Historically, potential environmental liability concerns often have been a major deal-breaker in the sale or transfer of real estate. Sellers wanted to be free of environmental liability after the sale, while buyers were extremely reluctant to assume liability for a site that could possibly be contaminated.
Likewise, in years past, prospective investors, lenders and financial institutions representing a wide range of industries have been understandably concerned about the risks of unexpected cleanup costs, delays and environmental liabilities that could derail an otherwise promising real estate project. This is because environmental "pitfalls" not only plague commercial and habitation real estate owners, but can also cause significant financial loss to health care institutions.
For example, a health care institution based in the Northeastern United States recently acquired property formerly used for farming to construct a new suburban hospital. Although the environmental due diligence was conducted and the site was determined "clean," more than 100 drums of buried pesticides and herbicides were unearthed during a phase of development.
As a result, the institution spent nearly $750,000 disposing of the drums and remediating contaminated soil and groundwater. Additional monies also were spent pursuing recovery from the environmental consultant and overcoming subsequent construction delays.
As this situation shows, health care institutions are not immune to a lengthy list of environmental issues that can extend from the property development stage to facility operations. In relation, environmental risks commonly associated with health care institutions may include but are not limited to:
o Large parcels of property that are "donated" to the facility and then later found to be contaminated
o The existence, release, inadvertent spill and/or disposal of hazardous, infectious and/or radioactive materials and chemicals
o Poor indoor air quality conditions that can lead to illnesses such as "Sick Building Syndrome"
o Improperly handled or stored gases such as oxygen, chlorine and ethylene oxide
o Poor underground and aboveground tank management programs resulting in surface and subsurface soil and groundwater contamination
MANAGING THE RISKS
Despite the long list of potential challenges, however, environmental liabilities need not impede the transfer or acquisition of property or the securing of funds if they are proactively identified, managed and mitigated.
In fact, over the past few years, many health care institutions have learned to mitigate environmental exposures several ways–contractually, through the use of environmental insurance, or by a combination of both methods–to relieve the pressure asserted by financial institutions as well as the property and casualty marketplace looking to protect their loans through the purchase of environmental insurance.
At the top of the ($2.5 billion premium) environmental insurance market are the five leading environmental liability insurers–Chartis Insurance (formally AIG), XL Capital, Zurich, ACE USA and Chubb–accounting for about 90 percent of the total premiums written.
The remaining 10 percent of the environmental liability insurance market, however, is growing with a number of very solid insurers providing at least some form of environmental liability insurance, including American Safety, Great American, Liberty International and Navigators, to name a few.
AVAILABLE COVERAGES
Each environmental liability insurer offers its own manuscripted coverage forms. To complicate matters even more, each insurer offers a portfolio of environmental liability coverage forms, with the largest carrier offering up to 15 different coverage forms, a total of more than 100 forms in the marketplace.
However, most health care institutions should focus on Premises Environmental Liability/Pollution Legal Liability (PLL) coverage to facilitate real estate transactions, to satisfy the board's fiduciary responsibility, and as a risk management best practice.
PLL provides coverage for pollution conditions or events on, at, under or migrating from a covered location(s). Coverage is afforded for third-party bodily injury, property damage, cleanup costs and legal defense expense.
In addition, a unique feature of many PLL policies is their ability to offer various and different coverage parts under one policy form. Such coverage parts include, but are not limited to:
o New pollution conditions
o Existing pollution conditions
o On-site cleanup coverage
o Transportation coverage
o Non-Owned Disposal Site (NODS) coverage
o Business interruption, including loss of rental income
o Mold/Legionella liability coverage and cleanup
o Fines and penalties and punitive damages where allowable by law
o Natural resource damages
Furthermore, PLL offers an effective risk management tool to the health care industry since it can help fill the "environmental gap" left in most general liability policies.
Therefore, it can also help reduce the uncertainty about environmental liability associated with the property, and provide simple asset protection from potentially catastrophic environmental events associated with day-to-day operations.
In today's environmental insurance market, available programs can be tailored to address the diverse needs of each property as well as structured to meet a variety of requirements and objectives–including but not limited to regulatory obligations, contract requirements, lender requirements, landlord obligations and business objectives.
Another important PLL aspect is that if a known environmental condition exists at a site, the policy can then be structured to provide coverage for the existing contamination.
With increasing concern about environmental liabilities, health care institutions are likely to take greater advantage of the environmental insurance market.
Fortunately, it is a market that has continued to adapt and broaden its environmental risk management offers to keep pace with the growing demands of the real estate owners and lenders working in this ever-expanding field.
John J. Heft is vice president and director of the real estate practice at New Day Underwriting Managers, LLC, a specialty resource for agents and brokers. For more information, go to www.newdayunderwriting.com
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