Offering assurance on a client’s financial position is the foundation of an Accounts business model. The Accounting profession offers various levels of assurance from an Audited financial statement, Reviewed or Compilation.
After going through their defined process, Accounts offer an opinion whether the financial statements are accurate and free of material misstatements. The Accountants work is designed to enhance the degree of confidence regarding a client’s financial position.
Government regulation has and continues to have, a huge impact upon the Accounting profession. Environmental government regulations such as SOX, SAB 92 Ruling, FIN 47, GASB 49…, can have major impacts on an Accountant’s work. Make a mistake and an Accountants E&O can take a hit.
Not only must accountants attest to the fairness and accuracy of recorded environmental exposures, but they must be aware of possible unknown environmental liabilities. As environmental exposures and related costs grow in dollar size and public awareness, Accounting Professionals must be prepared, in some cases required, to incorporate environmental impacts into financial reports and decisions.
In today’s transparent business environment, the problem created by a traditional Accountant’s work, is not making sure there is a financial assurance mechanism in place to backstop potential environmental liabilities. One environmental liability can render an Account’s work not worth the paper it’s written on unless there is an environmental financial assurance mechanism.
As more accountants understand the environmental financial assurance gap not addressed in their work, I am sure most will make environmental financial assurance part of every Audit, Review or Compilation.
The correlation to this is the transformation banks made to their business model in the 1990’s, once they understood how environmental due diligence granted them the Lender Liability Defense for collateralized properties. It took numerous times where a client’s environmental problem became a banks environmental problem, before banks woke up to the reality of the environmental gap created by their lending practices.
Just to make sure we are on the same page, Environmental Financial Assurance is nothing new, it’s been around for decades. Under Federal law, regulated Underground Storage Tanks Owners must evidence financial assurance to put fuel in their tanks. Industrial and hazardous waste haulers must evidence financial assurance before they can move one load of waste. Asbestos and lead abatement contractors must evidence financial assurance before they can remediate asbestos or lead. Landfills must evidence financial assurance before they can accept any waste….
There are various forms of environmental financial assurance, i.e. Bond, Letter of Credit, Insurance, Monies in Escrow, Captive, Risk Retention Group….
As with banks, Accountants have learned, when it comes to environmental liabilities, a client’s environmental problem can become the Accountants problem. As part of “Best Practices”, Accountants must incorporate coaching their clients on the value an environmental financial assurance mechanism (Bond, Letter of Credit, Environmental Insurance, Monies in Escrow…) adds to their business model.
Environmental financial assurance mechanisms also help to reduce the reputational risk associated with environmental liabilities while protecting the Accountants bottom line.
In today’s transparent business environment, Accountants must have a working knowledge of managing and transferring their client’s environmental exposures as part of “Best Practices” or face prosecution, reputational risks and / or extinction. I can remember when there were the “Big 8” Accounting firms.
Environmental Coaching Tips For Adding Accountants To Your TEAM
- What is a “Pollutant”? You need to make sure Accountants have a clear understanding of what a “Pollutant” is. If you look at an environmental indemnification in a contract, it generally describes a Pollutant as smoke, vapors, soot, fumes, acids…. However, due to the way courts and insurance companies have responded to lawsuits and insurance claims, environmental Strategist™ (eS) has developed a definition that is easier to understand. eS define a “Pollutant” as a material, substance or product that gets introduced to an environment for other than its intended use or purpose.” In other words, something that ends up where it does not belong can be a Pollutant. eS have examples where fresh water, milk, cheese, fruit, beer and more have all been defined as a “Pollutant”.
- Every business is impacted by environmental exposures.
- Environmental liabilities tend to be a severity versus frequency issue.
- Environmental Accounting is one of the fastest growing fields in the Accounting profession. This is partly due to Government regulations. Environmental accounting attempts to assure that current accounting methods are not contributing to or offering misleading signals. e. Is a business’s success achieved at the expense of the environment or does the success of a business make a net contribution to the betterment of our environment? Environmental accounting looks to balance or at least upgrade the dangers caused by current accounting methods and reduce misleading signals in their Accounting profession.
A correlation to this is the Federal Government coming out with “All Appropriate Inquiry”, to upgrade the ASTM Phase I, II… site assessments. We must remember; environmental issues are relatively new to business and society, so we must expect as we grow and learn more, that change is inevitable. As I like to say, “Change is the only constant, in the environmental industry”.
ERMI TEAM building strategy: Start by working with Environmental Accountants or Accounting firms that incorporate environmental accounting because they are coached up on the value environmental financial assurance offers their client’s. Like most business professionals, Accountants like to work with client’s that can pay their accounting bill. My experience is, most Accounts are not aware of the various environmental insurance products available and the financial assurances they afford.
- When it comes to environmental liability insurance as a financial assurance mechanism, three often overlooked benefits offered in policies are:
- Defense Costs: Environmental liabilities are relatively new and very litigious. Even if you do nothing wrong, you can still get named in a suit and must expense legal fees. Environmental insurance policies cover defense costs.
- Claim Management: All policies come with specialists to assist you in handling a claim. Who’s in charge of communications, public relations, emergency response, government compliance, financial management, third party claims for bodily injury, property damage, natural resource damages….?
- Third Party Liabilities: The majority of the time the cost to clean up the environmental problem/s is far less than the associated claims that come in from third parties for bodily injury, property damage and business interruption.
Environmental Liability Insurance For Accountants To Coach Their Client’s
Since every business is impacted by environmental exposures, consideration needs to be given to the economies of scale afforded with environmental liability insurance, versus other financial assurance instruments or self-insuring.
