Environmental Risk & Insurance Discussion

Transcription

1 Gallagher Environmental Practice Environmental Risk & Insurance Discussion For Real Estate Developers, Investors, Owners and Managers JULY 2017

2 Did You Know... Over 80% of Gallagher Real Estate clients are acquiring Environmental Insurance. Companies still retain environmental liabilities from divested properties. The average cost per square foot for Real Estate portfolio companies is pennies on the dollar. Vapor Intrusion is a REAL environmental liability. Standard liability and property insurance policies have excluded coverage for claims associated with pollution events since 1985, leaving significant coverage gaps in insurance programs throughout the U.S. Although there has been a market for pollution liability insurance since 1979, until recently, coverage was very narrow, limits were low, and premiums were relatively high. The market for pollution liability insurance has dramatically changed over the years. Environmental liability coverage has greatly broadened, limits have increased and premiums are significantly lower. This discussion is provided for developers, owners and investors of commercial real estate to overview how environmental liability insurance can be used to manage financial risks associated with environmental liabilities. Today, more and more commercial real estate entities are purchasing environmental liability coverage. Arthur J. Gallagher & Co., a leader in risk management advisory and insurance brokerage services, offers this discussion. Gallagher Environmental specializes in providing environmental risk management and insurance services. Our role as an industry leader in this area is to (1) identify the potential environmental risks facing our clients, (2) analyze them in terms of potential frequency and severity, and (3) review the appropriate risk control and financing mechanisms, including environmental insurance available to address these risks. 2 Gallagher Environmental Real Estate Developers, Investors, Owners and Managers

3 Potential Environmental Liability Exposures Real estate developers, owners and investors are exposed to many environmental liabilities and cost exposures due to their operations. In general, they face third-party liabilities related to contaminants from known and unknown historical usage/operations or neighboring properties; and third-party liabilities from ongoing operations. The most common environmental and regulatory exposures encountered with real estate include: Investigation and defense due to local and regional soil and groundwater contamination. Sick Building Syndrome, for example mold, carbon monoxide, bacterial air releases and/or vapor intrusion. Legionella in water systems and HVAC. Bodily Injury claims resulting from lead, asbestos, PCBs and radioactive material. Illicit abandonment of materials by tenants, and Midnight dumping. The Phase I environmental assessment performed during the acquisition of the property fails to recognize environmental conditions. Unknown leaking underground or aboveground storage tanks or piping. Devaluation of real estate asset due to buyers uncertainty concerning possible contaminants. Real estate developers, owners and investors are exposed to many environmental liabilities and cost exposures due to their operations. In general, they face third-party liabilities related to contaminants from known and unknown historical usage/operations... Inadequate containment at loading/unloading areas, and for hazardous materials, waste, and process areas. Surface water run off. Spillage, stained soils, discolored surface water, or oily sheens. Past and present use of septic systems for disposal of wastes. Construction debris containing hazardous materials (e.g., paint cans, tars, etc.) No coordinated or formal environmental risk management program. Complexities regarding waste management regulations. Easements (rail/roadways, pipelines) on the property with potential environmental implications Air emissions from ammonia based refrigeration systems. Past landfills, lagoons, and other solid waste disposal areas. Note: This list is not a comprehensive inventory of every environmental exposure found with these types of transactions, but an indication of the exposures that are often encountered. Gallagher Environmental Real Estate Developers, Investors, Owners and Managers 3

