Legal issues

Environmental Deal Breakers

Environmental liability concerns can serve as major deal breakers during commercial real estate sales and transfers. While sellers want freedom from environmental liability issues after the sale, buyers want to avoid the many challenges associated with contaminated properties.

For example, a shopping center was recently purchased from an owner who had held the complex for approximately five years. After the transaction was completed, the new owner implemented a property expansion and capital improvement project. During construction, contaminated soil and groundwater were discovered as a remnant from a former dry-cleaning operation.

Unfortunately, the phase I environmental site assessment initiated by the purchaser before the sale found no recognized environmental conditions and failed to recommend a phase II environmental site assessment. As a result, all shopping center expansion activities were halted until the property’s PCE-contaminated soil and groundwater was cleaned up to the cost of nearly $1.2 million.

In another case, $1.04 million was awarded to two women in an apartment complex who were subjected to the effects of persistent water leaks and mold. A kitchen sink leaked into a bedroom ceiling, causing discoloration and foul odors. In addition, a leaky bathroom ceiling developed dark-rimmed holes that ran with “black water” whenever the upstairs neighbor showered.

Despite repeated complaints, building management was slow to respond to the persistent water leaks and recurring appearance of mold as the health of both women deteriorated. Consequently, the women sued the landlord, demonstrating at trial that the owners had rarely performed any repairs beyond cosmetic patchwork.

Other environmental risks commonly associated with the sale, purchase, ownership, and redevelopment of commercial real estate are:

  • contaminants produced from known and unknown historical operations;
  • construction debris containing hazardous materials;
  • sick building syndrome, which can be carbon monoxide, mold, legionella, or other bacterial air releases resulting from faulty heating, ventilation, or air conditioning systems;
  • hazardous chemical storage such as laboratory chemicals, medical wastes, dry cleaning solvents, and pesticides;
  • lead, asbestos, polychlorinated byphenols or PCBs, and radioactive material;
  • "midnight dumping" on vacant land parcels;
  • contaminated surface-water run‑off; and
  • leaking underground or above-ground storage tanks or piping.

Managing the Risks

Despite the costly nature of these problems, environmental liabilities need not impede property transfers, acquisitions, or securing financing, if they are proactively identified and managed. In recent years, real estate developers and owners alike have successfully mitigated their environmental exposures through contractual means, the use of environmental insurance, or a combination of both methods.

Sitting at the top of the environmental liability insurance market are Chartis, XL, Zurich, ACE USA, and Chubb, which account for approximately 80 percent of the $2.5 billion in annual premiums written. In addition, the remaining 20 percent of the environmental liability insurance market continues to grow with a number of very solid insurers providing at least some form of environmental liability insurance. These include Liberty, Great American, Ironshore, Markel Underwriting Managers, American Safety, Freberg Environmental, Navigators Group, and Allied World, which offer a broad array of site coverage options.

Available Coverage

Confusion in the marketplace does persist, since each environmental liability provider offers its own portfolio of coverage forms. However, premises environmental liability/pollution legal liability, or PLL coverage offers various and different coverage parts under one policy form. This includes affording third-party bodily injury, property damage, cleanup costs, and legal defense expenses related to pollution conditions or events found on, at, under, or migrating from covered locations. Other benefits offered are:

  • first- and third-party transportation coverage;
  • blanket non-owned disposal site/location coverage;
  • business interruption coverage including loss of rental income;
  • mold/Legionella liability coverage and cleanup;
  • fines, penalties, and punitive damages where allowable by law; and
  • natural resource damages.

PLL is also an effective risk management tool for commercial real estate for many reasons. It can help fill the environmental gap in most general liability policies (due to the absolute or total pollution exclusion), reduce liability uncertainties, and provide simple asset protection from potentially catastrophic environmental events associated with day-to-day operations. In addition, available programs can be tailored to address the diverse needs of each property and structured to meet a variety of requirements and objectives, including regulatory obligations, contract requirements, lender requirements, landlord obligations, and business objectives. PLL also can be structured to cover existing and known environmental conditions.

For these reasons, real estate developers and owners alike should carefully consider the protection offered by today’s environmental insurance marketplace. Fortunately, it is a market that continues to adapt and grow, while keeping pace with the increased environmental demands and concerns of real estate owners and their lenders.

John J. Heft, CRIS, is a senior vice president and director-real estate practice of New Day Underwriting Managers, LLC, a specialty resource for environmental and construction related professional liability insurance coverage. Contact him at

For more on environmental liability, read “Enviromental Risk: 10 Myths” in the Nov./Dec. 2011 CIRE.


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