Articles / Publications

N.E. Real Estate Journal -- May 28 - June 17, 2002 www.rejournal.com

New York Real Estate Journal
The use of environmental insurance to clean up real estate

By Howard Tollin

The lack of suitable land for development in some parts of the country has led to a renewed interest in the redevelopment and re-use of existing real estate. Where industrial and commercial properties have been contaminated by historic releases of hazardous materials, it may be necessary to remediate areas of identified pollution in order to maximize the potential value of the property. This is particularly true where changes in the character of a neighborhood have resulted in the possibility of future uses that differ from those of past periods.

Frequently, an owner of a portfolio of properties impacted by historic pollution can use the combination of fixed cost remediation contracts and environmental insurance as a vehicle to cap aggregate cleanup expenses once remedial action plans have been developed and estimates of expected costs have been prepared. This insurance will also pay for unexpected costs that arise as a result of the existence of pollution conditions or cleanup activities, including third party claims resulting from actual or alleged releases of hazardous materials.

In practice this is accomplished by writing an environmental insurance policy to support the promise of the contractor to remediate the properties for a guaranteed maximum amount. The policy pays for cleanup costs, in the aggregate, that exceed those that were guaranteed. Protection against the discovery of unknown pollution conditions and third party claims is proved for both the contractor and the owner of the properties for the period of remediation and for a period of completed operations. Each property pays a portion of the total premium and receives protection for cost overruns and liability claims during the cleanup and for a reasonable period following completion of all required work. The presence and/or remediation of historic pollution can result in risks of liability for the owner of commercial and industrial properties that need to be considered as cleanup projects are undertaken. Sources of potential liability include:

The risk of third party claims being filed by neighbors alleging that pollution has migrated from the subject property and has damaged their land.

The risk of claims by tenants alleging bodily injury or property damage as a result of exposure to toxic substances on the subject property.

The chance that efforts to remediate contaminants will make the pollution condition worse instead of better.

The possibility that quantities or concentrations of pollutants will be worse than is initially estimated.

The risk that regulators will not approve the remedial action plan or ask for more work after the initial cleanup is completed.

A risk of claims by owners of neighboring properties that the values of their real estate has been negatively impacted by the presence of pollution on the subject property (stigma or diminution of values).

The risk of natural resource damage claims being filed by trustees of state or federal governments where permanent irreversible environmental damage is alleged.

The risk that financial institutions making loans for redevelopment will not accept the real estate collateral.

To be continued in the June 18th issue of the New York Real Estate Journal.

Howard Tollin is a managing director for Breitstone & Co. Ltd. of Cedarhurst, NY.

Continued from the May 28th issue.

These risks can be effectively managed by the purchase of environmental insurance that provides protection against a wide variety of pollution risks. The types of insurance that might be appropriate for a remediation project include:

1. Remediation Cost Overrun Insurance. Pays for costs in excess of those anticipated to complete all remediation activities required by the remedial action plan. This type of insurance requires that a remedial action to approved by regulators of conform to voluntary cleanup standards. It also requires that an estimate of the costs of executing the plan be approved by the underwriters. Coverage is typically written with a deductible of at least 10% of the expected cleanup costs.
2. Pollution Legal Liability Insurance. Pays for the cost of third party claims for bodily injury, property damage and cleanup arising as a result of pollution conditions on, under or emanating from the insured property, including the cost of defending such claims. These policies may also cover onsite claims and cleanup costs as well as costs related to the transportation and disposal of hazardous wastes generated at the site. Policies can be written for terms of up to five years or this coverage may be purchased on an annual basis.
3. Contractor's Pollution Liability Insurance. Should be required of all contractors providing remediation services at the insured property. These policies provide protection against releases of contaminants as a result of the contractor's actions at an insured job site. Coverage should be arranged for the term of the project and for completed operations for a period of three to five years following completion of all work. Policies can be purchased on a blanket basis for all work done during the policy period. They may also be purchased on a single site where the limit is not shared with other insureds and/or other projects.
4. Engineer's and Consultant's Professional Liability Insurance. Should be required of all professionals providing services related to remediation of the subject property. These policies provide protection against the errors and omissions of design professionals that result in claims due to releases of pollutants.
5. Secured Creditor Insurance. Provides protection for lenders against default on a loan as a result of pollution conditions on, under or emanating from the subject property. These policies typically pay off the loan balance in the event of pollution conditions and a default by the borrower.
6. Finite Risk Programs. Finite risk programs allow an insured to pre-pay expected costs associated with a remediation project. They are commonly written in conjunction with a cost cap policy to provide a means for a third party (the insurer) to be responsible for both known and unknown pollution conditions.

With the protection that can be provided through environmental insurance, it is possible for owners of contaminated properties to proceed with required remediation fee from the concerns that have been associated with cleanup activities. The broad coverage forms, substantial limits and competitive pricing of this insurance have made it a useful tool in facilitating transactions involving contaminated properties or to allow remediation to proceed at a pace that suits the owner's objectives.