4 Claims Examples A real estate development company purchased a former Brownfields property, which had recently been designated clean by the EPA. Shortly after construction began, a bulldozer uncovered several drums of chemicals buried during the site s past operations. While removing the drums, a spill occurred releasing the chemicals into an unprotected drainage pipe that dumped into a nearby river. A few days later, neighbors began complaining about unpleasant odors linked to the chemical spill and sued the developer. In addition to the additional costs of removing the buried drums and associated on-site contamination, cleanup of the river and claim settlement costs paid by the company totaled over $1,400,000. Toxic mold was discovered in various areas of a hotel after several days of heavy rainfall and flooding. The excessive rain subjected the building structure and roof to abnormal storm conditions, which led to interior water intrusion. The pollution policy responded and paid over $1,000,000 in remediation and restoration costs. With various areas of the hotel being closed to the public, significant Business Interruption claims were also filed. The insurer is continuing to pay defense costs for Bodily Injury claims. A developer discharged large amounts of sediment downstream during an expansion project. The EPA stated that the discharge threatened the water quality of the surrounding waterways and determined the developer was responsible for all costs associated with the assessment and cleanup. The developer was fined $27,500 a day for discharging pollutants into waterways without a permit. A property management corporation managed a large apartment complex. A carbon monoxide release from a faulty heating and ventilation system at an apartment complex caused the deaths of two tenants and serious injury to three others. Cost for the property management company that owned the apartment complex to settle bodily injury claims filed by the victims and their families exceeded $5,000,000 A real estate developer was constructing a luxury hotel with an underground parking garage on the site of a former apartment building. As excavation began, extensive PCB contamination was found on the site. A Phase I assessment had failed to detect the contaminants, and the developer faced over $450,000 in remediation expenses. 4 Gallagher Environmental Real Estate Developers, Investors, Owners and Managers

5 Traditional Environmental Risk Management As part of any due diligence, property developers/buyers typically conduct Phase I Environmental Site Assessments (ESAs) on their prospective investments involving commercial and industrial property. If the ESAs find the site(s) to be clean, the investment is made, assuming acceptability of other investment criteria. It should be noted that if the ESA determines that the site is clean and it turns out to be incorrect, the only financial recourse would be against the environmental consultant that conducted the ESA. To recover financial damages, negligence on the part of the environmental consultant would need to be proven. This can be a difficult, costly, and time-consuming effort. In addition, many of the contracts consultants use in doing ESA work limits the consultant s liability exposure to (1) the amount of the contract or (2) the limits of the consultants professional liability coverage, whichever is less. It should be noted that if the ESA determines that the site is clean and it turns out to be incorrect, the only financial recourse would be against the environmental consultant that conducted the ESA. Once properties are added to a portfolio, Environmental Risk Management is needed to manage risks associated with tenants, including contractual risk transfers in lease agreements, Operations & Maintenance programs, Indoor Air Quality plans, etc. However, these procedures do not eliminate the environmental risks. Gallagher Environmental Real Estate Developers, Investors, Owners and Managers 5

6 Environmental Liability Insurance The environmental liability insurance market today is approaching $2 billion in annual premium in which leading insurers, including Ironshore, Great American, Navigators, AWAC, Beazley, Zurich, Aspen, Allianz, XL- Catlin, and Chubb (to name a few) are providing significant coverage at cost-effective rates. Over the past few years, the environmental liability insurance market has responded to the inefficiencies in the traditional environmental due diligence process during property acquisition and ownership. Many different types of environmental policies can, and have been, purchased to address environmental risks at commercial real estate properties. Insurance Policy Type Risks Insured Limits Fixed-Site Pollution Liability Contractors Pollution Liability 1. On-Site and Off-Site Cleanup, Bodily Injury and Property Damage from New and Preexisting Pollution Conditions 2. Business Interruption 3. Non-Owned Disposal Sites 4. First- and Third-Party Transportation 5. Defense of Claims 6. Indoor Air Quality, including Mold and Legionella coverage 7. Illicit Abandonment of Materials 8. Underground and Aboveground Storage Tanks 9. Bodily Injury and Property Damage from Asbestos and Lead Based Paint 10. Ancillary Coverage for Lenders 1. Third-Party Bodily Injury, Property Damage and Cleanup Costs from Pollution Conditions as a result of contracting and management operations 2. Occurrence or Claims Made 3. Defense of Claims 4. Non-Owned Disposal Sites 5. Transportation 6. Indoor Air Quality, including Mold and Legionella 7. Bodily Injury and Property Damage for Asbestos and Lead- Based Paint Determined on a site-specific basis Up to $50,000,000 per loss and aggregate limits are available Over $500,000,000 in total limits are available by stacking insurers Up to $50,000,000 per loss and aggregate limits are available from a single insurer Over $300,000,000 in limits are available through stacking insurers 6 Gallagher Environmental Real Estate Developers, Investors, Owners and Managers

