As the commercial real estate landscape undergoes a significant transformation, environmental insurance is becoming even more pivotal in property transactions. This type of insurance is crucial for managing the risks associated with environmental liabilities, which can vary greatly depending on the history and location of the property.
In an industry where the potential for contamination can affect property values and legal liabilities, environmental insurance offers a safeguard, facilitating smoother negotiations and enabling more secure investments.
Chris Alviggi (pictured above), managing director and environmental practice group leader at NFP, highlighted the crucial role environmental insurance can play. In many transactions though, especially those involving previously undesirable sites now in demand, environmental due diligence can be overlooked.
“Depending on how the previous owner used the site, there are many ways a site can become contaminated,” he said. “When commercial real estate transactions commence, consideration should be given to the environmental conditions on-site and known contamination should be quantified and managed.”
Environmental insurance is a critical tool for real estate professionals aiming to protect their clients from unforeseen liabilities.
“For real estate professionals who want to maximize value for their clients, environmental insurance is a vital tool in commercial transactions,” Alviggi explains. “The key to successful placements is understanding the intricacies of purchase and sales agreements.”
This type of insurance bridges the gap between known and unknown contamination, particularly when additional testing is either restricted by the seller or reveals further complications.
Alviggi pointed out that achieving a mutually agreeable outcome in commercial real estate deals often involves intricate negotiation over the environmental liabilities to be assumed by the buyer or retained by the seller.
“Environmental insurance provides a third-party conduit to this transaction and allows both parties an opportunity to transfer environmental risk to the prospective insurer,” he said.
The structure of environmental insurance policies can significantly impact the transaction. Purchasers generally prefer to be listed first on policies to maximize their coverage against unknown contaminants. However, the inclusion of sellers in the policies post-closure can facilitate transaction finalization and provide mutual protection.
Alviggi advises that sellers and buyers also agree on handling potential uninsured pollution discoveries, policy limit dilutions, and payment responsibilities for premiums and deductibles.
“Frequently, sellers are reluctant to allow purchasers to complete additional testing,” he said. “In this instance, buyers’ knowledge is limited to information from previous transactions already in the public domain. When this occurs, pollution liability insurance can bridge the gap between ‘known’ and ‘unknown’ contamination and the intended future use of the property.”
Environmental indemnity is a key feature of these policies, providing defense and coverage for pollution-related losses whether the property is leased, owned, or rented. Alviggi urges real estate professionals to learn to navigate how liabilities are allocated in contracts, as many opt to have sellers retain certain environmental liabilities or escrow funds until transaction closure.
Aligning contracts of sale with environmental insurance policies is also a complex but essential task. “Ensuring alignment between contracts of sale and prospective insurance policies is a daunting task. However, failure to differentiate between contract terms and insurance terms can lead to misunderstanding and painful claims adjustment,” Alviggi emphasized.
Alviggi further discussed the role of tertiary contracts, like lending agreements and access agreements, in environmental insurance.
“In lending agreements, insureds who rely upon commercial debt to acquire property enter into environmental indemnity agreements with a lender. It’s important to note that these agreements can be joint and often include personal or corporate guarantors,” he said.
These contracts, which often involve indemnity obligations, can extend coverage to additional parties involved in the transaction, although they may also complicate the insurance landscape if not managed carefully.
Successful placement of environmental insurance requires a team approach, involving legal, environmental, tax, and other professionals. This collaborative effort ensures that all aspects of a deal are covered and that the insurance provisions accurately reflect the contractual obligations and intentions.
“Ensuring alignment between contracts of sale and prospective insurance policies is a daunting task. However, failure to differentiate between contract terms and insurance terms can lead to misunderstanding and painful claims adjustment,” he said.
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