Blog

Signed, Sealed…but Contaminated: Mitigating Environmental Risks in M&A

Management Liability

Lenin Lopez, Esq.

Jul 23, 2025

10 minutes

When environmental liabilities surface after a deal closes, the consequences can be severe. To name a few: plummeting valuations, securities litigation, and breach of fiduciary duty suits against directors and officers. In this week’s blog, my colleague Lenin Lopez explores how management teams and boards can mitigate these risks through diligence, the strategic use of D&O and transactional insurance, and good governance. —Priya Huskins

Environmental-related risks in merger and acquisition (M&A) transactions shouldn’t just be a technical concern for legal and compliance teams—they should also be a board-level consideration. Whether stemming from legacy contamination, pending regulatory scrutiny, or stakeholder pressure, these risks have the potential to derail deals, trigger shareholder litigation, and be the catalyst for breach of fiduciary duty suits against directors and officers.

buildings with tree overgrowth underneath

This article explains why environmental-related risks in M&A aren’t limited to industrial sectors, how lapses in diligence and disclosure can trigger shareholder litigation and derivative claims, and the role of insurance and board oversight in mitigating these exposures.

Environmental Risk Isn’t Just Limited to Industrial Sectors

In M&A, environmental risk tends to get pigeonholed as a manufacturing or energy issue. The reality is that the potential for pollution liabilities and environmental failures lurk in nearly every industry, including some of the following unusual suspects:

Industry	Environmental/Pollution Risk
Pharma	Unrecognized discharge of active pharmaceutical ingredients or solvents; lab cleanup obligations; storage or process noncompliance
Biotech	Live agent lab accidents; waste classification gaps; genetically modified organism containment issues
Tech/AI/Cloud	Data centers with high energy consumption, triggering carbon emissions scrutiny; water-intensive cooling systems

When environmental risks surface post-acquisition, the hope is that they aren’t significant enough to move the needle when it comes to risk exposure, deal valuation, or the company’s stock price.

Boards Can Be Liable for What Diligence Misses

The board’s role in overseeing M&A isn’t limited to signing off on valuation and strategy. Fiduciary duties come into play in ensuring that management has diligence processes that are sufficiently staffed and thorough to uncover risks that could materially impact the company. For instance, if environmental risks are foreseeable but ignored, or if diligence is superficial, plaintiffs may allege breaches of fiduciary duty if these risks surface post-acquisition.

When Directors Faced the Fallout from Legacy Contamination

The Tronox case is a cautionary tale. In that historical case, Tronox, a newly independent company, went bankrupt shortly after its spinoff—not because its business model failed, but because it inherited a massive, undisclosed portfolio of environmental obligations.

In that case, plaintiffs alleged that Tronox significantly understated environmental liabilities in public disclosures for years following the spinoff. While the company reported roughly $200 million in environmental reserves, plaintiffs claimed that actual obligations were closer to $900 million due to decades of contamination at dozens of undisclosed “secret sites.” As the environmental burdens came into focus, the company’s stock price took a significant hit, leading to the company ultimately being delisted from the New York Stock Exchange.

Plaintiffs named former directors and officers of Tronox, the parent company, and the company that was planning to acquire the parent company post-spin. The plaintiffs argued that the defendants helped to orchestrate a scheme to offload the parent company’s hundreds of millions of dollars and decades of environmental legacy liability by dumping all of them into the spinoff company, then failing to disclose these liabilities to investors in the spinoff company.

The litigation resolved with a $37 million settlement, including $14 million paid by directors and officers (D&O) insurance and $21 million from other defendants. Insurance coverage was likely a point of contention since there were multiple companies identified as defendants, along with certain of their respective directors and officers, all which involved different D&O policies.

But that wasn’t the end of the story.

A few years after the settlement, the successor entity agreed to a historic $5.15 billion settlement to resolve US government claims—approximately $4.4 billion of which funded cleanup efforts across more than 4,000 contaminated sites. Insurance didn’t save the day here. The successor entity primarily used cash on hand and borrowings to pay the settlement.

Insurance: Building a Comprehensive Strategy for Environmental Liabilities

One important lesson from the Tronox case is that boards and management teams shouldn’t assume that insurance will be the safety net if environmental liabilities surface after a transaction closes.

With that in mind, below are a few noteworthy categories of insurance that acquiring companies, their boards, and management teams should evaluate when contemplating a transaction that may involve potential environmental exposures.

Directors and Officers Insurance

D&O insurance is designed to protect management from personal liability for a claim resulting from an alleged breach of fiduciary duty while managing the operations of a company. This insurance also protects the company’s balance sheet by transferring the risk of indemnifying boards for these claims. See this short video for additional background on D&O insurance.

If shareholders sue the company, members of management, or the board over alleged environmental due diligence or disclosure failures associated with an M&A deal that leads to, for example, a significant stock price drop, D&O should respond.

To avoid surprises on the back end of an acquisition with potential environmental exposures, here are a few D&O insurance-related considerations:

Most D&O policies contain pollution exclusions, which bar coverage for cleanup costs and certain pollution-related damages.
Boards should ensure the pollution exclusion is not so broad as to preclude defense coverage for shareholder suits alleging process or disclosure failures.
For acquisitive companies, given the scale and complexity of environmental exposures, it’s worthwhile for boards and management teams to confirm whether Side A Difference-in-Conditions (DIC) policies are in place, how they interact with exclusions in the company’s primary tower, and whether limits are sufficient to respond.

