Licensed Real Estate Professionals have a duty to perform their services with a level of care which is established by contract and prevailing standards of conduct in their field. The fact is, Realtors have professional duties to disclose material facts of which encompass environmental exposures / liabilities.
Today’s, transparent business environment, means real estate professionals must be aware of the evolution of their E&O liability loss exposures. Claims under E&O often include allegation of failure to disclose or misrepresentation on a transaction.
Historically, Realtors have relied upon “Environmental Indemnifications” in buy sell agreements. The vast majority in the private sector have been slow to implement financial assurance requirements because they have been falsely content that contracts utilized are iron clad. What we have learned is “Environmental Indemnifications” in buy / sell agreements may not be worth the paper they are written on if not backed by a financial assurance strategy.
Governmental financial assurance requirements have been around for decades. For example, when I began working with pollution insurance in the 1980’s we were selling primarily to asbestos / lead abatement / remediation contractors because the government required them to have Contractors Pollution Liability insurance to perform their remedial services. Industrial and hazardous waste haulers must evidence transportation pollution liability insurance coverage in force before they can move any waste. Owners of regulated underground storage tanks must evidence financial assurance before they can put any product into a storage tank and the list goes on.
You may ask, why has the real estate profession been so slow to react? Answer: Lack of environmental education. That is where Insurance Professionals add their value in teaming with Professional Realtors. By coaching Realtors on better protect their E&O exposure while assuring they are dealing with cleaner and greener real estate, backed by a financial assurance strategy.
To understand why “Best Practices” for realtors means moving beyond traditional environmental indemnifications / site assessments to possessing a working knowledge of managing and transferring environmental exposures, we first must be on the same page about a few environmental facts.
- What is a “Pollutant”? If you look at a Buy / Sell Agreement they generally describe a Pollutant as smoke, vapors, soot, fumes, acids…. However, due to the way courts and insurance companies have responded to lawsuits and insurance claims, environmental Strategist™ (eS) has developed a definition that is easier to understand. eS define a “Pollutant” as a material, substance or product, introduced to an environment for other than its intended use or purpose.” In other words, something that ends up where it does not belong can be a Pollutant. eS have examples where fresh water, milk, cheese, fruit, beer and more have all been defined as a “Pollutant”.
- A leading source of E&O claims against real estate professionals is failure to disclose potential environmental liabilities. From Sick building Syndrome, (i.e. mold, Legionella, vapor intrusion, asbestos, lead paint, category 3 water…), storm water runoff, natural resource damages, leaking aboveground or underground storage tanks, Renovation Repair & Painting Rule, meth labs… the list goes on. Pollution insurance can protect against these environmental exposures and much more.
- Every real estate transaction presents its unique set of environmental exposures and has changed the way Realtor’s must address environmental financial assurance for their client’s.
- eS research has determined that fewer than 50% of Phase I Site Assessments are accurate. eS has heard from environmental professionals who feel in excess of 80% of Phase I site Assessments are inaccurate. Also, environmental due diligence (Phase I, Phase II…) as part of meeting the innocent landowner defense only protects the real estate owner from the government. Impacted non-governmental third parties can still file suit. Note: In Phase I Site Assessments when investigating who neighbors are that could have contamination going onto a subject property, environmental engineers do a minimum of a 2-mile radius search. Pollution insurance can protect against third party liabilities.
- Illegal disposal of waste in the United States is a tens of billions of dollars a year industry and real estate, especially vacant real estate, is a popular place to illegally dispose of waste. Pollution insurance can protect against illegal disposal of waste.
- In the United States there are more than 250,000 known leaking underground storage tanks. How many don’t we know about? Leaking underground tanks can and do cause Pollutants to go onto neighboring properties. Pollution insurance can protect property owners if third parties contaminate their property.
Professional realtors need to know if they are selling / purchasing an asset or environmental liability.
Educating realtors on managing and transferring environmental exposures will better protect their E&O exposure while driving the sales of pollution liability insurance. Why is this critical? Environmental exposures can be a deal killer and realtors not proactively addressing environmental exposures may find their professional liability insurance at risk of a claim when a client discovers an environmental liability on property the realtor sold.
Environmental Insurance Products to Meet Financial Assurance on Real Estate Transactions
Overlooked Benefits of Environmental Liability Insurance
Unlike other liability exposures impacting commercial real estate owners, pollution losses are not a frequency risk, but rather a severity risk. Because all commercial real estate owners have environmental exposures, consideration needs to be given to the economies of scale afforded with environmental liability insurance as part of your risk transfer strategy, versus self-insurance.
Furthermore, most commercial real estate owners only consider the remediation costs associated with a pollution event. However, often the clean-up costs are far less than other costs that can arise from an environmental loss.
