The Summit

Beacon Hill Associates A publication of Beacon Hill Associates
Cover Feature

Manufacturing & Distributing in 2022: What Do These Pollution Exposures Look Like?

We are taking a look at current exposure concerns for manufacturers & distributors and the coverage needed to address these problems.

Many industries have seen dramatic upheavals as the country moves out of the pandemic, but few have had as many challenges as manufacturers and distributors of a wide range of products. 

As the country has clamored for more cars, appliances, and building materials, the various industries have struggled to overcome supply chain constrictions of an unprecedented level.

When a product needs a hundred components to make a whole, and the manufacturer only makes half of those in their own plants, the availability of the balance creates an insurmountable log jam. For a distributor, unavailability to source the products distributed have a crippling effect on business.

Both industries are working hard to find workable solutions. As the supply chain challenges worsened in early 2021, we began to see a significant increase in both manufacturers and distributors buying pieces of their supply chains. Where they depended on others to provide various parts, many businesses are simply purchasing those companies, bringing them into their manufacturing process. Similarly, distributors are beginning to explore manufacturing where possible, effectively getting rid of some of their supply chain challenges.

While this effort will certainly help manufacturers and distributers control their businesses better, it does not come without many risks. Not the least among those, purchasing industrial or commercial operations of this type carries significant environmental risk.

Sites that have been historically characterized as industrial often have lengthy histories involving hazardous substances. Many of these locations can chart their histories back a half century or more, all with similar or related uses. This historic exposure creates a significant risk for the buyer who may be taking on legacy exposures or, at the least, a very complicated environmental pictures of the new acquisition.  

Even locations that have been solely used for storage and shipping can have long histories of environmental challenges. Spilled pallets, ripped bags, and pierced totes all lead to contamination building up at a location.

One of the fundamental challenges for many acquirers of these sites is the lack of historic regulation. While we may believe that we live in a heavily regulated world, it has not been this way for long. The Clean Water Act was first passed in 1972, and CIRCLA was passed in 1980. Enforcement of these tougher regulations has ramped up over the intervening forty years, but there are decades of contamination at many industrial locations that have not been thoroughly addressed and remediated.

The specific exposures at various sites can come from a number of different places. Properties that have been used for the manufacturing of products, whether they are a liquid, chemical, computer chip, or furniture part, all have a waste stream. The waste byproduct of what is made, including the maintenance of the machinery used to manufacture or package the products, must be stored and disposed of properly. Historic regulations around this exposure were much more lax than current regulations, which has often led to low levels of contamination building up over time.

The product itself might contain, utilize, or be made of a contaminant. Lubricating fluids within machinery, fluids that are the product itself, or a fertilizer or dry product can all escape into the environment. This escape can come from an accident, a fire, or simple negligence.

In addition to these worries, many of these older industrial sites are located near modes of mass commercial transportation. This may mean a rail spur that abuts or enters the property. Rail spurs often have contamination associated with them, stemming from the railroad ties, operating fluids from the engines and rail cars, and loading and unloading spill areas.

Other industrial sites are located on rivers or canals to allow easy barge access. These pose a heightened risk because of the ability of the medium to exacerbate a spill by spreading it easily. Contamination running off a property into a stream presents not just a cleanup and bodily injury hazard, but a Natural Resource Damages risk. Killing fish or inhibiting an ecosystem for wildlife that lives along the river can come with huge costs associated with them.

Finally, in addition to potential historic contamination issues, these new operations inevitably come with real time environmental risks. Fully understanding those and managing that risk accordingly can be a significant exposure for the company looking to expand their footprint and vertically integrate.

Environmental insurance policies can help buyers manage this risk in several ways. The first is to provide a degree of protection for unknown pre-existing conditions at the site. The negotiation of responsibility for historic conditions at a site, whether known or unknown, is a significant part of the purchase and sale process. Purchasing an insurance policy can help with several aspects of this tricky situation.

In many instances the seller will agree to indemnify the purchaser for any environmental conditions that were either unknown and subsequently discovered post sale, or in some cases known conditions that turn out to be worse than foreseen. Instead of accepting a seller’s promise to perform, the purchaser can purchase a policy from an insurance carrier to fulfill that obligation.

Even when no areas of environmental concern turn up during due diligence, it is prudent for a purchaser to buy a policy to protect from an unknown condition, especially when a site has a long history of industrial use. It is quite common for businesses to unearth contaminants as their operations evolve over the years post sale, and having a policy can go a long way towards providing financial security.

In instances where the buyer intends to upgrade or develop the facility, environmental policies need to be reviewed carefully and thoroughly understood. Coverage will often not be available for “cost of doing business” expenses like disposing of historic fill at the site. These are known costs that insureds should not expect carriers to cover as a loss. In these situations, policies will often have a range of manuscripted endorsements clearly delineating where the carrier will offer coverage, and where they will not.

In addition to addressing the historic exposures, environmental policies can cover future liabilities. This can be particularly helpful for the new operator of the site as they learn the proper management of the location. New processes can have significantly greater risks than those the manufacturer was historically exposed to, and using insurance to protect from that risk is prudent.

As manufacturers and distributors continue to evolve their business models to achieve greater success in the world as we know it today, being cognizant of the significant environmental liabilities that come along with those new operations is crucial. By partnering with an agent or broker who understands their business and who then partners with an environmental specialist who understands what markets can offer and how to get the best coverage, is key. When done properly, environmental insurance is a powerful tool to protect against unexpected loss that comes at a negligible cost, and should be part of every manufacturer or distributor’s tool box to manage their evolving risk.

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