Evolution revolution

Let's start at the beginning with the lender. There are few property transactions that do not involve a lender or financial institution, which will provide a site owner with a loan to acquire a property to be developed into a new end use, renovated/updated for a current or new use, or maintained to continue in its current usage. In the late 1990s, insurers created lender liability coverage to protect a lender that is subject to environmental liability due to their holding of or investing in loans that are backed by actual or potential real estate value. The value of the lender's collateral could be affected by unforeseen environmental conditions discovered after the loan is proffered. The most significant exposure for the lender is that it may have direct liability if unforeseen environmental conditions are discovered after it takes title to the property due to a mortgagee default of a loan.

Insurers developed the lender liability policy to provide a lender with collateral value protection in the event of a loan default and a newly discovered environmental condition at the insured property. When these two situations occur, the lender liability policy pays out in one of two ways: the lesser of 1) the outstanding loan balance and extra expense, or 2) the estimated cost to clean up the property. Within a few years after the creation of this innovative product, some environmental carriers removed the option of estimated cleanup cost and only provided coverage for the outstanding loan balance. There still needed to be a loan default and a newly discovered environmental condition for the coverage to be triggered.

The lender does not have to foreclose on a property before receiving coverage under a lender liability policy. The policy also can be extended to provide coverage for first party cleanup costs for claims made after the lender has foreclosed on the property. In addition, coverage can be provided for third-party bodily injury, property damage and cleanup cost claims, including defense costs, caused by an environmental condition at the insured property once it is in the lender's possession.

The PLL evolves

If you're thinking that the lender liability policy offers broader pollution liability coverage than the original PLL policy, you are correct. In the early 1990s, the PLL policy evolved fairly dramatically. The PLL originally provided coverage solely for bodily injury, property damage and cleanup costs claims made against a site owner by third parties due to the off-site release of environmental contaminants from the site owner's insured property.

By the end of the 1990s, PLL coverage also included coverage for third-party claims for on-site release of environmental contaminants at an insured property due to a previously known or unknown environmental condition. Further, coverage extensions also could be provided for first-party cleanup cost claims due to the discovery of a newly discovered environmental condition. Most environmental carriers tie cleanup cost coverage to those that a site owner is legally obligated to pay, meaning the carrier will only provide coverage for cleanup costs that are subject to local, state or federal cleanup standards. One or two carriers provide cleanup cost coverage that is reasonable and necessary with no link to any legal cleanup standards

There are other ancillary coverages provided in the updated PLL policy. One responds to third-party claims for cleanup costs related to the upset and overturn of vehicles transporting materials or waste. Another responds to third-party claims for cleanup costs resulting from the cleanup liability imposed on a site owner due to the closure and related cleanup of a non-owned disposal site.

The updated PLL policy expanded the scenarios under which the coverage could be purchased beyond the original one for in-use properties. Let's review these scenarios in the context of the "cradle to grave" lifespan of a property–from the time the property is acquired, during the time of its useful purpose, and to the time it is sold or abandoned.

1. The updated PLL policy is more commonly purchased for those properties that are currently providing a useful purpose–for example, currently operating manufacturing facilities, hospitals, schools or office buildings. The newer PLL coverages allow a site owner to protect itself from claims due to previously known environmental exposures. Included exposures are asbestos, lead-based paint or specific levels of environmental contaminants currently below any legal cleanup standards which apply to the specific insured property. The updated policy also provides coverage for third-party claims resulting from bodily injury, property damage or cleanup costs, as well as cleanup costs resulting from the discovery of environmental contamination due to previously unknown environmental exposures.

2. The extension of coverage found in the updated PLL policy provides the site owner with an opportunity to protect itself during the acquisition or sale of a property. Property that is acquired or sold is either characterized as virgin land, for which there has been no prior use, or as previously developed land that is currently in-use or abandoned. When buying or selling virgin land (or, as it is called today, "greenfield property"), the biggest concern is with previously unknown environmental conditions. Depending on which party is contractually responsible for the cleanup costs or third party claims related to the discovery of unknown contamination, the purchase of an updated PLL policy can protect their interest.

3. More significant environmental exposures in property transactions lie with those properties that are currently in use or abandoned. Unlike virgin land, these properties are either currently serving a useful purpose or they did so at one time. In addition, there is a higher probability that these properties have both known and previously unknown environmental conditions. The probability of environmental contamination increases the longer a property has been in use. The buyers or sellers of in-use properties can purchase an updated PLL policy to backstop an indemnity in the buy-sell agreement that contractually determines responsibility for known and previously unknown environmental conditions. Either one or both parties can purchase a policy to backstop the indemnity for the life of that indemnity or no more than ten years (maximum policy period allowed under this type of policy). The acquiring party will purchase a separate policy that provides coverage for its on-going operations.

4. The acquisition or development of abandoned properties presents the largest challenge because many of these properties have been abandoned as a result of the site owner no longer being in business or the economic infeasibility of doing anything with the site. When dealing with these properties, it may be somewhat difficult or even impossible to obtain an indemnity from the seller (i.e., the site owner) for known environmental conditions. For the last 15 years, the purchasers or developers of these properties have been utilizing the updated PLL policy to protect them from unknown environmental conditions.

The biggest concern with many abandoned properties has been the known environmental contamination found at these sites. To develop these properties, the known environmental contamination has to be remediated. Depending upon who was responsible for the environmental cleanup, entities wanted an insurance product that would respond if the cost to remediate known environmental contamination was higher than the estimated costs. Environmental carriers responded in the mid-1990s with a cleanup cost cap policy that would provide such coverage. This coverage was later merged with the updated PLL policy to also provide coverage for previously unknown environmental conditions.

One thing is clear: The choices presented to site owners over the last 25 years have shown an amazing progression and innovation in site-specific environmental liability products. The creation of the lender liability product, the updated PLL policy and the cleanup cost cap policy has dramatically expanded the protection available for site owners from environmental liability during the lifespan of an insured property. Environmental insurance carriers are known for their innovation. It will prove interesting to be part of the evolution of insurance products created in the next 10 years by carriers and site owners as they desire to support the "cradle to grave" environmental exposure.