Rising ESG scrutiny, environmental compliance demands and increased reputational sensitivity among investors require a proactive response, write Markus Messinger, head of EMEA at Liberty Global Transaction Solutions, and Gordon Smith, head of M&A environmental solutions at Liberty Specialty Markets
In M&A transactions, there is a dynamic with sellers seeking a smooth exit and buyers aiming to protect themselves against the acquired company’s past liabilities.
When acquiring a business or assets, a buyer can be exposed to substantial environmental liabilities, such as, contamination, regulatory breaches, remediation obligations and third-party claims. Some of these risks may be identified during due diligence and taken into account in the purchase price.
Others may remain unknown, surfacing only after the deal’s completion. These environmental liabilities can potentially jeopardise transactions, leaving both buyers and sellers facing significant exposures.
With rising ESG scrutiny, environmental compliance demands and increased reputational sensitivity among investors, if these risks are not effectively allocated or transferred, they could hold up or endanger a deal. Hence, addressing these exposures proactively is fundamental to preserving deal value and certainty.
An integrated approach
Against this backdrop, two insurance solutions play distinct yet complementary roles - Warranty and Indemnity (W&I) and Environmental Impairment Liability (EIL). W&I insurance protects against breaches of representations and warranties contained in the Sale and Purchase Agreement (SPA).
It provides confidence in the contractual framework of the deal, mitigating uncertainty for both buyer and seller and facilitating smoother negotiations. On the other hand, EIL insurance is specifically designed to address the Target’s pollution legal liabilities - both historic and future. It responds to liability arising from environmental conditions at a site or arising from business operations.
Environmental exposures remain a significant blind spot in many M&A transactions. Legacy pollution, redevelopment projects, emerging technologies and evolving regulatory standards create long-tail liabilities that may materialise years after completion. In many jurisdictions, environmental law extends liability beyond the original polluter to property owners or current operators. As a result, buyers can face exposure regardless of fault or knowledge.
Most W&I policies exclude or at least substantially limit coverage related to pollution, particularly in higher risk industries like manufacturing, chemicals and waste management. While the W&I market has gradually evolved to offer more flexibility for covering unknown pollution exposures subject to certain conditions, however, this remains limited as it is not supposed to take the place of specifically underwritten EIL policies.
Combining EIL and W&I policies provides the advantage of offering coverage for damages both from known and unknown legacy environmental issues from operations prior to the transaction along with unforeseen environmental liabilities after the deal is complete.
Even if the pollution exclusion is completely eradicated from W&I policies, the environmental cover would not be as comprehensive as an EIL policy. W&I and EIL policies go hand in hand, offering protection for legacy and future environmental risks that occur during an M&A deal’s lifecycle, removing key blind spots.
A strategic evolution in risk transfer
As environmental risks become more sophisticated and ESG reporting requirements intensify, the integration of W&I and EIL represents a strategic evolution in how risk is transferred in M&A. In the past two years, we have seen the demand for the combined approach increase in Europe, particularly Southern Europe, DACH, and the Nordics where renewable energy and power distribution projects are expanding rapidly.
Environmental risk is no longer confined to pollution-heavy industries. Land use history, redevelopment exposure and regulatory expectations now affect a broader range of sectors. While traditionally associated with pollution-intensive sectors such as chemicals and waste, environmental risk transfer is now increasingly relevant to M&A deals in other sectors including commercial real estate, infrastructure, power generation and supply, distribution chains and light manufacturing processes.
Value of early integration
The effectiveness of the integrated approach depends on timing and coordination.
Early involvement of insurers in the transaction process enables underwriting of W&I and EIL policies in parallel, using the same due diligence materials and draft SPA. This alignment facilitates consistency between contractual provisions and insurance coverage, helping to avoid gaps or unintended overlaps.
Additionally, when the same insurer underwrites both policies, coordination is further enhanced.
The result is a seamless and comprehensive risk transfer solution operating on the same deal timeline, without any complexity or delay. Deployed together, W&I and EIL policies provide protection across the lifecycle of the deal, addressing both legacy exposures and future environmental risks.
W&I and EIL are complementary instruments addressing distinct but interconnected risks to protect the contractual transaction between buyer and seller along with protection against key environmental liabilities.
When structured together through coordinated underwriting, they enable a comprehensive environmental risk transfer solution - reducing uncertainty, preserving valuation and supporting transaction certainty.
By Gordon Smith, head of M&A environmental solutions at Liberty Specialty Markets (pictured, first) and Markus Messinger, head of EMEA at Liberty Global Transaction Solutions (pictured, second)
No comments yet