ENVIRONMENT IMPAIRMENT LIABILITY: Insuring the Risks of Property Transfers - 0 - GREG COLLINS President & CEO, Parker, Smith & Feek Updated: 05/08
Overview The decade of the 1970 s arrived with a burgeoning awareness of the effects of chemicals on the environment. Decades of relatively uncontrolled disposal of industrial wastes had polluted the soil, groundwater, and air throughout America. Congress responded by passing such groundbreaking legislation as the Clean Air Act, Clean Water Act, and Superfund. The public developed a new awareness for the use and disposal of chemicals and for the liability associated with years of poor practices. Congress also authorized the establishment of the Environmental Protection Agency (EPA), which promulgated laws to manage the use of potential pollutant materials, as well as beginning the legal process for assigning liability for cleaning up contaminated sites. Initially, owners of businesses targeted with liability for clean-ups turned to their Commercial General Liability (CGL) insurance policy for relief, triggering enormous claims the insurance industry had not expected. Insurance carriers began to limit coverage for pollution conditions under the CGL, and by the mid 1980 s most coverage for pre-existing, historical pollution conditions had been excluded from the CGL policy. While practices involving the use and disposal of hazardous materials have improved enormously, there remains significant residual property contamination. The existence of historical pollutants in soil and groundwater can dramatically impact the value of a property bought or sold in today s real estate and development market. It is truly Buyer Beware. Without appropriate due diligence prior to purchase, a new owner can assume responsibility for the clean-up of their property as well as the property of neighbors whose soil and groundwater have been polluted by migrating contaminants. Fortunately, there are tools available to properly assess, and in many cases transfer, the liability attached to property contamination. Today, environmental risk management involves: Phase I studies reviewing historical records and identifying contamination potential in property transfers. Phase II analysis sampling and assessing soil, groundwater, air, and building materials. ElL insurance is a key factor in remediation and transfer of contaminated properties - known or suspected. Indemnification agreements imposing liability for environmental conditions in purchase and sale agreements and other contracts. Environmental Impairment Liability (EIL) insurance - transferring the risk of pollution liability to an insurance policy. - 1 -
Environmental Impairment Liability Policies ElL protection takes numerous forms: Pollution Legal Liability insurance - Property purchasers or sellers often use this insurance to cover losses from: Pollution legal liability essentially negates the CGL pollution exclusion. The discovery of pre-existing conditions (those in place prior to policy inception), or new pollution conditions (those introduced after the policy goes into force). Covered costs can include site clean-up, business interruption, third-party bodily injury, property damage, and defense costs. This insurance is used to secure the financial responsibility attached to indemnification agreements. Generally written with long terms of coverage (3, 5, or 10 years) the policies can't be canceled by the insurer. Liability limits ($1 million to $100 million) are designated for the full term of the policy and do not reinstate annually. Typical premiums for a I0-year policy with a $1,000,000 limit of liability and $50,000 deductible range from $75,000-$100,000. Cleanup Cost Cap - Often developments include the need to perform remediations (clean-up of soil and/or groundwater). This policy insures against remediation cost overruns. It attaches above a self-insured retention (SIR) consisting of the projected clean-up cost plus an additional percentage deductible. For example, if a clean-up is estimated at $2,000,000, the SIR might be that amount +20%. The policy would begin paying remediation costs when they exceed $2,400,000. Typical premiums range from 10%-15% of remediation costs. Only larger projects are insurable, those with costs of $1,000,000 or more. Lender's Liability - Designed to protect banks loaning on properties with environmental risk. This policy insures a lender against a borrower's loan default and a pollution incident. The policy would pay a lender the remaining mortgage balance or fund the environmental loss, whichever is less. Policies may be structured for individual properties or entire portfolios. Again, the insured party on these policies is the lender. Lender's liability is similar to pollution legal liability, except the coverage trigger must also include borrower default - the insurer is underwriting the borrower's financials and environmental hazards. Typical premiums are 50%-75% of pollution legal liability policies. - 2 -
