Environmental Law Update provides information on developments in environmental law as it applies to property, probate and trust matters. The editors of Probate & Property welcome information and suggestions from readers.
Environmental Insurance in Brownfields Transactions
State brownfields laws provide parties to real estate transactions with protection from some but by no means all environmental liabilities. "Reopener" provisions commonly allow states to revisit a closed brownfields case to remedy previously undiscovered contamination and other conditions that could endanger human health or the environment.
For these reasons, participants in brownfields transactions who need to quantify their environmental liability with certainty may consider purchasing environmental insurance. Several companies offer policies that protect property owners from certain liabilities under state and federal laws. The choice of coverage will depend on several factors, including the history and past uses of the site, the site's current environmental condition and the intended use of the property.
First party or environmental remediation coverage indemnifies property owners for the cost of performing government ordered remediation. The insurer bears most of the cleanup costs associated with restoration of the owner's property, subject to the policy limits and deductible. Depending on the policy, the insured may be covered for any preexisting contamination that later gives rise to a cleanup obligation.
Third party coverage, often referred to as pollution legal liabil- ity coverage, protects the insured against claims by third parties that hazardous materials from the in-sured's property contaminated the third party's property or caused bod-ily injury. This type of coverage may be written to include claims for diminution of property value arising from contamination from the insured's property. "Stop loss coverage" is appropriate when the landowner and insurance company already know that property is contaminated and will be remediated. This coverage is designed to protect an insured owner against cost overruns exceeding a contractor's estimate for the cost of remediation. "Post remediation liability" insurance protects the insured against risks incurred, including later governmental action, after cleanup has been completed.
Most environmental insurance policies are issued on a "claims-made" basis. This means that the insured must provide written notice of the claim to the insurance company during that period. The coverage period is crucial because the discovery of contamination outside of the policy's term will not be covered. Many policies have a term of only a few years and may have a subsequent "tail" period when coverage may be purchased for additional premiums. Some policies do not provide coverage for contamination that occurred before the policy period; in other policies, only the date of discovery of the contamination is relevant. Clearly, it is imperative that these policy provisions be compared when assisting clients in selecting the right policy.
Pros and Cons
Environmental due diligence will limit certain environmental risks and liabilities but may not reveal all contamination affecting a site. Environmental insurance allows purchasers and lenders to consummate transactions when not all the information is known. Also, it may allow "riskier" properties to be bought and sold. Stop loss coverage encourages parties to proceed with remediation without fears of unlimited cleanup cost overruns.
One significant limitation of environmental insurance is its claims-made nature. Policy terms typically are two or three years, a small window of time in which to discover and report environmental contamination. The insured also must consider the limitations of particular policies. Most insurers exclude preexisting conditions known to the insured; civil and criminal fines and penalties for environmental contamination; and punitive, exemplary or multiplied damages. Many policies exclude certain substances, such as acid rain; some policies even exclude asbestos. Environmental insurance is new, complicated and legally untested, so great care is needed in choosing the correct policy for a specific site. Purchasers also must weigh the cost of insurance against the potential costs of environmental liabilities in deciding whether insurance is appropriate for a given transaction.
Environmental Law Update
Editor: James B Witkin, Linowes and Blocher, 1010 Wayne Ave., Silver spring, MD 20910.
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