Environmental Exposures for Developers
Property development firms have significant environmental exposures to consider as they evaluate potential risk management strategies and insurance programs. These exposures include:
- Identified, pre-existing contamination at subject property – the presence of historic fill, contamination from prior operations, etc.
- Unidentified pre-existing contamination at subject property – existing contamination not identified in environmental due diligence documents
- Pollution conditions caused during the construction process by contractors – Fuel spills, disposal of waste materials, damage to underground piping, soil erosion runoff issues, and construction material off gassing (carpet, insulation, wood varnishes, etc).
- Pollution conditions occurring at the site once construction is complete:
- Completed operations from contracting services (example: leaking window flashing installed incorrectly, etc.)
- Pollution events that are new to the site (examples: chlorine spill at swimming pool, leak from emergency generator fuel tank, etc.)
Constructing the Right Coverage Program
All of these exposures can be managed in a variety of ways, including risk transfer through insurance. It is important for developers to consider programs where they control the actual insurance policies, instead of depending on the adequacy of coverage provided by others.
The above scenarios can be addressed in several ways. It is important to note, however, that the brief descriptions here are a general overview of how coverage can be structured. There are degrees within each that will vary depending on the unique issues at each site:
- Identified, pre-existing contamination at the subject property is typically not insurable for clean-up costs, and often not for third party exposures either. Assuming these issues are at, above, or near regulatory action levels, insurance companies will generally not assume the risk. These exposures are often addressed through a combination of prior seller indemnification, escrowed funds, or some other method of self financing. Insurance can play a part however, possibly addressing off site migration of known events, etc. As mentioned above, this will depend on the environmental information available, and what it tells the carrier.
- Unidentified exposures are where insurance plays a large role. If the property has current environmental reports that show no areas of environmental concern, and do not recommend further study, carriers will generally offer coverage for unknown pre-existing exposures. Phase I reports are a very surface review of environmental exposures, and while they do a good job of identifying areas of concern, they are by no means an exhaustive review. A great deal of coverage exists for the developer with this exposure.
- Pollution conditions caused or exacerbated by contractors working at the site are a significant concern, and one often handled through either an Owner Controlled Insurance Program or requiring the subcontractors to carry their own pollution coverage.
There are well known and significant dangers to depending on subs to carry their own coverage, and a Site Pollution policy provides the developer with real protection. When the developer carries a pollution policy on a site, the policy is tied to pollution conditions at the site and are generally not linked to a particular activity. Conversely, a Contractors Pollution policy is tied specifically to pollution conditions caused by the operations of the contractor for which the contractor is found liable. If a contractor causes a pollution condition at a site, the developer’s policy sees it as a “pollution condition at the site,” and can provide coverage where the sub’s policy might be lacking. It is important to note there are many conditions of a policy that can come into play in this scenario (other insurance, intentional acts, known conditions exclusions, etc.) that can impact the scope of coverage available, so each situation needs to be reviewed for its unique characteristics.
- Similarly, events arising at the site after construction is completed, whether the completed operation of a contractor or a plume migrating on site from a neighbor, are still a pollution condition in the eyes of the site form. Indoor air quality, vapor intrusion, radon, mold growth, and dozens of other exposures exist for operational facilities, regardless of the intended end use. As long as the developer still owns the site, or has coverage under a divested properties endorsement, the Site Pollution policy can provide very meaningful coverage for years to come.
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