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Navigating the environmental insurance maze

Lead-based paint, leaky underground storage tanks, dry cleaning solvent and ground water and soil contamination. The mere mention of such terms in conjunction with a potential retail site can rattle even the coolest retail execs. Environmental insurance might just be the balm to cure their nerves.

Though the policies emerged in the 1980s, changes in recent years have made them more flexible. And because policies can be tailored to a specific set of environmental problems, the retail world has embraced them with enthusiasm in the past five to seven years.

“Savvy retailers with good risk management people are recognizing the value these policies provide,” observes Ned Abelson, an attorney with Goulston & Storrs' environmental law group, Boston.

“People find them cost effective and they allow developers to put a number on the environmental risk so they can plug it into their pro forma and rely on it, rather than having a big question mark. It gives them a lot more certainty.”

Environmental policies can be used to cover the costs of cleaning up a site and to protect against future, unknown environmental calamities. They can also help owners, buyers, and sellers of environmentally tainted or potentially contaminated retail sites minimize other risks.

For instance, by providing an environmental policy to a buyer, an owner can more easily sell a property containing environmental hazards. “Such policies have tremendous potential in the transactional area because selling real estate with a liability attached isn't the easiest proposition.

People don't want to buy the risk,” comments Al Bixler, an attorney with Eckert Seamans Cherin and Mellott LLC, Philadelphia. “Most conservative investors are still looking for ways to put a perimeter around their risk. This is one way to do it.” The policies can be used to cover all properties in a portfolio, or just specific properties.

Here's a thumbnail sketch of the policies and what they entail:

  • Pollution legal liability: Covers cleanup costs of unknown pre-existing conditions, new conditions, bodily injury and property damage caused by contamination; costs incurred resulting from project delays because of contamination cleanup; the diminution of the value of neighboring properties because of contamination at a given site; the contamination of a protected natural resource (pollution caused the death of a protected species).

  • Cost cap: Covers known conditions and provides protection against a more expensive environmental clean-up than originally anticipated. For instance, the site may have more contamination than anticipated; during the cleanup for one contaminant, a different contaminant is found that also has to be remediated; the discovery that the contamination has oozed into the neighboring site and that site also must be cleaned; regulation changes during the clean up (that is, the law initially required a site to be cleaned to five parts-per-billion and during the course of the clean up the law now requires three parts-per-billion, necessitating a longer, costlier process).

  • Secured creditor impaired property coverage: Provides no protection to facilities' owners or operators. Its role is to encourage lenders to provide debt financing for projects involving a known or feared contaminated site. In some instances lenders wouldn't make the loan or would impose hefty risk premiums — additional basis points on the loan rate.

If borrowers default and a pollution condition exists on the property, the policy pays the bank the outstanding principal loan balance plus interest so the lender doesn't have to foreclose on a property, clean it up and try to sell it. Another sort of policy pays the bank the lesser of the principal loan balance or the actual cleanup costs, but requires the bank to foreclose.

Measuring risk

You would think such policies are just for the big guys. But it isn't so. “It depends on the nature of the location and how much of an environmental risk you're looking at,” says Abelson. “It's appropriate for owners and operators of properties with contamination or environmental risk.”

Alan Bressler, senior vice president, Marsh USA Inc., Atlanta, says, “You can't connect the size of real estate development to the size of the risk.” As an illustration, he compares a four-store strip center to a giant mall. The strip center includes a dry cleaner dumping used solvent behind his store. The mall's tenants sell clothes and gifts. Guess which one poses a greater environmental threat? “You can have huge multi-million-dollar developments that aren't impacting the environment, but have one little storefront causing groundwater contamination problems that could cost more than $1 million to clean up,” Bressler points out.

Premiums for environmental insurance can vary wildly. Cost is affected by issues such as the level and length of coverage, the size of the deductible, and how messy a site is.

And figuring out the degree of a site's contamination is key to procuring the right kind and amount of insurance. “That's the single most important set of information. Without it, you can't understand what the risks are or how much it will cost,” says Bixler. “You need to have a good handle on technical information regarding the site, and work with contractors and environmental consultants to have a good idea of contaminants, how much it will take to remedy the problem and what the remedy should be.”

Hire a guide

If you think understanding a life insurance policy is difficult, try wrapping your arms around an environmental insurance policy. They're as complex as the myriad environmental nightmares that can pop up at a retail site.

Therefore, it's wise to have a knowledgeable attorney and insurance broker guide you through the minefields when buying a policy. “If you're buying a policy for a complex situation, you're liable to be spending a lot of money,” says Bixler. “You want to be sure to get something that provides the protection you think it should be providing.”

According to Goulston & Storrs, a number of questions need to be addressed, including:

  • Does the policy cover previous contamination that has not yet been discovered, contamination that has yet to occur, or both?

  • Will one insured (e.g. an owner) be covered for liability arising out of intentional pollution by another user, say a tenant?

  • For what reason can the insurer cancel the policy?

  • Is the policy assignable?

  • Does the term of the policy mesh with the needs of the transaction?

  • How will a change in the use of the insured property affect coverage?

  • Is there coverage for asbestos and lead paint or indoor air quality issues. If so, how broad is the coverage?
    — Elyse Umlauf-Garneau

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