Addressing environmental to facilitate real estate deals
Low interest rates and great pricing in the mid 2000s lead to a real estate explosion. With dust now settled from the boom, buyers and investors are looking back and focusing on the transactions that took place, and one common threat continues to pop up — pollution and environmental liability. Pollution liability ends up costing investors and shareholders a large sum and can even prohibit transactions from reaching the closing table. The assets purchased during the real estate market boom are being investigated and what shareholders are finding is that these investments are full of pollution and environmental risk problems. In response, lenders, carriers and attorneys have implemented resources, one specifically being pollution legal liability insurance (PLL), which will protect against pollution liability exposures.
Environmental insurance was initially utilized to cover liabilities pertaining to landfills, hazardous waste transfer stations, and bulk chemical transporters. With time, PLL insurance has evolved and now secures a broader and more structured coverage. The product offered is more complete due to the demand in the market for coverage when applying for financing in real estate transactions. The loan process is where the environmental insurance is looked at due to the risks the lenders are taking on. When investors purchase a piece of land or a building the lenders are looking at that area to see what types of problems may arise.
Liabilities ranging from bodily injury to clean up are offered in the PLL coverage and are often times directly connected to the real estate transaction. The coverage extends from the actual land to the areas around it, securing that the investment is sound and the area is protected, even if an adjacent property becomes polluted. Thankfully pollution liabilities can be worked into most closing deals and greatly helps the investors salvage their properties that were perhaps hasty purchases. Due diligence being performed on properties that were invested in during the real estate uptick are revealing multiple issues and an environmental PLL is being used to prohibit expense from rising. Doing so provides a financial protection for the asset and will help to assist in the search for additional investors.
Lenders are interested in Environmental liability because it’s used to transfer their risk, reduce costs and enhance procedures. By performing due diligence during the purchase, the lenders will know how risky it is to purchase a property and assess the amount of insurance needed on it.
The environmental insurance market has doubled in the past few years due to many companies realizing how important the coverage is to their investments and business. Unknown problems are frightening to the lenders, which increases the coverage limits on properties being purchased. Carriers are focusing on offering General Liability and Pollution together to make it more appealing for the buyer and lender because the exposures on the landscape are continually changing. There is no standard in the market for environmental therefore companies are focusing on tailoring polices to the buyer. This is a great asset to investment property buyers as they are able to purchase properties and administer the environmental insurance as they see fit with their broker.
About the Author
Ray Roach is an Area Senior Vice President at Gallagher WGA, with over 30 years of experience in the insurance industry. Throughout his career, he has worked with in various aspects of environmental risk and insurance including loss control, underwriting, marketing, product development, captives and alternative risk products.