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 one of a two-part conversation. Part two will appear on GlobeSt.com’s New Jersey page on Friday.
Q: How is environmental insurance used in real estate transactions?
A: Environmental insurance can be used to manage unknown environmental risks in real estate transactions, so that the insurer assumes the risks that the parties to the transaction would prefer to avoid. Getting someone to accept those risks sometimes threatens the ability to close the transaction. For example, in every transaction the parties need to agree who will pay the cost to clean up pre-existing contamination that may be discovered on the insured property after closing. Where the risk has a higher probability of occurring, such as on industrial properties, gas stations and shopping centers with dry cleaning operations, a key obstacle in closing the deal is getting someone to accept that risk. In my experience, when the parties are negotiating who will accept this risk, if I suggest that environmental insurance can be obtained at a cost-effective price so that the insurance company will pick up most of this risk, the parties are apt to give serious consideration to buying environmental insurance to facilitate closing the deal.
Q: What risks do these environmental insurance policies cover?
A: A pollution legal liability policy, the type of environmental insurance policy most often used in real estate transactions, typically covers:
- The cost to clean up new discoveries of pre-existing pollution conditions, on- or off-site, but not pollution conditions known to the insured at the time the policy is purchased.
- The cost to clean up new pollution conditions, on or off site, that arise during the term of the policy.
- Third party lawsuits for property damage or bodily injury arising from known or unknown, pre-existing or new, pollution conditions.
- Business interruption (for the operator or tenant) and loss of rent (for the owner or landlord) caused by a pollution condition.
- Legal fees to defend claims or lawsuits for any of the above.
Q: What is your role as an attorney in helping a client obtain an environmental insurance policy?
A: Unlike most insurance policies, where you are stuck with the form the insurance company uses, environmental insurance policies are routinely negotiated with the insurer. To obtain coverage that best meets the needs of the parties, someone familiar with the transaction, the environmental condition of the insured property and the language of environmental insurance policies needs to negotiate the language of the policy and any endorsements to ensure that the policy best covers the risks that concern the parties to the transaction. In our transactions, I am that person. I have negotiated policies for well over 200 properties, mostly to facilitate real estate transactions.
Q: How do you go about getting environmental insurance for a transaction?
A: You need an insurance broker to seek environmental insurance, as insurers typically will not communicate with a potential insured unless they have a broker. The selection of a broker with significant environmental insurance experience can save time and money. I have had experience with the brokers who are most active with environmental insurance. An experienced broker will select the companies from which to pursue coverage (i.e., the least risk averse and with a high financial strength rating), choose the right coverage for the matter at hand and preliminarily request the language of the policy endorsements, to obtain the coverage sought by the parties. While the broker works for, and represents the interests of, the insured, as compensation they receive a percentage of the premium from the insurer. A broker with environmental insurance experience can save the client substantial legal fees by performing some of the tasks that would otherwise be performed by an attorney. Once the broker obtains quotes from several insurance companies for the requested coverage, the broker will review and compare the quotes and advise which provides the best coverage for the lowest premium. Then I, as the attorney, use that policy to begin negotiating the coverage needed to close the transaction.