Gordon Duus is a shareholder and chair of the Environmental Department at the law firm of Mandelbaum Salsburg in Roseland, NJ. In 35 years of practicing environmental law, he has been involved in thousands of real estate transactions, including the purchase, sale, leasing and financing of real estate, many involving contaminated properties, and has assisted his clients with obtaining hundreds of environmental insurance policies.
This is part two of a two-part conversation. Part one, published yesterday, can be found here.
Q: Are pollution conditions known to the insured when they buy the policy always excluded from coverage in environmental insurance policies?
A: No. Generally, coverage for the discovery of pre-existing pollution conditions is for contamination in existence, but not known to the insured, before they buy the policy. Pollution conditions known to the insured before buying the policy are typically excluded from coverage under a PLL policy, but may be covered by cost cap coverage, a different type of environmental insurance policy. It is possible to negotiate coverage for known conditions on the site that either have been the subject of regulatory closure (i.e., written confirmation the cleanup is finished) or have little risk of giving rise to a cleanup obligation exceeding the deductible. If those pollution conditions later require further cleanup, those costs would be covered.
Q: And the environmental policy covers any new pollution discharged onto the policy during the policy period?
A: New-conditions coverage is for pollution first arising during the policy period. Typically, this is coverage for the risk that current operations on the insured property may cause pollution conditions. Insurers will ordinarily prepare a policy endorsement describing the types of operations for which there will be coverage, which may exclude coverage if the operations change. By purchasing new-conditions coverage the insured can avoid future disputes with the insurer over when the discharge for which coverage is sought happened, since both pre-existing and new pollution conditions would be covered.
Q: Is coverage for loss of use of the property or lost rent caused by the pollution condition readily available?
Yes, PLL coverage is available for business interruption or loss of rent at the insured property. But to obtain this coverage, the insurer often requires significant information concerning the covered business. Unless the business is established, the uncertainty may make underwriting difficult and premiums uneconomical.
Q: And the policy pays the insured’s legal fees?
PLL policies cover legal costs to defend claims covered by the policy. For example, the policy would provide coverage for the legal fees incurred overseeing the remediation of pollution conditions on, or migrating from, the insured property or defending a third-party claim for property damage. Generally, the insurer has the right and obligation to defend the claim, usually with counsel chosen by the insured where permitted by law. Even where no such law applies, some insurers will consent to using the insured’s counsel if they accept the legal fee rates ordinarily paid by the insurer in that locale.
Q: You previously mentioned Cost Cap Coverage, what does that cover?
Before 2008, we often used cost-cap policies in contaminated property transactions to cover the risk of cleanup cost overruns on the cost of cleaning up known contamination. To be paid cost cap coverage, first the cleanup costs must exceed the self-insured retention (“SIR,” similar to a deductible). Generally, the SIR is equal to the price under a guaranteed cleanup cost or fixed price contract (“GCCC”) between the insured and an environmental consultant. The consultant under the GCCC agrees to pay all costs in excess of the guaranteed cost or SIR to be paid by the insured. Second, the cleanup costs must also exceed any co-insurance layer above the SIR. Usually, the environmental consultant pays the co-insurance layer to give them some skin in the game. Cost cap coverage really protects the consultant from having to pay cleanup costs in excess of the SIR and co-insurance layer, until the term of the policy expires.
Q: So, is Cost Cap Coverage still available?
Yes, but there are few insurers willing to provide it and the coverage is not as good as it once was. Excessive claims made cost-cap coverage unprofitable for insurers, so many no longer provide it. The few insurers issuing cost-cap coverage now view it as catastrophic coverage, and not to be routinely used to cover the risk of cleanup cost overruns for known contamination, as it once was. Many involved with environmental insurance have concluded that cost-cap coverage is mostly no longer available. But I know of underwriters who keep telling brokers that they are willing to do cost cap coverage for me if my clients need it. We’ll see.