Real estate developers/owners face a wide array of environmental exposures. The following competitive environmental intelligence offers a partial list of environmental exposures developers/owners of real estate may face. The second part of this competitive environmental intelligence will review environmental looses and the third part addresses risk transfer strategies.

Environmental exposures faced by real estate developers and owners include:

Real Estate Developers: Historical contamination from agriculture, mining, lagoons, landfills, manufacturing, scrap yards; illegal dumping or burial of hazardous materials which may result in soil or groundwater contamination; pollution from neighboring properties which causes soil, surface water or ground-water contamination; storm water runoff contamination; natural resource damages; easements that cross the property which may leak or spill hazardous materials; residual contamination such as fertilizers or pesticides from past farming or similar uses; previous spills of hazardous materials from adjacent roads or railways due to truck or train accidents; old, abandoned wells which are not properly closed and serve as an open conduit for groundwater contamination; improper management of protected or sensitive areas such as wetlands; corroded wastewater and storm water sewers; excavation through and spreading of unknown preexisting contaminated soil; impacting groundwater from drilling and excavation work (i.e. cross contamination of aquifers, etc.); old and/or unknown leaking underground storage tanks; improperly closed underground storage tanks; impacting underground utility lines and other underground structures; potential to cause collapse and/or or explosion during and after construction; trench collapse due to improper shoring; no auditing of waste handling and disposal companies; miss-delivery of unidentified contaminated fill; spill of oils/fuels/chemicals brought onsite; vandalism; inadvertent mixing of incompatible wastes; midnight dumping on construction site; spills from portable above ground storage tanks; fuel spills from recreational equipment….

Real Estate Owners: Contaminants from historical usage or neighboring properties; sick building syndrome, i.e. carbon monoxide or bacterial air releases from faulty heating, ventilation or air conditioning systems; pressurized gas cylinders; PCB’s; hazardous chemical storage; inadequate containment at loading/unloading areas; loading and unloading products/materials from tucks, rail road, barges, aircraft; inadequate containment for hazardous materials, waste in process areas; lead or asbestos containing materials; easements/utilities that cross the property which may leak or spill hazardous materials; past/present use of septic systems for disposal of wastes; surface water runoff; unknown leaking underground/aboveground tanks or piping; poor information on the possible adverse reactions and interactions of chemical compounds that accidentally commingle during a fire; halon releases from fire suppression equipment; easements (rail/roadways, pipelines, power lines, waterways) on the property with potential environmental implications; sludge’s from water treatment operations; raw materials stored and utilized in large quantities (i.e. acids, bases, compressed gases including cyanide and hydrogen chloride, lubricant oils, flammable paints and solvents); wastewaters generated from human septage, cooling water; plating lines; drum cleaning; products cleaning and chemical treatments (wastewaters generally contain heavy metals, oil, grease and organic compounds); uncontained floor drains; lack of knowledge on where floor drains discharge; in-ground concrete sumps and pits; unsealed truck ramps; inadequate or out-of-date emergency and spill control plans; inadequate or no auditing of hazardous and non-hazardous waste handlers, transporter and disposal companies; nuisance odors; spills of hazardous materials from adjacent roads, railways, waterways; spills and air emission from emergency power generator systems….

Environmental Loss Examples, Real Estate Developers

1. A real estate developer placed a new building on the site of a former parking lot. During excavation, petroleum hydrocarbon contamination was discovered. Cleanup costs exceeded $700,000.

2. A real estate investment trust (REIT) owned several parcels of vacant land in a remote area. When the owner and contractor visited the site to begin construction, they discovered that several piles of unidentified waste had been illegally dumped on the property. The owner had the piles tested, at a cost of several thousand dollars. The piles were determined to contain hazardous waste, and the owner’s cost to dispose of it exceeded $250,000.

3. A real estate limited partnership, acquired property previously used for farming on which they planned to build a mall. The firm hired a consultant to conduct a Phase I Environmental Assessment. The property was determined to be “clean.” However, when excavation for the mall began, 100 drums of buried pesticides and herbicides were unearthed. The chemicals contaminated the soil and had to be removed at the firm’s expense. Remediation and drum disposal costs exceeded $750,000

4. An environmental consultant performed a phase I site assessment at a site that had been previously used for industrial purposes. The consultant submitted a report saying that negligible contamination had been found. The property was subsequently sold. During excavation an unregistered underground storage tank was discovered on the site that had been leaking. The property developer sued the consultant for $1.2 million for remediation expenses, lost profits, and diminution in value.

5. An excavation/grading contractor unknowingly spread petroleum-contaminated soil across a project site during fill operations. The contractor and property owner were named in a lawsuit for exacerbating the extent of contamination. After lengthy deliberations, the contractor and property owner were eventually removed from the lawsuit, however, they had invested $250,000 in defense.

