Account Profile: Site Pollution Liability for a Contaminated Site

By Alex Krcmarik, Broker

With the economy in full swing across many parts of the country, real estate values are soaring, and developers are eager to convert industrial sites into mixed use facilities. Often the developer will find a parcel of land that looks great initially, but while conducting their environmental due diligence they discover contamination from a previous owner or tenant. Depending on the severity of the contamination, the remediation costs range from relatively insignificant to a multi-million-dollar endeavor. Since environmental laws could hold the purchaser strictly liable (liable without proof of fault or causation) for remediation costs, most lenders will refuse to finance the deal due to the potential magnitude of the cleanup cost. One solution frequently used to transfer the risk associated with the cleanup cost is to purchase an Environmental Impairment Liability (EIL) insurance policy to facilitate the transaction.

We recently worked on an account where a land owner wanted to sell a property that was previously leased to a manufacturer, but the prospective buyers were unable to secure financing due to contamination from the tenant. Throughout the manufacturer’s five-year lease, they spilled thousands of gallons of industrial solvents and several other harmful pollutants on the site. The tenant agreed to participate in a Voluntary Cleanup Program to address the pollution, but upon completion of the program, the groundwater tests still indicated actionable levels of various pollutants. The tenant’s participation in the Voluntary Cleanup Program was enough to get the Department of Health and Environment to issue a No Further Action letter, which declared the state doesn’t intend to hold them liable for further remediation. Although this letter was encouraging, the buyer could still be on the hook for the remainder of the remediation costs if the decision was reversed. Beacon Hill was able to write an EIL policy for the buyers that would be triggered if the government mandated that the existing pollutants be further cleaned up. Ultimately the pollution policy ended up costing approximately 4% of the total purchase price, but it made the lenders comfortable enough to finance the transaction.

EIL policies can be extremely flexible and are often modified via manuscript endorsements to address the exposures unique to each deal. These policies are not “one size fits all” and the coverage offered varies greatly between carriers. Even if there’s historic contamination, there are several other factors that can persuade underwriters to offer coverage. Underwriters consider the severity of contamination, types of contaminants, remediation plan, and any data regarding whether the pollution concentration is improving, and what steps the client is taking to prevent further contamination. With the variance in coverage offered between carriers, it’s important to make sure the client understands exactly what’s covered, and what’s excluded. EIL policies are a great tool to transfer transactional risk, but they can be challenging to interpret, so it’s important to make sure you’re working with an environmental specialist who is familiar with the marketplace and products available to effectively transfer the risk. The environmental exposure is unique for each site, and specialty brokers like Beacon Hill can help you navigate the marketplace and clearly highlight the differences between competing quotes.

Contact us for more information on coverage for contaminated sites.