Environmental Impairment Liability (EIL)
EIL is site pollution coverage for property owners susceptible to economic loss caused by pollution that actually or allegedly originated from scheduled properties of the insured. Sometimes referred to as Pollution Legal Liability (PLL), this coverage is for those who own, operate, lease, or have any other insurable interest in real property and/or the operations. Coverage can be written in a variety of ways addressing unknown preexisting conditions or new conditions. Coverage can include third party bodily injury and property damage along with business interruption and extra expense, on and off-site cleanup costs, legal defense expenses, non-owned disposal sites, transportation and more. EIL can be offered on multiyear terms. Most EIL policies cover above ground storage tanks up to a certain size. Scheduled Underground Storage Tanks can be covered on EIL policies. You can cover multiple locations on a single policy.
Property Transfer Coverage
When buying or selling property there can be unknown preexisting environmental conditions. Since environmental due diligence (Phase I, Phase II…), cannot guarantee uncovering all potential environmental liabilities, insurance companies have created property transfer insurance. This coverage protects the new owner or any party with an insurable interest, against unknown environmental conditions that may be discovered during the policy period, that were not caused by the new owner.
This coverage not only helps to keep the property at its maximum value, it will assist the purchaser in being able to secure the necessary financing to complete their transaction. You can cover multiple locations on a single policy. Coverage is generally written on a multi-year term (i.e. 3, 5, 7… years).
Mergers, Acquisitions & Pollution Protection (MAPP)
Key to any acquisition is the correct valuation and effective due diligence and MAPP operates as a backstop against issues due diligence or valuation processes may not be able to identify.
As a financial assurance mechanism for M&A’s, pollution liability insurance has become part of “Best Practices”. Representation & Warranties (R&W) insurance is proving its value for M&A’s much the same as pollution liability insurance has.
R&W insurance is designed expressly to provide insurance coverage for the breach of a representation or a warranty contained in a Buy / Sell Agreement, in addition to or as a replacement for all or most of the seller’s contractual representations and warranties.
MAPP delivers a cost-effective way to transfer R&W and pollution liabilities to a financially stable third party.
Brownfield Redevelopment Insurance
Today, more than ever, Federal, State and local governments are creating incentives for redevelopment of Brownfield sites. These are properties that due to actual or perceived contamination are sitting idle or underutilized. Through Brownfield redevelopment these properties can be cleaned up and put back on the tax rolls.
The basic purpose of this insurance is to protect the owners, purchaser or investors against known or unknown environmental conditions. Brownfield redevelopment insurance can be structured in a variety of ways. Besides the financial assurance mechanism, contractor’s pollution liability, transportation, off-site disposal, cost cap insurance, post remediation coverage and much more can be addressed. The important thing to remember about Brownfield redevelopment coverage is that it is customized for each project.
Contractors Pollution Liability (CPL)
Contractors Pollution Liability (CPL) insurance protects the insured should they cause or exacerbate an environmental condition while performing their contractor services. CPL protects the insured for covered operations performed by or on behalf of the insured, while operating away from any premises they own, rent, lease or occupy.
CPL can be offered on claims made or occurrence basis. Coverage can be written on a job specific basis, blanket basis to cover all the work performed by the insured or Owner Controlled. Most policies can be endorsed to cover transportation pollution liability, mold, lead, and asbestos, defense outside the limits, off-site disposal coverage, and more. Contractors incorporating CPL coverage as part of their risk transfer strategy, drive their growth and profits by marketing the benefits CPL coverage affords in reducing job interruption due to environmental issues. A major environmental liability exposure faced by all contactors lies in who they are doing business with. If there is an environmental loss at a job site, innocent contractors can and do get named in lawsuits. Do your subs/vendors have CPL insurance if they cause an environmental loss?
Home Depot, Wal-Mart and many more, have paid multimillion dollar fines for contractors they hired that caused environmental liabilities. They now require CPL for contractors doing work for them to avoid paying on liabilities created by their vendor contractors.
Professional Liability
The absolute pollution exclusion in a standard commercial general liability policy excludes sudden and accidental, and gradual pollution losses due to the release of “solid, liquid, gaseous, or thermal irritants or contaminants, including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste”…. Engineering firms who work in solving environmental exposures faced by their clients need to have coverage for negligent acts, errors or omissions that may result in damages caused by pollution conditions.
There are various ways coverage can be written to protect the engineering firm and their clients. Professional liability on a standalone basis or professional liability including general liability (GL) is available. For engineering firms that may also get involved in doing hands on work at the job site, they can add to the coverage contractors pollution liability (CPL) insurance, (refer to contractors pollution liability insurance for more details). Coverage for the professional liability is done on a claims made basis. For the GL and CPL, coverage can be on a claims made or occurrence form basis.
You have to also keep in mind there are contractors that in the performance of their work may act in a consultants or engineers capacity. You need to make sure you offer your client the broadest program available to meet their business model.
Transportation Pollution Liability (TPL)
Generally, Business Auto or Truckers policies will exclude pollution losses arising from spills or other releases of their cargo. Broadened auto pollution liability (typically Form CA 9948) affords coverage during the loading, unloading and transportation, for a spill, release or sudden upset and over turn of transported cargo. Make sure you do not confuse the MCS-90 endorsement as being TPL coverage, it is not and the insurance carrier reserves the right to subrogate back against the insured for cost to clean up a release of the transported cargo.
Coaching up Accountants how pollution insurance can protect their client’s, while better protecting their E&O and bottom line, will drive the sales of your insurance products.
