Protect Your Interests
Environmentally contaminated property buyers should obtain insurance that effectively meets their needs.
ue to recent
regulatory reforms and advanced remediation techniques, more investors
are purchasing environmentally contaminated properties. To protect such
buyers from unknown liabilities, providers are offering more insurance
products that adequately address environmental concerns. The use of
environmental insurance is growing as more people become aware of its
benefits. There are only a small number of insurers and insurance
brokers that specialize in this coverage but premium volume continues
to grow as success stories become known to attorneys, commercial real
estate brokers, and others involved in these types of transactions.
insurance can cap liability and/or remove liability reserves from
properties' balance sheets, thereby limiting buyers/developers' risks
and minimizing sellers/owners' contingent obligations. Further, it
provides a method to quantify the economic risks associated with
environmentally impaired properties and enhances access to debt
To determine the best
environmental insurance policy, buyers first must understand particular
contaminated propertys' risk management considerations. Issues
impacting contaminated property transaction parties can include known,
unknown, and underfunded environmental liabilities; adverse development
of known environmental liabilities; and pending litigation. Buyers also
should choose an insurance broker that specializes in environmental
insurance placement or one that is experienced in these types of
Environmental Insurance Products
four major types of environmental insurance coverage include cost
cap/stop loss, environmental impairment liability, finite programs, and
Cost Cap/Stop Loss.
This type of coverage works for buyers who are remediating contaminated
properties. It minimizes uncertainty by paying for defined cleanup
costs that exceed the anticipated cleanup costs, as well as providing a
buffer above the expected cleanup costs. Buyers usually must submit a
remedial action plan to obtain this type of coverage. However, this
coverage typically is only available for very large cleanup projects
(in excess of $1 million to $2 million).
Environmental Impairment Liability. EIL
coverage is site specific (that is, those sites that are specifically
scheduled to the policy) and covers first and third parties. It covers
both preexisting and new claims for known conditions. Policy terms
extend up to 10 years, with coverage ranging from $1 million to $100
Finite Programs. Finite
insurance programs may cover the entire expected cleanup costs. They
usually are recommended for large projects (more than $4.5 million),
although providers sometimes consider small projects. To obtain a
finite program, buyers must submit a remediation action plan and an
accurate annual cleanup cost estimate.
Lenders typically are concerned with a property's potential
environmental liability and the subsequent compromise of their
collateral. Secured creditor insurance is designed to protect lenders
from collateral value loss, borrowers' inabilities to repay the loans,
and foreclosed properties' environmental condition liabilities.
Obtaining lenders coverage might make lenders more willing to provide
capital for contaminated properties.
Insurance Aids Deal
Consider a recent $10 million contaminated property transaction in
which contingent cleanup costs and liability estimates exceeded
$100,000. The site's contamination stemmed from on-site tenant
operations, as well as the migration of contaminants from an off-site
leaking underground storage tank. A major oil company had been involved
in mitigating the plume from the storage tank. As the operator under
the lease, the tenant arguably was obligated for pollution problems
caused by its operations, but no contractual agreement existed to cover
the oil company's pollution.
assurance that both the oil company and the tenant would fulfill
remediation obligations, the property buyer obtained a pollution legal
liability policy, a type of EIL coverage, which protected it from
first- and third-party claims by covering preexisting known and unknown
conditions. Without this insurance, the deal could not have proceeded.