Owners, landlords, and tenants have a wide range of environmental exposures that need to be considered as part of a broader risk management program. Understanding what a “pollutant” is from an insurance perspective, where the exposures can come from, and finally how they can be mitigated, minimized, or transferred is an important exercise to undertake.
Environmental Exposures for Owners, Landlords, and Tenants
Real property environmental exposures generally stem from a release of a pollutant at a site, the long-term exposure to one, or the incidental exposure to activities of neighbors. An example of a release at a site would be a leak from an underground or aboveground storage tank. The leak could happen gradually, such as a pinhole leak in a tank, and could take weeks or even years to discover, or it could happen suddenly with a carbon monoxide incident. An example of long term exposure to a pollutant could be a facility where vehicles are maintained or stored. Oil changes, radiator flushes, and break line repairs can all drop residual material on the ground to be washed away into surrounding soil. And finally, a pollution condition at a site can stem from the operations of a neighboring property and migrate through the soil or groundwater onto the insured’s property. While the neighbor would be held responsible, their ability to pay for the resulting clean up and any related bodily injury would depend entirely on their financial status and insurance coverages.
These are some of the very basic exposures the most innocuous sites might have. We also see significant claims activity at rural properties with illegal dumping and unregistered tanks, main street businesses like printers, cleaners, service stations, and residential properties with old heating oil tanks and faulty sewer lines.
Environmental Coverage for Owners, Landlords, and Tenants
Environmental insurance policies designed to cover these exposures are written with the specified locations listed on the policy. Coverage is available for pollution conditions at, on, or emanating from the site which lead to claims for Bodily Injury, Property Damage, or Cleanup Costs.
These products have two very important aspects to be aware of. The first is that the policies cover new conditions, or pre-existing conditions, or both. New conditions will generally be those conditions that occur after the first date coverage is purchased, while pre-existing conditions are those unknown conditions that occurred prior to purchasing coverage that lead to a claim after coverage is in force. Clearly the degree of coverage afforded by this distinction is significant.
The second issue is that insurance policies don’t pay for things you already know about. That would be similar to insuring a building on fire. A policy for pre-existing conditions excludes situations you are, or should have been, aware of. In order to get the broadest, most effective coverage possible, insureds need to do their due diligence regarding the environmental conditions at a site.
The unique aspects of the real estate industry make these complicated issues even more challenging. When one buyer meets with a seller, environmental due diligence can be readily accomplished. When an entity is managing hundreds of properties, the process of completing effective due diligence can be daunting. And without a reasonable due diligence program in place, it is impossible to insure pre-existing exposures at the properties.
When an entity is taking ownership of hundreds of properties, it is crucial to design a thorough risk management program in conjunction with a partner insurance carrier. If done properly, insurance can be available for the unknown and unexpected at a minimal cost to the client. Given the growing frequency of these types of losses, the question is not whether a portfolio will have an environmental loss, it is when.
Claims Involving Owners, Landlords, and Tenants
- A permanent lender placed a loan on a community shopping center. After an anchor tenant moved, overall tenancy at the property suffered and the loan went into default. An environmental site assessment discovered contamination at the property traced to a dry cleaner – one of the tenants that had vacated the premises. The lender was unable to find the responsible party from the dry cleaning establishment, and the limited partnership, which owned the property, filed for Chapter 11 bankruptcy protection.
- A strip mall owner upgraded the heating system for all of his tenants. While working in one of the stores, the contractor failed to vent the system properly, causing a release of carbon monoxide. Store employees and customers complaining of headaches and nausea were rushed to the local hospital. As a result, several bodily injury suits were filed against the strip mall owner.
- A pension fund investor had provided a first mortgage loan on an urban office building. Years later, when the major tenant vacated the property, the loan went into default. Prior to foreclosure, a Phase I environmental site assessment was completed which indicated no areas of concern. After foreclosure, the lender retenanted the property and listed it for sale. A buyer was found who completed a Phase II environmental site assessment as part of their due diligence prior to completing their purchase. The Phase II investigation discovered underground contamination from petroleum based products, and the buyer refused to go forward with the sale.
- A company sued a fast food chain, claiming that a property that they were going to purchase from the fast food chain for office space was contaminated. The $23 million transaction was stalled as a result of the company conducting an inspection of the property and finding substantial environmental problems, including benzene, lead, and trichloroethylene (TCE) at the property. The suit sought $500,000 as earnest money in addition to legal fees and other costs that were spent on transactional costs.
- Several Maryland office workers filed a lawsuit seeking three million dollars for personal injuries arising out of exposure to toxic mold. The suit alleges that mold and fungi “were allowed to flourish” within the building’s 30 years old heating, ventilation and air conditioning system. Defendants are the current and former building owners, the current and former property managers and the on-site building supervisor.
- A property management corporation owned several apartment complexes. Faulty heating and ventilation systems released carbon monoxide, which caused the deaths of three tenants and serious injury to five others. The property management corporation’s comprehensive general liability insurance carrier denied coverage due to the absolute pollution exclusion.
- At one time, a warehousing location’s drains led to a septic system. Periodic chemical spills from mixing and blending areas were washed down the drains and entered the septic system. Several years later, samples from neighboring residential wells indicated that contamination originated at the warehouse septic tank. Cleanup costs exceeded $500,000.
- A dry-cleaning operation dumped toxic chemicals into the soil and contaminated a shopping mall’s water supply. Even though the contamination happened over a period of time and filters were installed within the water supply system to remove contaminants, it was determined that the pollution continued to contaminate the water. Damages of $1.3 million were sought in a lawsuit to cover the cost of constructing and operating a permanent new water supply system to serve the affected area.
- A real estate firm acquired land that they were planning to develop a shopping mall. They contacted an environmental consulting company to comply with state environmental due diligence requirements. After conducting an investigation, the environmental consulting company told the developer that there were no “recognized environmental concerns” on their site. When the real estate firm started to break ground for the new development, they discovered several waste piles on their property. The cost to remediate the waste piles was over $250,000.
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