6. An excavation contractor stockpiled soil on an adjacent property. The scope of the project was excavation of 357 feet of trench. Prior to completion of the work a dioxin was discovered in the soil. The US Environmental Protection Agency investigated the situation and issued an administrative order finding the contractor and the property owner responsible for contamination of the adjacent property. Government mandated cleanup costs exceeded $250,000.

7. An excavation contractor was subject to cleanup costs and business interruption expenses in excess of $500,000 when they ruptured and unmarked petroleum pipeline. The contractor was forced out of business so the property owner had to pay the bill.

8. While clearing a construction site for a new shopping mall, the building contractor followed routine procedure by hauling construction debris to a local landfill. Later, when neighbors close to the landfill complained about a strange odor, it was discovered that the debris contained hazardous materials. The municipality sued the developer for clean-up costs, which the court awarded in the amount of $1.2 million.

9. While excavating for a foundation, an unknown underground storage tank containing oil was ruptured. Hundreds of gallons poured out before the rupture was closed. The entire street and neighborhood lots were covered. Settlement costs paid by the developer to cover third-party claims for bodily injury, property damage and clean-up totaled $5 million.

10. A real estate developer completed a subdivision. Shortly after completion, small sinkholes began to appear in the development, soon giving up all kinds of debris. Residents feared the debris could extend underneath some of the homes. Homeowners filed a lawsuit against the contractor/developer. Because the contractor could not identify the owner of the debris, they were forced to clean it up at a cost exceeding $1 million.

Environmental Loss Examples, Real Estate Owners

1. A HVAC contractor was hired to upgrade an office buildings heating system. While working in the building, the contractor failed to vent the system properly, causing a release of carbon monoxide. Building occupants complaining of headaches and nausea were rushed to the local hospital. As a result, several bodily injury suits were filed against the building owner in excess of $1,000,000.

2. A contractor was hired to remove a leaking underground storage tank. During the excavation they discovered they were not dealing with one tank but two. They also realized these were not actually UST’s but rather two complete rail road tanker cars that had been buried and used to store diesel fuel. The cost of the job exceeded $300,000.

3. The concrete secondary containment of a 10,000-gallon diesel aboveground storage tank was cracked. A release from the tank spilled 8,000 gallons into the containment. The diesel seeped into the underlying soils and required costly excavation and removal. The total cost for investigation, removal and disposal exceeded $320,000.

4. A real estate owner hired an electrical contractor to upgrade a buildings electrical system. During trenching operations, a backhoe hit a natural gas pipeline causing an explosion. Third parties filed bodily injury claims against the contractor, as well as the property owner whose building was destroyed in the explosion. Claims exceeded $2.5 million.

5. A real estate owner leased a building to a manufacturer. The manufacturer stored bag house dust containing heavy metals in an uncovered dumpster behind the facility. Whenever it rained, storm water mixed with the dusts, forming a slurry which ran off-site. Soil testing of a nearby stream bank showed high levels of lead, cadmium and mercury. The contaminant source was determined to be the dumpster run-off. The property owner and manufacturer were responsible for cleanup costs and natural resource damages exceeding $250,000.

6. A dry cleaner leased commercial space from a property owner. PCE was detected in soil and groundwater. The dry cleaner was forced out of business and the property owner paid $940,000 for investigation, remediation, defense and third party bodily injury and property damage claims.

7. A commercial real estate owner was subject to defense costs exceeding $25,000, in addition to property damage and bodily injury claims exceeding $400,000 from a neighboring residential community. During sewage installation, a subcontractor improperly tied in piping. This caused raw sewage to migrate into the underlying groundwater and contaminate residential wells.

8. A general contractor performing concrete etching in a commercial building used muriatic acid. The highly corrosive fumes from the acid were released into the building. Over $75,000 in property damage to chrome fixtures resulted from the fumes and bodily injury and business interruption claims were also filed in excess of $1,000,000

9. A circuit court jury verdict against a property owner by a county resulted in an award of $25.9 million and a $35 million settlement. In the case, the plaintiffs alleged that faulty construction had resulted in the presence of mold in the county courthouse and respiratory illness among the people working there.

10. A commercial building owner had to pay $90,000 for disposal of hazardous waste that was illegally disposed of in an on site dumpster. Even though vandals disposed of the hazardous waste in the dumpster, the building owner was responsible for proper disposal until and if they can catch the vandals.

Environmental Risk Transfer Strategies

ENVIRONMENTAL LIABILITY INSURANCE PRODUCTS APPROPRIATE FOR REAL ESTATE DEVELOPERS/OWNERS

The majority of real estate developers/owners lack the financial strength to self insure their environmental liabilities. Under CERCLA, the government offers real estate buyers the innocent land owner defense if they perform environmental due diligence (All Appropriate Inquiry (AAI), Phase I or II site assessments, Baseline Environmental Assessments (BEA)….). As we have learned, these reports are not perfect and unexpected environmental problems do occur.

