Environmental insurance reduces risk when investing in distressed property

A strong real estate market in Northern California has led property owners, businesses and developers to look more closely than ever at environmentally contaminated properties.
“In areas like Silicon Valley, these parcels contain large amounts of acreage with potentially beneficial uses such as new corporate offices/campuses and multi-use residential/commercial developments near transportation,” says Jeremy S. Roberts, Vice President for the Environmental Liability Practice at Woodruff-Sawyer & Co. “But they are within the footprint of large regional contaminated groundwater plumes.”
In some cases, these properties have already been developed to house modern office buildings, but are still in need of long-term remediation/mitigation measures due to residual contamination, Roberts says.
The effort to remediate a distressed property often scares potential investors away.
While there is certainly risk involved, many companies look toward environmental insurance products like Pollution Legal Liability (PLL) to alleviate concern and transfer risks associated with causing or discovering unknown pollution conditions.
Smart Business spoke with Roberts about how a PLL can become a future asset during a subsequent sale of the property.
How does the PLL become a future asset?
These PLL products are often purchased on properties with known contamination where the insured is not the responsible party for the known contamination.
Policies can be used as a risk transfer tool to cover liability claims that could arise from third-party tenants or inhabitants at the site, or for cleanup costs required after the property has been developed and a ‘no further action’ status has been designated.
This becomes valuable should regulatory guidelines change in the future. A properly structured PLL policy can also help you manage the future sale of the property.
You should include proper assignment terms to add a future buyer to the policy or to add future lenders to the policy and protect them in the event any claims arise out of that past contamination.
In many cases, the PLL that is being passed on to a future buyer helps facilitate the transaction and mitigate the business negotiations around the potential diminished property value.
What is the key to negotiating an effective PLL policy?
It’s critical that you look at this product as an option while still in your due diligence period.
The key is not just to focus on transferring as much of the risk as you can that could arise during property development, such as the discovery of unknown contamination and the resulting added cost, but to also look longer term.
These products can provide policy terms for up to 10 years, which gets you past your current risk and allows you to help transfer the policy to a future buyer.
You need to take the time to structure the policy the right way upfront so you have the flexibility to make that future transition and transfer the benefits of the policy toward the future buyer.
Focus on things like correct assignment provisions, insured contracts and indemnity obligations, future named insured provisions, lender additional insured status and waivers of subrogation.
What about environmental indemnities and regulatory comfort letters?
In many cases, a purchaser of a contaminated site may inherit an environmental indemnity being passed down from a prior property owner and/or responsible party.
Other times, the prospective purchaser may negotiate a ‘comfort letter’ from the lead regulatory agency confirming that by practice, the regulatory agency generally does not go after innocent purchasers of contaminated sites for future clean-up obligations.
However, given the litigious environment we live in, it is still worth considering additional risk transfer tools like PLL policies that can protect you as well as future lenders or buyers.
In such approaches where an environmental indemnity or regulatory comfort letter exists to the benefit of the insured, the typical exclusions under a PLL policy for known pollution conditions can be replaced with broader coverage triggers in the event the new buyers get brought into future liability claims for clean up, bodily injury or property damage. ●
Insights Business Insurance is brought to you by Woodruff-Sawyer & Co.