Legally Speaking: Environmental insurance shifts risk from land owners

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The enactment of environmental regulations holding property owners liable for environmental contamination on their land has had a significant negative impact on the nature of real estate transactions. |ret||ret||tab|

A chill has been cast over the real estate market, driving transaction costs up and, in some cases, forcing property values down significantly. While environmental site assessments are helpful in attempting to quantify the environmental risk inherent in a given property transaction, even the most thorough site assessment may fail to reveal latent historic contamination at a given site.|ret||ret||tab|

Recently, however, a new tool has come to the forefront. Environmental impairment insurance has emerged as an affordable and useful mechanism to shift environmental risk away from the parties to a property transaction, but, as with all insurance products, it should be carefully evaluated.|ret||ret||tab|

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Impairment coverages |ret||ret||tab|

There are several types of environmental impairment coverages available for real estate transactions. These products can vary significantly from company to company. However, the most common policies insure against remediation costs resulting from pollution incidents relating to property use, and they provide protection against bodily injury and property damage claims made by third parties. |ret||ret||tab|

Other, more specialized products provide coverage for cleanup cost overruns incurred during a remedial action at an insured site. The newest product available offers lender's coverage that pays the lender the lesser of the principal balance due on a mortgage loan, or the costs of remediation or third-party claims. |ret||ret||tab|

Detailed information about the various policies is available from a professional, such as an environmental attorney or a specialized environmental insurance brokerage firm.|ret||ret||tab|

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Insurance pitfalls|ret||ret||tab|

These new insurance products can offer significant protection to the real estate entrepreneur. However, because they are new and because the available policies can differ greatly, there are pitfalls to watch for in the use of environmental impairment insurance that can limit or even exclude coverage altogether. |ret||ret||tab|

Take, for example, the "claims-made" provision, which is standard in most policies. Under the this provision, insurance coverage is triggered by a claim to the company made by the insured during the policy period. |ret||ret||tab|

However, many times environmental contamination is not discovered until years after the polluting event occurred. If the policy period has expired before contamination is discovered, with no claim having been made by the insured under the policy, no coverage would be available.|ret||ret||tab|

Claims payment may also be a potential concern. Since the product is relatively new, there is little claims history for this type of insurance. According to Ed Greene, president of Environmental Capital Insurance Brokerage Inc., who specializes in environmental impairment coverage, the few significant claims that have been made to larger insurers have, for the most part, been paid without litigation. |ret||ret||tab|

Greene noted, however, that the larger insurers have adjusted premium rates and coverages accordingly, especially on "cost cap" policies that have incurred higher dollar claims in recent years.|ret||ret||tab|

Many policy forms also contain provisions, termed "standard exclusions," that could exclude coverage for the very risk for which the insurance is being purchased. In reality, these exclusions are not necessarily "standard," and often they can be deleted from the policy for a marginal increase in premium or deductible, if you know to ask in advance of buying the policy.|ret||ret||tab|

The financial strength of the insurer offering coverage should also be considered. Many banks require the insurer to carry an A.M. Best rating of "A" or better. Specialty insurers who concentrate primarily on environmental impairment coverage, but who may be of lesser financial strength, pose a greater risk of insolvency. On the other hand, a specialty insurer may be capable of providing a more responsive product at a better price than larger insurers.|ret||ret||tab|

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Choosing a policy|ret||ret||tab|

Shopping among various insurers for the best coverage can be tricky, since policy formats and coverages vary significantly. For effective coverage, the insured must be able to quantify, to the extent possible, the environmental risks; research the financial viability of the insurer; and understand, and even negotiate, the insurance coverage to be provided. |ret||ret||tab|

The assistance of a knowledgeable environmental attorney can be vital to the successful use of environmental impairment insurance in real property transactions.|ret||ret||tab|

(Randell Wallace is a member of the Springfield office of Lathrop & Gage LC. Additional information for this article was supplied by Ginevera Moore.)|ret||ret||tab|

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