Environmental Risk Transfer Solutions for Mergers and Acquisitions

By: Brad Maurer JD, CPCU

In every business transaction, buyers want to be assured of what they are buying.  In the context of mergers and acquisitions, environmental liability is an elusive issue to evaluate and quantify.  The strict, joint, several and retroactive nature of environmental liability for releases of hazardous substances creates uncertainty because it attaches not only to current but also past operations of a business. Environmental due diligence, although pervasively performed is notoriously inaccurate.  Most environmental due diligence studies performed by technical experts are too focused on known issues and pay just cursory attention to potential issues.  These studies often fail to evaluate current operational and product-based environmental risks.  Undefined and unmanaged environmental risk makes it difficult to successfully purchase or sell an enterprise.  Defining what potential financial loss environmental liability poses is essential to properly value and structure a transaction.  American Risk Management Resources, LLC (ARMR) is an expert at environmental risk identification, evaluation, and treatment.  We assist in defining environmental risk to aid in the successful transfer of equity and assets.

Benefits of Effective Environmental Risk Management

  • Defines the known risks and their cost of treatment so that true deal valuation can occur
  • Protects directors and officers from liability
  • Protects shareholder value from unexpected costs
  • Simplifies the transaction by transferring risk to a well-capitalized insurer
  • Reduces post-transaction representations and warranties litigation
  • Increases the success rate of transactions with significant environmental issues

The most cost-effective means of risk transfer is the purchase of liability insurance for unknown
occurrences. There is a very active market for both pollution liability and products liability
insurance.

Summary
An analytic approach to defining and treating environmental liability risk inherent in a merger or acquisition
will ultimately save time and costs. By effectively identifying risks and converting them into concrete costs of
either mitigation efforts or transfer, a company can be more accurately valued. Besides monetizing the risks, the
cost-savings in avoiding litigation and increasing the success rate of any transaction reduces the friction costs of
conducting the deal.

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