These days almost any property carries with it the possibility of environmental contamination. Even “virgin” agricultural land may be contaminated by pesticides, herbicides, animal waste or that forgotten underground storage tank Farmer Brown used to gas up his tractor. Even if there are no pollution sources on-site, contaminants can migrate from almost anywhere—mold spores and groundwater know no boundaries. Historic liability insurance policies may still have tremendous value in addressing environmental problems. However, even insurance companies that in the past may have reflexively denied any sort of “environmental” claims now offer a variety of products that can address these environmental concerns and facilitate all types of real estate transactions.
Facilitating Deals
Purchasing any one of a number of new environmental insurance products can minimize the need for elaborate indemnity agreements between a buyer and a seller. At properties where potential environmental risks are considered minimal, certain types of insurance are being used in place of traditional Phase I Assessments. Bringing environmental insurance into the equation can provide all parties to a transaction, including lenders, the level of comfort they need to get the deal done and in real time at the speed with which most businesses would like to operate.
Capping Cleanup Costs
When contemplating the reuse of contaminated land, i.e., turning Brownfields into green fields, insurance can be purchased to cap projected clean-up costs or cover the costs of the entire investigation and remediation. So-called Cleanup Cost Cap and Finite Risk insurance policies can be used to provide an element of certainty to stakeholders when cleanup is necessary. A general rule of thumb is that the projected cleanup costs total approximately $2 million or more or there has to be some other significant sticking point on the part of at least one of the parties to make the purchase of these products worthwhile. The underwriting process may also take more time than expected and uncover new problems. Local, state and federal Brownfield initiatives, including tax breaks and accelerated approval by environmental regulators, however, make reuse of land—even industrial property— increasingly attractive.
Toxic Mold
Most insurance policies sold today attempt to exclude liability for mold contamination. Anywhere there is water, there may be mold. This means that when a tree falls on your house in a storm, residual water can cause significant expense if not promptly addressed. In addition to purchasing a tarpaulin and a dehumidifier, mold coverage can be “added back” by endorsement to address this issue before a loss is sustained. Of course, less coverage should mean lower premiums. Insurance companies and insurance professionals should inform you of any changes in coverage and your options for dealing with them.
Old Liability Insurance Can Fund Redevelopment
Historic Comprehensive General Liability (“CGL”) insurance can respond to today’s environmental liabilities. Prior to approximately 1985, liability insurance routinely provided coverage for an “occurrence” taking place during the policy period. If activities giving rise to pollution occurred during the insurance policy period, the policy is designed to respond today to address any remaining historic damage to property that may have taken place decades ago.
Certain exclusions periodically have been introduced by the insurance industry purporting to exclude coverage for environmental liability. Pre-1973 liability insurance typically is free of these exclusions, but, as with all purported exclusions, whether and how they apply is often a very complex question involving industry intent, contract interpretation, the facts on the ground and state law. The bottom line: when an insurance company cites an exclusion to avoid coverage, never simply take their word for it.
Another issue with historic coverage involves locating the insurance policies and determining what entity or entities is or are covered. “Missing” policies can be found in insurance company files or established based on secondary evidence from accounting, government or insurance broker records, etc. Moreover, changes in corporate structure or nomenclature can be addressed through proper research. Insurance is designed to cover liabilities. Insurance companies should not be able to avoid their coverage obligations merely because of corporate name changes or mergers and acquisitions. Even the most tenuous claims may have some value as insurance companies may be willing to “buy-back” old coverage merely to take potential liabilities off the books for good. Of course, old insurance may have value over and above simply addressing environmental liabilities and partial “buy-backs” may be a better option than simply selling back all potential coverage. So pull those records back from storage and call your retired broker in Florida—old insurance policies can be worth more than their weight in gold. After all, you paid for them.