Site pollution liability insurance is a tool that both buyers and sellers can use to help efficiently close real estate transactions involving environmental risk.
For example, in our current seller’s market, a commercial property buyer is likely facing as-is, where-is purchase terms. Site pollution liability insurance is an affordable warranty against unknown existing conditions. On the funding side of the deal, buyers may more easily secure a loan by naming their lender as an additional insured on a policy through a “mortgagee insured endorsement,” reducing the lender’s risk and hesitation related to environmental conditions. In fact, with stellar financials, many known condition limitations are waived with respect to a lender’s risk. Owners of commercial real estate can purchase the insurance to remove a potential environmental liability from its balance sheet, satisfying shareholders’ and directors’ requirements. A property seller can buy a site pollution liability insurance policy and include the buyer as an insured, preserving the sales price during negotiations.
Today, there is abundant market competition and capacity with at least 20 programs competing in site pollution for portfolios and transactions, including 10 or more carriers receptive to sites with a history of pre-existing conditions. Policies generally address cleanup (remediation) and claims for bodily injury and property damage, including legal defense costs. Remediation coverage is a combination of first-party protection (e.g., money to clean up contamination on your site) and third-party remedy (e.g., a spill on your site has migrated to your neighbor’s property).
Environmental Due Diligence Considerations
As insurance carriers review sites and consider policy language, site investigations and other due diligence reports play an important role. A well-delineated site will likely gain coverage considerations that an unexplored location will not.
Carriers consider coverage for existing conditions, which are pollution releases occurring before the policy inception date, and new conditions, for pollution releases occurring after the policy inception date. When considering existing issues, they focus on how they might address known conditions (identified as part of due diligence) and unknown conditions (something missed during site investigations). Policies are bound for up to a 10-year duration, adding reassurance to backstop the deal.
Most large claims for cleanup coverage have been the result of unknown pollution discovery. Another type of unknown condition is “emerging contaminants.” These aren’t conditions missed during site investigations; rather, they are conditions that had not yet been identified as concerns when the site due diligence took place.
Would you have guessed that the most frequent environmental claim is bodily injury from indoor air quality? Site environmental liability insurance includes decontamination expense and third-party protections for claims arising from mold, legionella, asbestos, lead paint and other toxic building materials.
The Challenge of Emerging Contaminants
Perfluoroalkyl and polyfluoroalkyl substances, commonly called “PFAS” in the news, are prime examples of emerging contaminants. These chemicals, omnipresent in manufacturing especially prior to the early 2000s, were frequently discharged into public waterways and have contaminated large regions of groundwater. It is only because of our increased ability to detect, measure, test and analyze compounds in the environment more precisely and in smaller concentrations that we now know that these chemicals bioaccumulate, posing human health risks and earning PFAS the nickname of “forever chemicals.”
The U.S. Environmental Protection Agency (EPA) has issued PFAS-related drinking water health advisories, setting the safe allowable chemical limit at 70 parts per trillion. There is growing pressure to further regulate PFAS under the Safe Drinking Water Act. Many states are currently evaluating and setting even lower limits, with some legislators proposing limits as low as five parts per trillion.
In October of 2021, the U.S. EPA announced their PFAS Strategic Roadmap, a strategy including timelines for new and bolder policies to safeguard public health and the environment and to hold polluters accountable. Key actions are expected through 2024 and include testing protocols per Toxic Substances Control Act authority, the establishment of risk thresholds, industry reporting protocols, monitoring requirements and coordination across all exposure mediums (i.e., air, water, land).
Meanwhile PFAS are turning up in hundreds of everyday products and are estimated to be in the blood of 97% of Americans. Current remedial technologies are costly, and alternative remedies for site contamination have not yet been extensively studied. PFAS contamination is expected to remain difficult and expensive to remediate.
As science progresses, we will detect and connect other commonly used chemicals to human health problems and the degradation of natural resources, making them subject to future regulation and likely leading to exposure for claims related to remediation, bodily injury and property damage. Nanomaterials and nutrient pollution (in the form of algal blooms) are just two examples of substances under increasing scrutiny and emerging concern. Owners, operators and buyers of real estate should be aware that advances in analytical technology and in substance and disease correlation could subject them to future liability.
Site pollution liability insurance can help both property buyers and sellers manage their risks when transacting deals. This coverage is complex and subject to appetite change as new pollutants emerge and regulations are revisited. Those involved in these transactions should work closely with an insurance brokerage offering a dedicated environmental practice and deep experience with negotiating coverage for these types of exposures. To learn more about how site pollution liability insurance for real estate transactions supports commercial real estate deals, watch our 50-minute recorded webinar.
The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.