Turning Point for Pollution Insurance

Even as Sarbanes-related liabilities loom, companies are discovering that environmental coverage can help property deals go down easier.

While much hard science goes into the tidying up of a polluted corporate site, gauging the future costs of that job can involve skills that are a good deal softer.

Armed with varying and sometimes patented cleanup strategies, different environmental consultants can come in with cost estimates that vary by as much 500 percent on a given site, says David Dybdahl, president of American Risk Management Resources Network, a Chicago-based environmental insurance brokerage firm.

But the Sarbanes-Oxley Act, combined with pressure from environmentally minded shareholder activists, could place a much higher premium on precision in environmental reporting. “The stakes are higher under Sarbanes-Oxley,” says John Nevius, an attorney who represents corporations for Anderson, Kill & Olick in New York. “The consequences if you get it wrong are greater.”

Until recently, however, difficulties in predicting cleanup costs haven’t mattered much to senior finance executives. That’s because, under Securities and Exchange Commission rules and Financial Accounting Standards Board dictates, they’ve had the latitude to report the cheapest cost estimates. “There isn’t much of a carrot associated with reporting,” notes Dybdahl. “You increase your environmental reporting and you decrease earnings.”

If there’s not a carrot, perhaps Section 302 of Sarbanes-Oxley will provide a stick. Some say that Sarbox 302, which directs CFOs and their bosses to personally sign off on their companies’ financials, could cause top executives to demand more scrupulous accounts of future costs from their environmental managers. Yet coming up with such estimates can often be a matter of hitting a very movable target. For example, in a recent review by Dybdahl of proposals by two consultants for a site with polluted groundwater, the cleanup cost had the potential to vary by as much as $40 million.

The first consultant suggested that the company take a conventional approach: pump the groundwater out of the soil, run it through treatment facilities, and continue the flushing-out process for 30 years. Estimated cost: $40 million.

The second consultant proposed bioremediation, an approach involving the use of bacteria, other microorganisms, or plants. The remedy would be to pump a common household item into the soil; that ingredient (which Dybdahl wouldn’t reveal, since its use in bioremediation is proprietary to the consultant) would bond chemically with the pollutant in the groundwater and neutralize it.

If all went well, the cleanup would take just 10 years, and the cost would be a mere $20 million. If it didn’t work, however, the tab could be as high as $60 million — $20 million for the failed bioremediation and $40 for the conventional pump-and-treat cleanup. Further, there could be more costs and other risks, since the bioremediation could turn the pollutant even more toxic than it had been.

In the end, the company chose bioremediation, largely because it might be faster. Since the situation on the site had become an issue in a local mayoral election, the owners felt it would be a good idea to present a plan to clean up the site as swiftly as possible, according to Dybdahl.

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