Purchasing, leasing or selling commercial land often comes with environmental risk. This isn’t a risk you can afford to ignore because when claims do occur, they are severe.
Mary Gerding, ARM, vice president, Client Service Executive, Environmental Risk, at Hylant, says there’s risk when developing something new on a site that’s got a history. Even on farmland, unexpected discoveries of pollution can pop up.
That’s why you need to investigate prior use, both on-site and nearby.
“A site that is downstream from a chemical plant, dry cleaner or gas station has a higher likelihood of contamination,” Gerding says.
In fact, common chlorinated solvents or degreasers can be one of the worst offenders. Other major risks include things left behind in the soil, such as a storage tank releases, buried debris and fertilizers/pesticides that can leach contaminants.
Smart Business spoke with Gerding about environment risks in real estate transactions.
How does investigating the site history mitigate these risks?
Site investigation is a must for both buyers and renters, and it’s often required by lenders.
In a Phase I Environmental Site Assessment, consultants look for recognized environmental conditions in the prior use of the site and its surrounding properties. If the investigation suggests potential contamination, a Phase II assessment, with sampling and lab analysis, is usually next.
What is transactional environment insurance? How does it help?
Investigating the site history is the first step to risk protection, yet absent the seller’s indemnity, you can’t be certain without insurance. Transactional environmental insurance is also known as premise pollution/environmental site liability insurance. This surplus lines insurance policy pays cleanup costs if contamination is discovered on your property or on a nearby property if your site is the source.
With no standard policy form, coverage is customized to fit your site conditions and deal. That’s why you need an insurance expert who can focus on the site issues and policy terms and conditions.
The use of environmental insurance has grown out of the industrial box. It can help address mold, legionella and other indoor air quality concerns, which are critical to the residential and hospitality sectors.
What exactly can be insured?
The policy can cover existing but not yet discovered conditions or new releases. Beyond paying for the cleanup costs, it provides legal defense expense and third-party protection for bodily injury and property damage claims. So, you would have coverage if, for example, a tenant becomes ill on your property, or the contaminant causes loss of use, stigma damage or natural resource damage. Transportation liability and non-owned site liability, such as when you ship waste off-site to be landfilled, recycled or incinerated, is also insurable. These policies won’t cover the cleanup of an existing known condition before issuance of a no further action, or abatement of asbestos or lead paint, although third party claims response can often be negotiated.
As a claims made insurance policy, most people buy a five- to 10-year policy for a real estate transaction.
Why might a tenant need to be concerned?
Tenants may not think environmental risks apply, but it depends on the lease language. They may have responsibility for any environmental harm they cause. But if the prior tenant had a similar business, how do you prove which company is responsible?
Do sellers also use this type of insurance?
Sellers may choose to be proactive. If there is environmental uncertainty, they can conduct a study and share the findings for a coverage proposal. This can add to the site’s marketability, protect the price point and speed up the closing.
Sellers can collaborate with an attorney, environmental consultant and insurance broker to preplan how various technical and risk transfer tools fit together to benefit all parties — as the buyer, seller and lender can be identified in the policy as insureds.
Don’t allow your transaction to lose momentum when environmental concerns pop up without first exploring risk transfer to an insurance policy.
To learn more, contact:
Mary Gerding, ARM
Vice President, Client Service Executive, Environmental Risk