environmental coverages

Environmental conditions that exist on a property before or after a financing of the asset can give rise to various complications:

  • Lenders refuse to provide financing.
  • Lenders require escrows, holdbacks or personal guarantees in loan documents to provide backstop to existing pollution conditions.
  • Lenders may lower proposed loan amount, increase interest rate or lower loan proceeds based upon existing environmental conditions.
  • Lenders might be willing to accept an environmental insurance policy in lieu of the principal's executing environmental indemnities or warm body carve outs in loan documents.
  • Environmental conditions have migrated to the property from an adjoining property and there is no financially responsible party to remediate.
  • The tenant terminates the lease due to environmental conditions that have not been remediated by the landlord or the responsible party (not the tenant).
  • The tenant abates rent until the condition is remediated.
  • The tenant / landlord refuse or are financially incapable of fulfilling their obligations under an existing environmental indemnity. 
  • The terms of lease state that tenant is only financially responsible for pollution condition going forward (new conditions) and not responsible for historical pollution conditions. 
  • Although remote, investors/institutional share holders may be named in law suits related to onsite or offsite pollution conditions.

There are various forms of environmental insurance available:

Pollution Legal Liability (PLL) to pay for clean-up of the site and third party liability for damages. This provides a financially responsible party to supply the necessary funds for clean-up of existing conditions or future conditions. Limited coverage for underground tanks is available. 

PLL Options:

Coverage A:

Protects against loss resulting from third party liability claims for bodily injury, property damage and/or clean-up costs, as a result of pollution on, under, or beyond the boundaries of an insured property.
 

Coverage B:

Provides for the costs of cleaning up pollution on or under an insured property discovered during the policy period.
 

Coverage C:

Pays for defense costs, charges and expenses associated with defending pollution-related claims.

Environmental Cost Cap Coverage provides coverage for the cost of a clean-up which is greater then had been estimated.  Carriers are extremely conservative in underwriting cost cap coverage, and it’s extremely difficult to get the Cost Cap coverage to attach below $1million.  

Cost Cap Coverage Options:

Coverage A:

Pays cleanup costs up to the limit of liability for all activities ( as defined in the remedial plan) that exceed the self insured retention – usually the estimated cleanup value plus a buffer.
 

Coverage B:

Pays cleanup costs that exceed the self insured retention associated with newfound contamination that is discovered in performing cleanup pursuant to the remedial plan.

Secured Lender Coverage provides coverage for a debt default when an environmental condition exists. The market for this coverage is limited  as to limits and term.   Typically only used when the land and building are the collateral for the loan.  This is typically not utilized on Mezzanine loans when the collateral is shares in the corporation.  Pollution Legal Liability coverage is typically utilized on the Mezzanine loans.  

How the Policy is Structured:

Coverage A:

The policy pays for the outstanding commercial loan balance (at the date of the default) when a loan is defaulted when accompanied by environmental contamination. *
 

Coverage B:

Protects collateral by providing coverage for third-party bodily injury, third party property damage and third party claims for cleanup costs resulting from on and off-site pollution conditions at insured properties.
 

Coverage C:

Provides coverage for on or off-site cleanup costs if the insured decides to foreclose on the on the insured property.

* Alternative insuring clause will pay the lesser of the loan balance or cleanup costs at the date of the default.

Finite Coverage - combination of Pollution Legal Liability and Environmental Cost Cap coverage.  Finite insurance is typically used on cleanup projects greater than $5 million.   This insurance is used to transfer (for a premium) known liabilities to an insurance company.   The carrier calculates the net present value of the estimated cleanup costs over the life of the project.  This amount is placed in an account and the known/expected losses are paid out of the account by the carrier.  Limits are purchased (for additional premium) to provide clean-up for unknown conditions, third party liability for damages and environmental Cost Cap coverage for cost overruns.  This insurance product is typically used when a municipality is interested in a financially stable third party holding the funds, a large public company is interested in transferring contingent liabilities to an insurance company and as a replacement to environmental bonds utilized by the mining and landfill industries.

Contractor's Pollution Legal Liability Coverage/Owner Controlled Insurance Program - Used on construction project.  Covers environmental conditions that occur during and as a result of the project work.  The insurance program can be controlled by the contractor or the property owner.  Carriers are generally more aggressive in providing mold coverage with this product than with the Pollution Legal Liability Coverage. 

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