Freeborn & Peters LLP

Transfer Your Environmental Risks to a Third Party

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Courtesy of Courtesy of Freeborn & Peters LLP

Remediation of contaminated sites often is costly and time-consuming, diverting scarce corporate resources from a company’s core operations. Moreover, the Sarbanes-Oxley Act and recent Securities and Exchange Commission and the Financial Accounting Standards Board rules and standards governing accounting for and reporting of environmental liabilities (e.g., FIN 47 Accounting for Conditional Asset Retirement Obligations) have created more headaches for corporate management than ever before.

Over the last several years, environmental consultants, insurers and others have developed a creative solution to address these issues by shifting the risk and liabilities presented by a contaminated site to a financially backed third party. Referred to as Environmental Risk Transfer (ERT) transactions, these transactions offer a financially responsible way to reduce a company’s risk and time commitment, as well as alleviating burdensome accounting and reporting obligations.

ERT transactions take a variety of forms and are flexible enough to accommodate different objectives. At the core of any ERT transaction is the transfer of the risk and liability associated with a contaminated site – both cleanup and compliance obligations – from a site owner or other liable person (“assigning company”) to a company specializing in ERT transactions (“ERT company”). This risk shifting typically is achieved through use of a written agreement in which the ERT company assumes some or all of the risks, liabilities and obligations associated with a contaminated site. The party seeking to rid itself of these risks, liabilities and obligations pays the ERT company a fixed sum of money. In return, the ERT company agrees to undertake and complete the environmental remediation in compliance with applicable laws and existing permits or orders. The obligations assumed by the ERT company generally are backed by a pollution legal liability or other environmental insurance policy issued by a reputable and financially capable insurer to the ERT company and the assigning company jointly. As part of the transaction, the assigning company may retain ownership of the contaminated site, but without the associated environmental risk or liability, thus making the property more marketable.

By entering into an ERT transaction, the assigning company may achieve one or more of the following benefits:
  • Cap or limit environmental response costs and other liabilities associated with a contaminated site,
  • Reduce balance sheet liabilities and other accounting or reporting issues,
  • Minimize risk and improve credit rating,
  • Satisfy financial assurance obligations, and/or
  • Achieve favorable tax benefits.

Depending on the situation, ERT transactions can be a useful and financially responsible tool.

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