Environmental Deal Breakers
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
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.
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.
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.
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.
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;
interruption coverage including loss of rental income;
liability coverage and cleanup;
penalties, and punitive damages where allowable by law; and
- natural resource
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 http://www.newdayunderwriting.com.
For more on environmental liability, read
“Enviromental Risk: 10 Myths” in the Nov./Dec. 2011 CIRE.