Overlooked Benefits of Environmental Liability Insurance:
- Defense Costs: Environmental liabilities are relatively new and very litigious. Even if you do nothing wrong you can still get named in a suit and must expense defense costs i.e. legal fees, environmental investigations, etc.
- Claim Management: All policies come with specialists to assist you in handling a claim. Who oversees communications, public relations, emergency response, government compliance, financial management, third party claims for bodily injury, property damage, natural resource damages….?
- Third Party Liability: Most the time the cost to clean up the environmental problem/s is far less than the associated claims that come in from third parties for bodily injury, property damage and business interruption. You need to look at your client’s and neighbors that can be impacted if you or a sub-contractor/vendor cause an environmental loss.
Environmental Liability Insurance Coverages
Property Transfer Coverage: When buying or selling property there can be unknown preexisting environmental conditions. Since environmental due diligence (All Appropriate Inquiry (AAI), a Phase I or Phase II survey, Baseline Environmental Assessment (BEA)….), cannot guarantee uncovering all potential environmental liabilities, insurance companies have created property transfer insurance. This coverage protects the new owner or any party with an insurable interest, against unknown environmental conditions that may be discovered during the policy period, that were not caused by the new owner.
This coverage not only helps to keep the property at its maximum value, it will assist the purchaser in being able to secure the necessary financing to complete their transaction. Real estate owners and developers who use this product as part of their risk transfer strategy often find they can negotiate with the seller to share the cost and negotiate a better mortgage rate than if they did not have property transfer coverage. You can cover multiple locations on a single policy.
Mergers, Acquisitions & Pollution Protection (MAPP): Combining Representations & Warranties Insurance w/ Pollution Liability Insurance to keep your company’s growth & value on course.
Key to any acquisition is the correct valuation and effective due diligence and MAPP operates as a backstop against issues that the diligence or valuation processes may not be able to identify.
As a financial assurance mechanism for M&A’s, pollution liability insurance has become part of “Best Practices”. Representation & Warranties (R&W) insurance is proving its value for M&A’s much the same as pollution liability insurance has.
R&W insurance is designed expressly to provide insurance coverage for the breach of a representation or a warranty contained in a Buy / Sell Agreement, in addition to or as a replacement for all or most of the seller’s contractual representations and warranties.
As we have learned from environmental indemnifications in transactional documents, if there is not a pre-determined financial assurance mechanism in place, the environmental indemnification the seller agrees to may not be worth the paper the agreement is written on. With MAPP, Environmental Risk Managers, Inc. (ERMI) has raised the bar on financial assurance for M&A deals.
The insurance industry has learned that one out of every four M&A deals has at least one claim of a breach of the reps and warranties. In the past, the response has been let’s try to negotiate around the problem. Unfortunately, negotiating often is expensive, time consuming and rarely brings about the most desirable outcomes for the parties involved.
MAPP delivers a cost-effective way to transfer R&W and pollution liabilities to a financially stable third party.
Environmental Impairment Liability (EIL): EIL is for commercial real estate owners susceptible to economic loss caused by pollution that actually, or allegedly originated from their property. Sometimes referred to as pollution legal liability, this coverage is for those who own, operate, lease, or have any other insurable interest in real property and/or the operations. Coverage can be written to cover preexisting conditions and/or new conditions.
Coverage can include third party bodily injury and property damage along with business interruption and extra expense, on and off site clean-up costs, legal defense expenses, non-owned disposal sites, transportation and more. EIL can be offered on multiyear terms. Sewer lines and pump/lift stations can be covered by EIL. Most EIL policies cover above ground storage tanks up to a certain size. You can also cover multiple locations on a single policy.
Transportation Pollution Liability: Generally, Business Auto or Truckers policies will exclude pollution losses arising from spills or releases of transported cargo. Broadened auto pollution liability (typically Form CA 9948) affords coverage during the loading, unloading and transportation, for a spill, release or sudden upset and over turn of transported cargo. Whether it’s building materials or business supplies, you need to strategize on your exposure to transportation. How are goods received? FOB point of Shipment or FOB point of delivery? Do not be confused by thinking the MCS-90 endorsement is auto pollution liability coverage.
Underground Storage Tanks
Storage tank financial responsibility requirements ensure that owners/operators of underground storage tank systems have the ability to financially handle a release from the tank system. The responsibility encompasses the ability to pay funds for corrective action and third party bodily injury and property damage from non-sudden and sudden and accidental releases from a regulated underground tank system.
Real estate owners with a financial responsibility strategy dependent upon state UST funds need to regularly confirm fund solvency and length of time it will take to get reimbursed. If part of your business strategy depends upon the state tank fund, you are putting the future success of your business in the hands of the state. You need to strategize on “just how strong is your business” if you are putting its future in the hands of your state government.