Expert Commentary

When It's Too Late To Buy Pollution Legal Liability Insurance

Have you ever received an urgent call from an insurance agent or broker looking to purchase project professional liability insurance for their developer/owner client when they should be just as focused on environmental liability associated with the site itself?

January 2019

In one case, the request regarded coverage for a $350 million mixed-use, 20-acre parcel of land in Hamilton, New Jersey, that the developer/owner/insured already bought or was close to finalizing. (Side note: for those of you who don't know Hamilton—this is a hypothetical situation because nothing much happens in Hamilton.) As the conversation progressed, we discussed various options that ranged from an excess route offering owner's protective professional indemnity coverage to a project-specific professional liability program that would "wrap up" the entire design team.

After the process was placed on track, the broker was then asked if the client had pollution legal liability (PLL) coverage? It's a simple question but produces baffling answers that span from "I don't know" and "that's not our focus right now" to "they really don't have site-risk concerns" and simply "no." Believe it or not, the most awe-inspiring answer is "that's something they might consider after the certificate of occupancy is archived." This means that, barring some form of contractual environmental indemnity provision from a financially stable seller, the new landowners are actually fine with opening themselves to any and all environmental liabilities associated with that property once construction starts. Furthermore, this stance doesn't even consider the costs that may be needed to remediate any known or unknown contaminants found on the site as well as the contamination that might have migrated to other properties.

Phase I and II Studies Aren't Enough

Sorry, but the old "Well, they conduct Phase I studies on all their properties prior to acquiring them" response just doesn't carry a lot of weight when things go wrong. While the Phase I is a solid first step, it's really only a cursory overview that usually only consists of the review of current and available data as well as a possible site visit. 

That's because there's just so much a Phase I environmental assessment can miss. To no fault of the environmental consultant, many unrecorded hazards are not identified until it's too late. In some instances, Phase I and Phase II studies have even been known to overlook certain risks. About 5 years ago, there was an approximately 5-acre commercial development project in a metropolitan area that had been repeatedly investigated over a 10-year period by three different environmental consulting firms. During this process, the first firm identified contamination from several existing underground tanks. In conjunction with the second environmental company, the owner legally secured a No Further Action letter from the state after it removed the tanks and remediated the contamination. 

A few years later, the third environmental firm performed a follow-up Phase I study at the request of a prospective buyer. It verified the previous remediation work. Unfortunately, in less than 3 months after purchase, contractors working on the site uncovered 5 additional underground tanks. Apparently, the installation of these tanks was never recorded by any local or state regulatory body; therefore, the environmental assessment process did not discover them due to the lack of data.  

Thankfully, a $5 million PLL policy had been put in place prior to the construction/development. The payout not only covered the removal of the tanks but also avoided any form of out-of-pocket expenses. It should also be noted that the buyer did not receive any contractual indemnities associated with the environmental hazards because of the extensive environmental work performed on the property.

This was just one more example of the forward-looking thinking that can help manage risks while overcoming construction delays and remediation costs.

Considering Going without PLL Coverage? Think Again

The following are also some additional challenging situations to ponder before moving forward without PLL coverage.

  • Environmental studies that fail to identify the illegal or "midnight" dumping of waste or other hazardous materials
  • Reports that misidentify existing environmental hazards in the ground or in existing structures, such as asbestos, lead, and polychlorinated biphenyls
  • Contamination found on the project site only after construction has begun
  • Properties contaminated by former gas stations and/or dry-cleaning operations using perchloroethylene
  • Methane generated from debris like tree stumps, grass clippings, and construction materials
  • Contaminants found at waste processing sites, garbage dumps, and other disposal areas on the project site
  • Septic systems used to dispose of wastes such as cleaning chemicals, lab wastes, etc.
  • Microbial and bacterial risks associated with water intrusion, faulty heating, ventilation, and air-conditioning systems and other forms of water contamination
  • Any construction work using hazardous constituents or causing the erroneous release of pollutants into the environment

The PLL Market

Today, the PLL marketplace continues to be a key risk financing tool to facilitate transactions of real estate (contaminated or not) as well as to buoy balance sheets for large real estate assets. This claims-made coverage remained consistent for the past 5 to 10 years, including on- and off-site cleanup/remediation expense, third-party bodily injury, property damage, and defense expense for buyers. Coverage enhancements such as contingent business interruption and first-party diminution of value as well as several others are readily available for inert real estate portfolios, while indemnity triggers can be utilized to address known pollution conditions identified in contaminated property transfers.

Overall, market capacity reaches well over $300 million with a few insurers still able to provide $50 million limits per policy. For most transactions, certain insurers construct 10-year policies to bring about certainty in coverage for a longer period of time. Pricing for such programs has also dropped in the past 5–7 years as well, making PLL an affordable tool for those who recognize the true benefit of the insurance. 


Now, here's the point. It's too late to buy PLL coverage after the certificate of occupancy is received and the construction process starts. To receive true PLL program benefits, the product must be purchased before the property's acquisition. Once "a shovel is put to ground," every developer/owner operating without a PLL policy runs the risk of owning any known or unknown preexisting condition unless a viable financial solution is already in place to remediate the contamination. Buying at close is not an option. So, it's imperative to initiate the process as soon as possible. Otherwise, be prepared to absorb the self-inflicted risks surrounding the surprise of finding what no one has found before.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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