Pollution insurance: what you need to know

By JOHN POE
Raleigh Schwarz & Powell

Your present property, or any commercial real estate site you may buy, could be polluted with contaminated soil, ground water or structures, and it could even cause environmental damage to adjacent properties.

Property owners, past or present, may find themselves facing clean-up costs that exceed the value of the property, or paying for hidden costs associated with complying with environmental statutes and laws.

Soils being spread for bioremediation at a site in Bellingham. Photo by Foster Wheeler Environmental

Environmental liabilities may cause property to lose value, or restrict its use and development. And as the owner or former owner, you could face liability for contaminants migrating to adjacent properties as well as for personal injury and property damage caused by the release of hazardous substances (including emissions). So how do you ensure that your company is protected?

Most federal, state, and local environmental laws are less than 20 years old, and while new laws continue to be passed, old ones are amended. Don't let this overwhelm you. There are only a few key laws that you need to know in order to increase your awareness of environmental liabilities affecting commercial real estate.

The two most comprehensive of these laws are CERCLA (Comprehensive Environmental Response, Compensation and Liability Act of 1980), and its amendment, SARA (Superfund Amendments and Reauthorization Act of 1986). Congress designed these laws to provide funding for the clean-up of abandoned sites and to recover costs from potentially responsible parties.

There are only three defenses to CERCLA liability: an act of God, an act of war, and the "innocent landowner defense."

This last defense is what now motivates prospective buyers and lenders to perform their "due diligence" on a piece of property. To trigger this defense, an owner must show they had "no reason to know" there was contamination on the property "after making all appropriate inquiries, at the time of acquisition, consistent with customary practice."

It is crucial to identify real property contamination through an ASTM Phase I Environmental Site Assessment. This includes the following:

• All potentially responsible parties should review current and historical ownership and uses of the property by using historical evidence such as interviews with knowledgeable sources, government files, historical archives, aerial photographs, etc.

• All potentially responsible parties should review governmental records documenting past and current environmental violations and restrictions.

• Past, current, and potential owners should physically inspect the property for such contaminants as asbestos, underground storage tanks, radon, transformers (containing PCBs), and signs of contamination (stressed vegetation, spills, etc.) as well as potential sources of contamination.

• In addition, all reviews should include the inspection of adjacent properties for their current and historical use, signs of contamination, as well as past or current environmental violations.

If any of these inquiries indicate possible pollution, you may need to have a Level II assessment made, including sampling and chemical analysis.

If you find a problem, what can you do about it?

If the pollution is on a site you are considering for purchase you may want to weigh the cost versus benefit of buying and cleaning up the site. Contacting an experienced lawyer familiar with environmental real estate law is a must. However, if the pollution is on a site you already own, you may need to notify the EPA and/or DEQ and take corrective action.

One of your actions should be to review your Commercial General Liability (CGL) policies. Past court decisions have sometimes found pollution coverage, even though the policy was not intended to cover pollution. As a result, most current CGL policies have been amended to specifically exclude coverage for pollution.

Within the last few years, insurance companies have begun developing policies specifically designed to provide environmental coverage. These include:

• Providing coverage for certain types of on-site clean-ups.

• Property damage to personal property of third parties and bodily injuries.

• Clean-up costs for third party claims beyond the boundaries of the insured site and coverage for non-owned site cleanup costs.

• Third party claims arising from transportation of product or waste by vendors causing pollution conditions.

• Endorsements for business interruption that cover gross earnings and extra expense when policy holders sustain losses from interruption of their business due to on-site pollution conditions.

Policies are also currently offered to companies wanting to develop brownfields, which are typically abandoned or under-used contaminated sites. These sites may not be developed due to the liability and cost associated with the environmental clean-up or the risk that such clean-ups may later require.

In summary, to minimize your company's risk, you should arm yourself with all available information concerning your real estate site, review your insurance coverages (both current and past) with your broker, and possibly consider the purchase of one of the new insurance products that will offer your company protection from the high costs of an environmental clean-up.

Copyright © 1998 Seattle Daily Journal of Commerce.