Over the past several years, exclusions for mold, microbial matter and lead-based paint have consistently appeared on general liability policies to create substantial coverage gaps.
As a result, uncovered claims can be significant. Take, for instance, the discovery of mold in an apartment community in the State of Delaware. A leaking kitchen sink was the verified cause of discoloration and foul odor in a bedroom ceiling as well as the dark-rimmed holes in the bedroom ceiling.
Despite repeated complaints, building management was slow to respond resulting in health-related issues for the two women living in the apartment. During the law suit, the women demonstrated that the owners rarely performed repairs beyond cosmetic patchwork. After two weeks of testimony, the jury awarded $1.04 million to the complainants for personal injuries.
Another example of catastrophic loss occurred at a condominium complex in the Northeast. It included the sickening of two people as well as the death of a 50-year-old woman who contracted Legionnaire’s Disease. The resulting effects included evacuating the entire complex, disinfecting the water system and a significant law suit.
As the above-mentioned situations show, habitational property owners have significant environmental worries.
Other environmental risks commonly associated with habitational real estate may include, but are not limited to:
- Contaminants from known and unknown historical usage/operations or neighboring properties
- Construction debris containing hazardous materials
- Sick Building Syndrome i.e. carbon monoxide, mold, or bacterial air releases from faulty heating, ventilation or air conditioning systems
- Hazardous chemical storage (such as maintenance degreasers, pool chemicals, pesticides and herbicides used both indoors and outdoors)
- Lead, asbestos, polychlorinated byphenols (PCBs)
- “Midnight dumping” on vacant land parcels
- Leaking underground or aboveground storage tanks or piping.
Managing the risks
Despite the obvious challenges, environmental liabilities needn’t be an obstacle to property transfers and acquisitions if they are proactively identified, managed and mitigated.
In recent years, habitational real estate developers and owners alike have mitigated their environmental exposures through contractual means, the use of environmental insurance or the combination of both. This trend is also likely to continue due to the ever-increasing need of financial institutions to protect their loans in today’s economic climate and the desire of sellers, who would prefer to be free from potential claims related to unknown legacy issues.
At the top of the ($2.5B annual premium) environmental insurance market are the five leading environmental liability insurers of AIG, XL Capital, Zurich, ACE USA, and Chubb, which account for approximately 90 percent of the total premiums written. However, the remaining 10 percent of the environmental liability insurance market is growing with a number of very solid insurers providing at least some form of environmental liability insurance. These markets include Liberty, Markel Underwriting Managers, American Safety, Freberg Environmental/Endurance and Great American.
Each environmental liability insurer offers its own manuscripted coverage forms. To complicate matters even more, each insurer also offers a portfolio of environmental liability coverage forms, with the largest offering up to 15 different coverages totaling over 100 forms in the marketplace.
Among these is Premises Environmental Liability/Pollution Legal Liability (PLL), which provides coverage for pollution conditions or events on, at, under or migrating from a covered location(s). Coverage is afforded for third-party bodily injury, property damage, clean up costs and legal defense expense. A unique feature of many PLL policies is their ability to offer various and different coverage parts under one policy form. This includes, but is not limited to:
- New pollution conditions
- Existing pollution conditions
- On site clean-up coverage
- Transportation coverage
- Non Owned Disposal Site (NODS) coverage
- Business interruption including Loss of Rental Income
- Mold liability coverage and clean-up
- Legionella coverage
- Fines and Penalties and Punitive Damages where allowable by law
- Natural Resource Damages.
PLL is an effective risk management tool for commercial real estate since it helps to fill the “environmental gap” left in most general liability policies. It also helps reduce the uncertainty about environmental liability associated with the property and provides simple asset protection from potentially catastrophic environmental events associated with day-to-day operations.
In today’s environmental insurance market, available programs can even be tailored to address the diverse needs of each property and then structured to meet a variety of requirements that include regulatory obligations, contract requirements, lender requirements, landlord obligations, and business objectives. Another important aspect of coverage offered under PLL is that it can be structured to provide coverage for contamination, even if it is known certain environmental conditions already exist on site.
Fortunately, the environmental insurance marketplace is continually adapting to keep pace with the growing risk management demands of real estate owners and lenders—demands that are not likely to subside in the near future due to the costly nature of environmental liabilities.