Imagine purchasing a new office for
your business and then getting stuck
with a bill upwards of $1 million as the
result of someone else’s negligence. It can
happen if you aren’t aware of potential
environmental contamination.
“The first thing you want to realize is that
in the majority of real estate transactions,
there is some sort of environmental exposure that needs to be addressed,” says
Phil Coyne, vice president with ECBM
Insurance Brokers and Consultants.
“Whether you are selling the property,
purchasing the property or you’re going to
be financing the property, there is going to
be some potential environmental exposure
that may need to be addressed.”
Smart Business spoke with Coyne about
how environmental insurance can help to
alleviate the risk.
Why should buyers consider purchasing
environmental insurance?
Environmental issues can have a long
tail. It can be a situation where you’re buying a piece of property, and during your
due diligence, there are no issues found,
but then you go to develop it and you find
out there is contaminated soil that wasn’t
disclosed or known at the time you purchased the property. This type of situation
that leads to cleanup requirements costs
and/or a potential third-party claim due to
the contamination is why you would buy
the environmental insurance.
What costs can environmental insurance
cover?
There are typically three costs covered.
The first is the actual cleanup costs of the
contamination. The second cost is any
potential third-party claims for property
damage or bodily injury; this can be both
off-site or on-site. The third is defense
costs from a third party that says, ‘This
contamination came from your site. It’s
contaminated my site; I now have property
damage or bodily injury,’ and files a claim
against you.
These three costs can actually occur on
the same incident: In the process of doing
the development work for a project, contaminated soil is discovered, which
requires you to notify the EPA or local
authority. You are then required to clean up
the contaminated soil, and during the investigation, it is determined the contamination
has migrated from your site onto the adjoining property, and the owner of that property files a claim against you for damages.
Even if you didn’t cause the contamination,
if you are the owner of the property at this
particular point, you could be held responsible for the cleanup and other damages.
Do you need environmental coverage in
order to get financing for your purchase?
Most if not all loan documents have a reference to or a section in regards to environmental issues and requirements. These
loan documents and agreements typically
do not allow this exposure to be transferable, which is when most buyers of environmental insurance decide to purchase
the coverage. Most banks or lenders during their due diligence for financing of a
property will require or order a Phase I
report to determine the potential environmental exposure to the borrower and the
lender.
How does the process of obtaining insurance
work?
The process first starts when an owner,
purchaser or seller realizes the need for
environmental insurance. Then there is an
application submitted along with any environmental reports available. Typically, the
first report is a Phase I, which gives the history and background of the property or parcel that is being sold, purchased or
financed. It gives an overview of what the
property is, what it was and if there are any
potential environmental issues at that location. If, based upon the Phase I report, it is
determined there are no real concerns, you
typically can obtain a quote from the application and Phase I report. But if, based
upon the Phase I, they find there may be
additional reports needed, that’s when they
go to the Phase II, which involves actual
drilling and core sample testing of the property; at this time the process of obtaining a
quote or coverage becomes slightly more
complex depending on the Phase II report.
How much environmental insurance should
you consider purchasing?
You need to review the value of your
assets or asset, or the limit may be set by a
lender. If you have a location with very low
risk, many times you’ll run into a minimum
premium, meaning that regardless of the
risk or the amount of coverage you wish to
purchase there is a minimum premium the
insurance company needs to collect, such
as $10,000 to $15,000 for a one-year policy
or $25,000 for a multiyear policy. In order to
purchase the best coverage for the best
price, try to purchase the highest limits you
can and/or obtain a multiyear policy from
three to five years. If you have more than
one location, you would want to insure all
your locations to get the most from your
premium. Also under consideration is the
size of the deductible. Many policies have a
minimum deductible of $10,000. If you feel
comfortable with a higher deductible of say
$25,000 or more, you may be able to purchase more coverage at the same premium
or obtain a premium savings.
PHIL COYNE is vice president with ECBM. Reach him at (610) 668-7100 or [email protected].
