Many investors are inclined to buy or invest properties without even thinking of the impacts of pollution or the other environmental factors to their investments. They will find themselves decades later taking a big hit from liabilities due to pollution.
Bill Nellen, executive vice president of the Environmental Group at Alliant Insurance Services Inc., discussed on Business Insurance how proper assessment and coverage of environmental liabilities can make the difference between successful or failed real estate investments.
Environmental Insurances
Environmental Insurance was not included in the Commercial General Liability until the early 1980s and was only initially used as an adverse-selected product to cover inherent environmental liabilities associated with bulk chemical transporters, hazardous waste transfer stations and landfills.
Pollution insurance covers responsibilities resulting from cleanup, bodily injury and property damage. Policies are tied specifically to the insured's insurable interest in a property. Coverage will respond if a pollution condition is found on a covered property, without regard to its source.
Key enhancements to the off-the-shelf policy include:
- Business interruption/loss of rents
- Legal defense expense outside the limits of liability
- Government re-opener coverage for resolved prior issues with no further action or NFA
- First- and third- party transportation
- Historical blanket disposal site liability
- Indoor air quality - mold, legionella, methicillin-resistant Staphylococcus aureus, bacteria, fungi - and related disinfection
- Natural resource damages or NRD
Due Diligence
Environmental risk embodies an important aspect of transactional due diligence, with two key purposes:
- It enables a prospective purchaser to receive limited liability relief under the Superfund Act.
- It provides a baseline for investors, lenders and deal teams to make a "go/no go" determination for pursuing the deal.
Price Offset
Buyers can negotiate purchase discounts or offsets for pollution impacts, real or presumed. For example, if a property has a long history of industrial activities but due diligence reveals no pollution effects, an offset will fund the contingent liability assumed by the new buyer. This is a fixed-cost way to exit an asset or investment without leaving a legacy tail.
