Development

Protect Your Interests

Environmentally contaminated property buyers should obtain insurance that effectively meets their needs.

D 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.

Environmental 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 capital.

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 transactions.

Environmental Insurance Products
The four major types of environmental insurance coverage include cost cap/stop loss, environmental impairment liability, finite programs, and lenders coverage.

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 million.

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 Coverage. 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.

Needing 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.

Daniel Johnson and John Farinacci

Daniel Johnson is managing principal of San Diego-based Environmental Business Solutions, a subsidiary of SCS Engineers, an operating company of SCS Engineers, a national environmental consulting firm. Contact him at (858 ) 571-5500 or danj@ebsenvironmental.com. John Farinacci is managing director of Tustin, Calif.-based Interstate Specialty Insurance Marketing, an insurance brokerage firm specializing in environmental insurance. Contact him at (714) 544-6125 or at j.farinacci@ismflex.com.

Recommended

Preparing for the Storm

July.Aug.19

Last year, the United States incurred $91 billion in costs from weather- and climate-related disasters, making it the fourth most expensive year since 1980, with the top three years all occurring in the past decade. Government action on infrastructure development and energy efficiency can help the industry prepare for an uncertain future. 

Read More

Natural Disasters, Human Response

May.June.19

The frequency of and costs related to natural disasters — including wildfires, hurricanes, tornados, and droughts — are increasing at an alarming rate in recent years. Housing, retail and office space, warehouse facilities — all of these contribute to a coordinated response and rebuilding effort.

Read More

Opportunity Zones VS 1031 Exchanges

March.April.19

While the tax benefits of 1031 exchanges in commercial real estate are well-known to most, the new qualified opportunity zone program now offers another approach to deferring or eliminating taxable gain.

Read More

If You Build It...

September.October.18

Demand for industrial space remains strong with 230M square feet of industrial space under construction in 1Q 2018. Learn why developers are leaning on spec construction.

Read More