After a 9-year insurer hiatus from the market, the marquee environmental
product—cost cap—is again available from an A-rated and otherwise outstanding
insurer. From roughly 1998 until 2011, cost cap had been offered by AIG, Chubb,
XL, and Zurich. It was used to support virtually all of the large fixed-price
environmental cleanups throughout the United States. The Environmental
Protection Agency (EPA) and other regulators came to love the product, as did
industrial owners, developers, bankruptcy courts, and others intent on
maximizing cost certainty while avoiding cleanup delays and retaining or even
improving cleanup quality.
The New Cost Cap and Its Improvements
Today's cost cap is offered under a new name—Remedial Environmental Site
Cleanup Expense (RESCUE)—and improves on even the best pre-2011 cost caps
(providing additional coverage and other benefits as well) but, as of this
writing, is offered by only one insurer (Markel). Perhaps others will take note
and follow suit.
To be considered "cost cap," a policy must cover pollutants that
are (1) identified in a government-prescribed remediation action plan (RAP),
and/or (2) discovered in the course of executing the RAP, all the way
through to where the government issues a no further action (NFA) letter. In the
absence of the support of both coverages, even the largest remediation
contractors have been understandably unwilling to offer fixed price cleanups
(FPCs) that meaningfully shift cost overrun risks from the property owners and
other potentially responsible parties to contractors. Some contracts professed
to do so, but they were either very limited in size (e.g., <$1 million) or
allowed change orders that routinely resulted in increased cleanup costs and
schedule delays. RESCUE not only provides and further enables meaningful
transfers but is best suited for sites where cleanup costs are $20
million or more.
Having cost cap back is important as a matter of public interest as well as
private. As noted and as the EPA, Department of Defense (DOD), and others have
found,1 when cost caps are integrated with
well-constructed FPC contracts, cleanups that routinely result in cost overruns
are instead done (1) with maximum cost certainty, (2) on or even ahead of
schedule, and (3) with quality meeting or beating expectations. With this
record, they should be considered for virtually every cleanup where expected
costs exceed $20 million. Some specifics are the following.
1998-2011 (and 2020-forward) Core Areas of Cost Cap
Coverage
- Pollutants known at policy inception to require remediation
("knowns")
- Unknown pollutants discovered in the course of remediating the
knowns
RESCUE's 2020 Improvements
- Covers off-site disposal and related transportation
- Is in a shorter and otherwise clearer policy (less prone to
disagreements, etc.)
- Does not require up-front payment of the expected costs
- In 19 states, qualified projects may be eligible to be written on an
"admitted" (versus "nonadmitted") basis, where potential
benefits include the following.
- The limits may be backed by state guaranty funds.
- There would be no surplus lines taxes and fees.
- Regulators and others may be more comfortable with the coverage.
As important loss control measures, RESCUE is available only when applied
within a comprehensive program that includes the following.
- Robust processes for contractor selection, engineering review, and other
due diligence
- A clear FPC contract template that shares definitions and is otherwise
closely integrated with the policy
- Post‐binding cleanup cost invoice review and other program management
from the first month of the cleanup through receipt of the NFA letter
As reflected in my
2016 IRMI.com Expert Commentary on cost caps, alternative forms of cost cap
have been applied (via captives and escrows) even during the 9 years that
commercial insurers had abandoned the field. Indeed, two such alternatives used
by the Air Force (in 2012 and 2015) were not only approved by the EPA but led
to its first Federal Facility Excellence in Site Reuse Award.
That said, with cost caps again offered by a large commercial insurer, those
who lack a captive and/or otherwise prefer coverage from a large and well-known
entity can again get the cost and schedule certainty and other benefits of
meaningful fixed price cleanups from such an entity.
Conclusion
While there has been talk of one or two other Insurers entering the cost cap
space, until now, none has covered pollutants discovered in the course of doing
the cleanup (literally the core requirement), much less offered coverage
related to off-site disposal and the other improvements discussed above.
Regardless of whether others follow Markel's lead (and eventually some
will, though to varying degrees), insureds and regulators should strongly
consider the new cost cap at virtually every site with expected cleanup costs
exceeding $20 million.