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?
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.
Conclusion
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.