up spending $40 million to clean up the problem.
“It's about doing the best due diligence, but it doesn't always work, frankly,” Mr. Taylor said. “Do your homework and don't forget the insurance.”
As companies seek growth through mergers and acquisitions with complex environmental liabilities, one mitigation option is buying environmental liability insurance.