Environmental Impairment Liability Insurance

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1 Environmental Impairment Liability Insurance Liability for contaminated land or groundwater can often run to several millions of pounds, exceeding the value of the property. With over 300,000 former industrial sites in England, every property transaction requires the appropriate searches, investigations and contractual protections. In many cases, insurance has been shown to provide the most suitable solution to protect the property owners. a creative and dynamic approach to risk solutions...

2 TRANSFER OF ENVIRONMENTAL LIABILITY As a rule of thumb, liability for pollution rests with the polluter. However, this liability regularly transfers to the property owner (that was not the polluter), where: The owner has indemnified the polluter through the sale purchase agreement; The polluter no longer exists; and The owner knows about the pollution and fails to manage it.

3 KEY RISKS Key environmental risks associated with a property transaction include: Known issues site investigations and searches identify pollution; Unknown issues the above investigations (as a snap shot in time) fail to identify the pollution, for example the pollution has already migrated beyond the boundary of the property; Data Gaps intrusive investigations may not be wanted as they could realise contamination that then needs to be dealt with; Liability Bounce Back a seller, although protected by an indemnity, may still retain the liability should the purchaser have inadequate financial strength (particularly when the buyer uses a Special Purchase Vehicle to ring fence liability); and Changes in Law or the response of the environmental regulator. Over time the legal framework, or more likely the position of the regulator may change allowing liabilities to attach to a property that were not envisaged at the time of the transaction. These risks introduce uncertainty for both seller and purchaser, impacting the transaction process and value of the land.

4 STANDARD INSURANCE PRODUCTS Standard (Public Liability) insurance policies are unlikely to provide adequate protection from the above liabilities, as they will be limited to providing cover for sudden and accidental events only. Historical leakage from drains or on disposal of waste material would be considered neither sudden nor accidental. ENVIRONMENTAL INSURANCE The insurance market has developed products designed cover this gap in Public Liability policies associated with environmental liability. These policies respond to Statutory, Civil and Contractual Liabilities and so are well placed to support transactions. Benefits of these policies include: An ability to insure known issues (see below); Cover for gaps in the understanding of the condition of the property; and Financial provision against liabilities, protecting the bounce back of liability post sale. These products therefore work on both seller and buyer side, with the ability to provide protection to funders and other stakeholders associated with the property.

5 INSURANCE FOR KNOWN ISSUES It is accepted that insurance cannot be purchased for known issues the burning building. However, with respect to environmental insurance, the presence of contamination does not necessarily mean that a liability exists at this time. Insurance can therefore be used to manage these known potential liabilities, effectively taking them from negotiation process.

6 Case Study The following case study demonstrates the benefits of the use of insurance in a, seemingly, low risk property transaction: Location Southern England Property Current Use Pilot training centre Property Historical Use Residential Potential Source of Contamination Petrol underground storage tank, 20 years old Liability Transfer Buyer to indemnify the seller Actual Outcome Purchaser, on advice from consultant, commissioned an intrusive investigation around the storage tank. This investigation identified the presence of diesel in groundwater. Source of contamination not known. Sale collapses with responsibility to identify source of diesel and remediate falling back to Seller. Seller determines source is an old disused above ground tank, clean-up of 350,000 over a 12-month period. Alternative Outcome Purchaser, on advice from broker, commissions walk over survey, identifies storage tank. Tank decommissioned (cost 5,000) and insurance purchased (cost 1,000 per year). Sale goes through with smoothly. CONCLUSIONS Environmental liability may pose a significant issue for property transactions. Often these issues can be overlooked or the subject of poor guidance from consultants employed to support the transaction. The use of insurance, in the correct circumstance, can provide confidence to stakeholders allowing the transaction to progress efficiently.

7 Who are Pii? At Pii we have developed an excellent reputation as property insurance specialists, working closely with some of the leading insurers to provide a wide range of policies relating to the management, procurement or disposal of property assets, ensuring that no stone is unturned and that all areas of exposure are addressed. Our industry has for some time lacked creative and dynamic thinking in terms of risk transfer and risk solutions. Focus has instead been on growth via acquisition. Our growth is delivered from embracing innovation for alternative risk transfer programmes. By understanding the Real Estate sector we are able to provide solutions for those difficult property risks that often prove problematic. Our outstanding track record is built on generating trust and creating the right environment for doing business. We trade using a carefully chosen set of core values and believe in constant dialogue with our clients, insurers and employees to ascertain their needs. We are committed to being the best, with the strength of Pii resting firmly in our people and their abilities. a creative and dynamic approach to risk solutions... STEVE PACKER Director stevep@piiuk.com Office Mobile Web London Office 1/1A Telegraph Street, London EC2R 7AR +44 (0) Hampshire Office 7 Highview, Bordon, Hampshire GU35 0AX +44 (0) Web Property Insurance Initiatives Limited Registered In England: Registered Office: 7 Highview, Bordon, Hampshire GU35 0AX Property Insurance Initiatives Limited is authorised and regulated by the Financial Conduct Authority No: