Cleaning Up Isn’t Always Enough
by Lynn Jenkins, Esq.

It never ceases to amaze how many real estate owners and developers purchase environmental insurance for a contaminated property, then are surprised and dismayed to learn that their policy excludes coverage for loss for the cost of cleaning up any of the pollution conditions
known to exist on the site.

A Pollution Legal Liability policy (PLL) is commonly used to deal with pollution conditions at contaminated sites. It is primarily designed to provide coverage for third-party claims of bodily injury (BI) and property damage (PD) which have occurred on or off site , as well as the clean up of unknown pollution conditions on and off site. A PLL can also be used to insure for cleanup of
new pollution conditions, business interruption, toxic tort claims, natural resource damage, and diminution in value, among other things.

But what about known conditions? Well, PLLs typically exclude coverage for claims arising from known pollution conditions. Generally speaking, many insurers tend to view known pollution conditions as claims waiting to happen.

But the policy purchaser’s dismay may be lessened by some basic risk transfer tools like a “wrap” policy or partial coverage for certain risks. Here’s how it works. The PPL’s restrictiveness regarding known conditions can be dealt with in various ways. For instance, it may be possible to negotiate coverage for third-party BI and PD claims—occurring on- and off-site—arising from known pollution conditions. This depends on a number of factors, such as the nature of the pollutant(s), the extent and degree of contamination, what type of media is involved (i.e., groundwater, contaminated soil, vapor intrusion), the likelihood that the pollutant has migrated or will migrate off-site, and the demographics surrounding the site. In particular, contaminated groundwater can be a major sticking point when it comes to covering third-party BI and PD for known conditions, as it may increase the risk that the pollution condition
could migrate off-site and affect other properties.

Depending on the risk assessment of these factors and others, you may be able to secure coverage for onsite/off-site, or both, for BI and PD claims. Insurers may be willing to provide this coverage as part of the policy’s general coverage or with higher self-insured retentions (SIRs) and/or sublimits regarding the specific known conditions.

With respect to first-party coverage for the cleanup of known conditions on-site, the situation can be challenging. As a general rule, PLLs do not cover the cost to clean up known pollution conditions on the insured site. Many insurers will likely take the position that this situation should be addressed by a Cost Cap policy, or that the insured should bear the cost of dealing with a known condition.

There was a time, however, when some insurers would consider providing coverage for the cleanup of on-site known conditions by employing higher self-insured retentions and/or sublimits along with other restrictions. In today’s market, this practice seems remote. It should also be noted that, based on the risk assessment factors noted earlier for evaluating third-party coverage for BI and PD claims, some insurers may be willing to offer off site cleanup coverage for known conditions. Again, the type of pollutant involved, type of media and extent/degree of contamination and other factors will be critical in making this assessment.

One other key insurance approach to consider when obtaining coverage for known conditions is a no further action (NFA) designation (so-called wrap coverage). A NFA involves a situation in which a property owner (i.e., insured) is required by environmental regulations to clean up known pollution conditions on his or her property to an acceptable regulatory level. Once the cleanup is completed and approved by the responsible environmental agency, a NFA is issued to the insured.

Under a PLL, it is possible to endorse coverage for cleanup costs and third-party BI and PD (if these items were initially excluded) for known conditions back into the policy once a NFA is obtained.

Ultimately, there is more flexibility to insuring known conditions than many real estate owners and developers realize. By working with your legal counsel and insurance brokers, an insurance program can be structured to help ensure that benefits of redevelopment are realized.

Lynn Jenkins, Esq., is an attorney with Greenberg Traurig LLP in Washington, D.C.