Pollution Legal Liability (PLL) Insurance, aka Environmental Impairment Liability (EIL) Insurance

PLL insurance is one of several types of EIL insurance used to insure real estate. PLL generally covers third-party claims for cleanup costs, bodily injury, and/or property damage resulting from a pollution condition on, under, or migrating from, onto, or through an insured location.

Here are a few considerations specific to these policies when considering an acquisition:

Insurance is typically structured to provide protection for historical contamination not discovered in diligence (e.g., unknown contamination). However, given that PLL insurance is often used when purchasing properties with known environmental histories, depending on what environmental information is available, there may be some coverage grants that can afford coverage to known environmental conditions.
Coverage can extend to new pollution conditions that commence after policy inception and can be written for a single location, entire portfolio or select locations, and divested locations. Generally, economies of scale work in a company’s favor, meaning the more locations covered, the cost per location tends to decrease significantly.
These policies have claims-made and reported triggers, requiring timely notice when issues arise. However, depending on the type of transaction, PLL policy terms of up to 10 years may be available.

See this article for additional information regarding PLL insurance policies.

Representations and Warranties (R&W) Insurance

R&W insurance can protect buyers (or sellers) against losses that result from breaches of the representations and warranties in contracts, including certain environmental representations. These policies are designed to enhance or replace the indemnification given by the buyers (or sellers).

Here are a few considerations specific to these policies when considering an acquisition:

These policies typically exclude known environmental conditions or cap potential recovery amounts.
Policies will sometimes categorize environmental-related representations and warranties into what is called a “heightened risk” category. This step, which is done at the quote stage, is a line in the sand for the buyer, demonstrating that extensive diligence is expected in this area.
Policy negotiations should focus on defining “knowledge” and clarifying how environmental matters will be treated. See this article for additional information regarding R&W insurance in the context of M&A transactions.

Evaluate Policies Carefully to Avoid Coverage Gaps

Each of the policies discussed above solve for different exposures that may result from environmental-related risks tied to M&A. They also contain exclusions and limitations that can leave significant gaps in coverage—gaps that may not be known until the company or its directors or management team are in the midst of a tough situation and are expecting insurance coverage. This is why it’s important to evaluate coverage in the aggregate as an integrated risk transfer strategy. Ideally, that evaluation is being conducted with the help of a knowledgeable and experienced insurance broker who can navigate through these and any other insurance policies to help ensure they operate in harmony.

However, even the most sophisticated insurance portfolio can leave a company out in the cold. Policies can be rescinded for misrepresentations or denied for late notice. Limits can quickly become exhausted by large-scale remediation costs or protracted litigation.

Ultimately, insurance should be viewed as just one layer of protection. Good governance practices remain one of the most effective (and sometimes overlooked) safeguards against mitigating environmental-related risks in M&A.

Governance: The First Line of Defense Against Environmental-Related Risks in M&A

If there is one unifying theme across regulatory actions, shareholder litigation, and the real-world fallout from environmental liabilities, it’s this: good governance makes the difference between a manageable issue and a crisis.

While management teams and environmental consultants will lead the efforts in the diligence of a company and/or its assets, members of the board will want to ensure that diligence efforts are robust. This, of course, speaks to each director’s duty of corporate oversight. If the transaction goes sideways because of an environmental-related issue, plaintiffs’ firms, investors, the media, regulators, and insurers will look to the board’s conduct when evaluating whether environmental risks were reasonably identified, evaluated, and addressed.

So, what are boards to do?

Elevate Environmental Diligence to a Board-Level Priority. Environmental diligence shouldn’t be relegated to a technical appendix in the data room. Even in cases where environmental risk isn’t expected to be an issue, it’s still advisable for boards to ask their management teams about this topic. If environmental liability is a matter that needs to be investigated further, boards may want to consider requesting updates from environmental advisors and legal counsel, not just summaries prepared by management.

See this article from Gibson Dunn for a few key environment, health, and safety issues to think about in M&A transactions.
Align Risk Assessment with Deal Economics. Boards may want to insist that potential environmental liabilities are quantified and reflected in the deal structure, including purchase price adjustments, indemnification rights, and, if necessary, remediation obligations.
Confirm Insurance Fit and Limits. It’s advisable for boards to request a summary of insurance structures and exclusions, including D&O policy pollution exclusions, R&W coverage carve-outs, and EIL or PLL coverage terms and limits. This can help avoid unwelcome surprises if claims emerge post-close.
Document the Process. Board minutes and transaction files should clearly demonstrate that environmental-related risks were reviewed and discussed. Contemporaneous records are among the most persuasive evidence of fiduciary diligence if challenged later.

Board-Level Questions to Ask

For directors looking for how best to pressure test environmental due diligence issues in an M&A deal, here are a few questions that may be worth asking:

What independent environmental assessments were conducted?
Have all consultants been given full access to sites?

Were all known communications with regulators, notices of violations, or prior enforcement actions disclosed?

Are environmental liabilities adequately reflected in the purchase price adjustments and indemnification provisions?

Parting Thoughts

Environmental-related liabilities in M&A can be hidden, complex, and expensive. They can trigger regulatory investigations and enforcement, damage a company’s reputation, lead to civil and criminal lawsuits, and leave management teams and boards exposed to personal liability. While insurance is an important tool, it can’t replace the need for rigorous diligence, critical questioning, and a governance mindset that views environmental risk as a board-level issue.