7 When an insurance program is designed for a property transaction, the insured risks can be broken down into four major categories: The expected costs of cleaning up known contamination; Excess costs or cost overruns related to cleaning up known contamination; Risk of either creating or discovering new contamination in the future; and Third-party claims caused by pollution conditions at or emanating from the location(s). These risks and the corresponding environmental insurance program are shown in the figure. Known Environmental Liabilities Cost Overruns of Known Environmental Liabilities Third-Party Claims Caused by Environmental Liabilities Risk of Discovering or Creating Environmental Liabilities Time Environmental Liability Insurance Examples As discussed in the section above, property owners and investors have many potential environmental liability exposures that, uninsured, could adversely affect their financial performance, internal budgeting and net earnings. Many property owners and investors used environmental liability insurance coverage to insure risks associated with their portfolios. A few recent examples include: One of the largest commercial real estate services and investment companies recently purchased environmental insurance for over 225 million square feet of managed real estate. The 3 year policy provides coverage for new and preexisting pollution conditions, as well as, Contractors Pollution Liability coverage for their managed locations. The limit of liability for the policy is $30,000,000 each loss and $30,000,000 in the policy aggregate. The total policy premium was approximately $525,000. A large commercial real estate company designed an environmental insurance program for over 900 properties. The 5-year policy covers preexisting and new pollution conditions, and has limits of $25,000,000 each loss and $50,000,000 in the policy aggregate. Total policy premium for their real estate portfolio was approximately $1,000,000. Additionally, to mitigate environmental exposures on the portfolio policy, the company purchases separate environmental insurance policies for Brownfield sites. A real estate investment company purchased environmental insurance for over $3.3 billion in managed assets. The 3-year policy covers preexisting and new pollution conditions and has limits of $10,000,000 each loss and aggregate. The total policy premium was approximately $200,000 A residential real estate property owner and manager maintains an environmental insurance program for over 1,200 locations. The policy was for a 4-year term with $10,000,000 each loss and $50,000,000 in the policy aggregate. The total policy premium was approximately $1,400,000. A residential real estate property owner and manager maintains an environmental insurance pro gram for 12 locations with 5,000 units. The policy was for a 3-year term with $5,000,000 each loss and $5,000,000 in the policy aggregate. The total policy premium was approximately $50,000 or only $10 per unit for a 3-year period. The monthly rate per unit is 27 cents. Gallagher Environmental Real Estate Developers, Investors, Owners and Managers 7

8 Gallagher Environmental Practice Global Headquarters 2850 Golf Road Rolling Meadows, IL The information contained herein is intended to serve only as an overview of insurance policies available. This is for discussion purposes only. For a completed description of coverage terms, conditions and exclusions, the policy/policies must be referred to. Please address any specific questions to your Arthur J. Gallagher & Co. representative. About the Author Anthony Lehnen, CHMM, is the Managing Director of Gallagher Environmental, which is an expertise group within Arthur J. Gallagher & Co. For over 25 years, he has specialized in understanding the environmental risks faced by clients and designing the appropriate risk management and insurance program to best address these risks. He has underwritten complex coverage terms and conditions for numerous large national and international Environmental Liability insurance programs for oil and gas companies, real estate clients, attorneys, manufacturers, healthcare, engineers, environmental consultants and contractors. Additionally, he participated in the development of environmental management systems for refineries and chemical manufacturing plants and performed numerous environmental due diligence assessments and regulatory audits of facilities in various industries. For more information, please contact a Gallagher Environmental team member: Chicago Managing Director Anthony Lehnen, CHMM anthony.lehnen@ajg.com Cameron Douglass cameron_douglass@ajg.com Amber Chavin amber_chavin@ajg.com Tara Frasure tara_frasure@ajg.com Luke Trejo luke_trejo@ajg.com Tatiana Zaatiti tatiana_zaatiti@ajg.com San Francisco New York Jonathan Leavens jonathan_leavens@ajg.com Gene Devine gene_devine@ajg.com Carl Varteresian carl_varteresian@ajg.com 17GGB24240A