A medical equipment manufacturer, Medi-Instruments, Inc. had operated on their Massachusetts site for many years. Unfortunately, one of the long-term legacies left from those business operations was some contamination in the soil and groundwater. In 1995, Medi-Instruments began a business consolidation that moved much of their operations out of state. This move necessitated selling the Massachusetts property. The sale was made to another medical products company, Tech-Med. As part of the agreement, Medi-Instruments agreed to indemnify Tech-Med for any clean-up costs of the known soil and groundwater releases to the level of “industrial” standards. They also agreed to include in that indemnification any third party claims that may arise that could be directly associated with the contamination.
As a result of the indemnity given to Tech-Med, Medi-Instruments maintained a trailing liability on their balance sheet, and a responsibility to Tech-Med for the duration of the agreement. A key element to the indemnity agreement from Medi-Instruments was that the property be restricted to use only up to and including “industrial” levels. This clause eliminated the prospect of the property being used for any form of residential use. Medi-Instruments was comfortable with the fact that as long as Tech-Med used the property for industrial purposes or sold the property to another party for industrial uses, its trailing liability on the property was manageable and not overly burdensome on their balance sheet.
In 2004, the current property owner, Tech-Med, put the property on the market for sale. They were approached by an assisted living care firm, Welcome Home Living Co. Inc, whose proposal to purchase the property included plans to construct an assisted living care facility on the site. Construction of a residential facility as proposed by Welcome Home would require the site be cleaned to the highest standards of residential remediation. With Medi-Instruments’ indemnity in place which required they be responsible for clean up to industrial standards and third party claims as a result of their contamination, the seller, Tech-Med, needed to gain Medi-Instruments’ approval before moving forward with the sale.
At first glance, Medi-Instruments had no interest in exposing themselves to the potential increase in environmental liability that would come with a higher use of the property, such as the proposed residential assisted living care facility. However, they recognized an opportunity to reduce or eliminate their trailing liability on this site as a result of the sale if the correct, protective safeguards could be put into place; the most important of these being environmental insurance. If the appropriate environmental insurance was negotiated for all parties involved, everyone’s risks could be covered. This would include all risks associated with further site clean up to residential standards and any third party claims that may arise that could be associated with Medi-Instruments’ contamination of the original site.
The next step was for Welcome Home to bring in HRT Environmental Engineering, Inc., to assess and determine what site clean-up modifications were necessary to improve the site from its presently remediated industrial clean-up standards to the desired residential and unrestricted standards level. HRT Engineering determined the cost for remediation (which would include significant soil excavation and groundwater monitoring) would be approximately $3 million. As the responsible party with the added burden of an indemnity, Medi-Instruments’ immediate reaction was to decline the transaction. They had no interest in becoming further exposed to the risks associated with the additional remediation modifications that were necessary to bring the usage of the site up to residential standards. Furthermore, they were still carrying concern over their long-term exposure to future third-party claims.
Making a Deal
Other then all parties agreeing to lift the standard of responsibility from Medi-Instruments, what could possibly cause Medi-Instruments to consider agreeing to the sale of the property and its use as a residential facility? The right environmental insurance. Having just invested in environmental insurance coverage to facilitate a property sale, Medi-Instruments knew exactly where to turn. They contacted their environmental insurance broker and reviewed the details of the Tech-Med site and the potential transaction with Welcome Home as a means of eliminating their on-going responsibility for future site clean-up expense and third party liability. With an environmental insurance solution in place, Medi-Instruments could ensure their long-term protection and peace-of-mind, and the property sale could become a reality.
The involved parties brought in an environmental insurance broker to assess, negotiate and recommend a risk management program that would cover all aspects of the $3 million clean-up process. This would include coverage for everything from cost overruns associated with the clean up to third party claims. With the risks assessed and remediation costs established, the parties agreed to proceed with the project.
What had originally looked like a long and winding road of trailing liability for Medi-Instruments to their original site, and a lost opportunity to Med-Tech to gainfully sell their property to a buyer who offered needed elderly assisted living residences to a community, turned into a direct connection to a business opportunity. The results benefited everyone. There was a much needed cleaning of a property to an unrestricted level for residential use, and all parties associated with the transaction realized economic gain. This was due to putting the right environmental insurance program in place. Although the property transaction, site conditions and environmental insurance policy were complex, an experienced environmental insurance broker was able to provide the knowledge necessary to facilitate the deal to closure and help eliminate a trailing liability on a corporate balance sheet.