While the innocent landowner defense protects real estate developers/owners from the government, it does not protect you from third parties such as a neighbor, whose property is being contaminated by pollutants emanating for your property.

The majority of real estate developers/owners further address this issue by transferring their risk via legal environmental indemnifications to the property seller. What value is a legal environmental indemnification if you discover an environmental problem and make a claim only to find out the seller who signed the indemnification has passed away and the estate dissolved? What if the seller moves out of the country? Gets a divorce? Are monies set aside to address environmental issues or is all you have a signature?

Another exposure that has to be addressed is “who are you doing business with?” As the real estate developer/owner you can do everything possible to minimize or eliminate your environmental exposures but those you do business with can draw you into a liability situation.

Consideration to the economies of scale afforded with environmental liability insurance as part of your risk transfer strategy is critical for any real estate developer/owner.

Consider the three main benefits environmental liability insurance affords:

1. Coverage includes defense cost. Environmental liabilities are relatively new and very litigious. Even if you do nothing wrong you can still get named in a suit and have to expense defense dollars to get released. At one time, Superfund had .83 cents of every dollar going to legal fees, and only .17 cents for actual cleanup. When you realize the average Superfund site cost in excess of $30,000,000 to clean up, you can begin to understand just how big of a factor defense costs play in your risk transfer strategy.
2. All policies come with experts to assist you in handling an environmental claim. Anytime you can have the EPA, state and local environmental officials along with the press pounding on your door, this is not a fender bender, you need experts to assist you in running damage control central.
3. The majority of the time the cost to clean up the environmental problem/s is far less than the associated claims that come in from third parties, mainly for business interruption. You need to look at the customers and neighbors that can be impacted should an environmental loss occur. Who can you impact should you or a sub-contactor/vendor cause an environmental liability?

Insurance is a means of financing a loss.

ENVIRONMENTAL IMPAIRMENT LIABILITY (EIL)

EIL is for real estate developers/owners susceptible to economic loss caused by pollution that actually or allegedly originated from their properties. 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 in a variety of ways addressing unknown preexisting conditions 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 multi year terms. Sewer lines and pump/lift stations can be covered by EIL. Most EIL policies cover above ground storage tanks. You can cover multiple locations on a single policy.

PROPERTY TRANSFER COVERAGE

When buying or selling property their 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.

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 GROUND 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 developers/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 fund, this means just that, 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.

Who are you doing business with? A real estate developer/owner is legally liable when environmental contamination originates from site or activity-related business operations on owned property. Hiring licensed third-party vendors to identify, remediate, transport, store, treat, dispose of pollutants does not automatically transfer the associated environmental liabilities to the third-party vendor. General contractors, subcontractors, vendors hired to work at a facility or provide a service present environmental and financial risk, as well.

To minimize your environmental exposure, carefully verify each vendor’s qualifications and, when appropriate, compliance with state and federal licensing and regulations. Utilizing contracts that legally transfer liability to the vendor can further reduce exposure. Confirm proper insurance is in place to meet contractual requirements. Should an environmental accident happen and the vendor is unable to cover the resulting clean-up and third-party compensation costs, the property owner can be held responsible for the uncovered costs, it is critical to know “who you are doing business with.”

CONTRACTORS POLLUTION LIABILITY (CPL)

Note: For real estate developers/owners, you have potential indirect environmental exposures from the service vendors you hire. Should your vendors cause an environmental problem or exacerbate an existing environmental issue their general liability insurance policy probably will have either an absolute or total pollution exclusion.

CPL coverage can be purchased to meet two specific exposures. First, contractors that perform remedial activities (asbestos, lead, mold, soil or ground water remediation) there is the standard contractors pollution liability (CPL) insurance coverage. This protects the insured for pollution conditions they may cause or exacerbate while performing remedial services. This is for covered operations performed by or on behalf of the insured. The loss must occur away from any premises the insured owns, rents, leases or occupies, in other words while they are performing remedial services in the field.

Secondly, standard contractors (i.e. general contractors, HVAC, plumbing, electrical, mechanical, janitorial, demolition, drilling, excavation, highway, street and paving contractors, rigging, utility, millwrights, artisan, etc.), in performing their services may cause an environmental liability that is generally excluded from their general liability coverage. For these contractors there is contingent contractors pollution liability (CCPL) coverage. Basically they are afforded the same coverage as remedial contractors but the cost to purchase this insurance is substantially less.

PROFESSIONAL LIABILITY (E&O)

E&O insurance protects a real estate developer/owner should an environmental engineer/consultant make and error or omission in performing their professional services. The standard commercial general liability policy excludes coverage for professional services performed by engineers/consultants/surveyors….