All of these ElL policies are written on a claims-made basis, which means the incident giving rise to the claim must be discovered and reported during the term of the policy. Common exclusions (no coverage) in these policies are: Asbestos and lead clean-up in buildings Fines/penalties Known contaminants in excess of clean-up standards Punitive damages. Major ElL insurance carriers currently include: ACE AIG Chubb XL Zurich Challenges and Solutions Case Study: A condominium developer is interested in purchasing land that has recently been remediated. The Department of Ecology has issued a No Further Action letter on the property, indicating that no additional clean-up need be done at this time. However, there are still contaminants in the soil and groundwater. Extensive site development, including excavation and dewatering need to be done for the development, creating opportunity for further discovery of pollutants. The developer is also concerned about the possibility of claims from neighboring properties whose groundwater has been contaminated, as well as future condominium owners. Finally, there is always the risk that the Department of Ecology could rescind their No Further Action and force additional remediation of the developer s and neighbors properties. The developer is able to purchase a 10 year Pollution Legal Liability policy with a $2,000,000 limit of liability for $100,000. For the next 10 years the policy will respond to claims brought against the developer for clean-up, bodily injury, property damage or diminished value that occur as a result of discovered historical contaminants. Case Study: A property in an attractive industrial location was formerly a chemical processing business. Years of leaking from above ground and underground storage tanks have contaminated the soil and groundwater both on and off site. A Clean-Up Action Plan has been developed by a - 3 -
remediation contractor with an estimated cost of $3 million dollars over two years with the hope of attaining a No Further Action (NFA) letter from the Department of Ecology. A developer purchases the property and takes on the responsibility of remediating the site and developing the property for light industrial use. The estimated clean up costs are accounted for in the purchase and sale agreement and the developer agrees to indemnify the previous owner for all environmental liabilities. A policy is purchased from an insurance carrier to cover both remediation cost overruns and pollution legal liability claims. For a $350,000 premium the developer obtains $3 million of insurance. The insurance carrier will pay for cost overruns if remediation exceeds $3,250,000 - the estimated cost of remediation plus a $250,000 policy deductible. The insurance carrier will also provide a 10 year pollution legal liability policy with a $50,000 deductible. This policy will cover clean-up of pollutants that were not identified in the Clean-Up Action Plan (unknown/undiscovered); claims brought by neighboring properties for clean-up, bodily injury or property damage, and will also secure the remediation project against future claims after project completion and obtaining a NFA letter. The $3 million of insurance is a blanket limit for both policies. Conclusions Environmental Impairment Liability insurance can be a key piece of any current or future property owner s risk management. These policies are highly flexible and can be tailored to meet the needs of a particular property or development project. When used in conjunction with the services of an environmental attorney and environmental consultant, transfers of ownership, clean-up projects, and development of contaminated properties can be accomplished safely and profitably. ***** - 4 -
About Greg Collins President and CEO of Parker, Smith & Feek In addition to his corporate management obligations, Mr. Collins heads Parker, Smith & Feek s Environmental Practice Group. Greg has presented public seminars concerning asbestos abatement, underground storage tanks, and environmental impairment liability. Additionally, he served as the insurance industry representative to the Seattle Economic Development Council on the Duwamish Coalition, a public/private enterprise seeking to develop the Duwamish Brownfield. Mr. Collins, in his twenty-first year at Parker, Smith & Feek, is a partner in the firm and has over 30 years of insurance industry experience. He holds the Associate in Risk Management (ARM), Certified Safety Professional (CSP), and Associate in Loss Control Management (ALCM) professional designations. He has been certified by the National Asbestos Training Center to consult on Asbestos Abatement and Handling. Greg has a B.S. degree from Montana State University in Environmental Sciences. About Parker, Smith & Feek, Inc. Parker, Smith & Feek is one of the largest privately owned insurance and risk management brokerage firms in the nation, with offices in Bellevue, Washington and Anchorage, Alaska. We guide our clients to make informed risk management decisions and develop innovative insurance, surety and employee benefits solutions uniquely suited to their needs. For more information on Parker, Smith & Feek, call 425.709.3600 or visit www.psfinc.com. - 5 -