Most real estate being bought, sold, and developed in the United States is not raw, virgin land. The significant majority has a history: agricultural, commercial, industrial, mixed use, residential, etc. Real estate often experiences multiple use types over time, and most of these transactions occur in what are today urbanized and developed areas, with complex environmental histories dating as far back as the colonization of America.
A Brief History of Why This Matters
The history of environmental regulations in this country has a much shorter timeline. The Environmental Protection Agency (EPA) began operating on December 2, 1970. The Clean Air Act and Clean Water Act both shortly followed, and with them came environmental quality standards, regulations, accountability, and enforcement that previously had not existed. Keep in mind that regulations and standards have continued to expand and become more prohibitive ever since.
The Industrial Revolution unfolded from 1760 to 1840 in America. That means roughly 210 years of industrialization, development, and progress happened with little to no accountability or concern for environmental quality and its potential impacts on human and environmental health. This timeline is shorter for the West Coast but still significant; San Francisco was founded in 1776, Los Angeles in 1781, and Seattle in 1851.
Prior to 1970, companies were not breaking environmental laws, simply because these laws did not exist. What were once considered completely acceptable or even “best” practices are in all likelihood instances of “unintentional contamination.” The old adage, “The more you know, the more you realize you don’t know” could not be more spot on.
Considering that no regulations were in place and “best practices” were significantly different even 30 years ago, let alone more than 200, the potential for environmental liabilities is very high. Environmental quality standards set by the EPA exist on a sliding scale. As science advances, so does our understanding of how various materials, substances, and products impact human health and the environment. Regulations tend to adjust with our understanding, and typically tighten along with government scrutiny, oversight, and enforcement.
What is Environmental Liability Insurance?
Pollution Legal Liability (PLL) is one of several types of Environmental Liability Insurance and the product used for insuring real estate. PLL typically covers third-party claims for bodily injury and property damage resulting from a pollution condition on, under, or migrating from, onto, or through an insured location. Coverage is also provided for first-party onsite cleanup resulting from both first- and third-party losses. Pollution condition definitions can be broadened to include risks such as mold and legionella, meth labs, illicit abandonment, and more. Coverage enhancements such as Transportation (first and third party), Business Interruption (first and third party), Non-Owned Disposal Sites, and Legal Defense are also available.
Coverage can be written for a single location, entire portfolio or select locations, and divested locations. Generally speaking, economies of scale work in our favor, meaning the more locations we cover, the cost per location tends to decrease significantly.
Coverage is written on a claims-made and reported basis, so policies only pay claims presented during the policy term or within an established extended reporting period after the policy’s expiration. Coverage is available for both preexisting and new pollution conditions.
Buying Pollution Legal Liability Coverage
What if I told you that you could purchase 10 years of environmental liability coverage with $10 million limits to protect you against these potential historical liabilities for a property you are selling, and the premium may only be in the $110,000 to $150,000 range? That scenario is entirely possible. That’s $11,000 to $15,000 a year, or .011 to .015 cents on the dollar, for $10 million in coverage against historical environmental liabilities that your organization could be held liable for as a potentially responsible party in the event of a loss or claim.
And what if I told you that even if you are purchasing a property, the premium range may not be much more than this (if at all) to cover you against unknown historical contamination that may subsequently be discovered during development or capital improvements? Well, with typical environmental due diligence, that coverage and price point are possible!
Now, what if I told you that you could purchase five years of new conditions coverage (operational) and 10 years of historical conditions coverage with $20 million limits for $225,000 to $250,000, or roughly .012 cents on the dollar, to protect you against historical conditions and new conditions that could arise through the course of your operations? Yes, that scenario is entirely possible as well.
What you really need to consider then is whether you can afford not to purchase this valuable coverage.
The Cost of Not Having Environmental Insurance
Keeping in mind that every property is unique and has a unique history, environmental due diligence, typically in the form of a Phase I or Phase II report (or similar), is required for underwriting PLL policies to ensure the broadest possible coverage terms.
Although environmental claims have historically been low frequency (though this narrative is changing), they are known for having extremely high severity characteristics. When the worst case scenario happens, you can write a small check (insured), or a big check (self-insured). Big check claims have occurred in excess of $270 million; more frequently they occur in the $5 million to $25 million range.
