Prevent environmental liabilities from derailing a deal.

Whether you are a real estate developer, owner or investor, concerns about potential environmental liability can be a major sticking point in the transfer of property.

Sellers want to be free of environmental liability after the sale, while buyers are reluctant to assume liability for a potentially contaminated site. Prospective investors and lenders are also understandably concerned about unexpected cleanup costs, delays and environmental liabilities that can derail an otherwise promising project.

Environmental liabilities do not need to be an obstacle to a property transfer, acquisition or securing financing for a purchase if they are proactively identified, managed and mitigated. In the following example, fixed-site environmental liability insurance enabled an owner to sell a contaminated property at fair market value.

A former tenant had contaminated a property owned by a limited liability company (LLC). After remediation was complete, the LLC received a No Further Action (NFA) letter for the soil contamination and agreed to ongoing groundwater monitoring. However, the LLC could not sell the property for more than 60 percent of the fair market value. This impasse was resolved when it purchased a fixed-site environmental liability policy, with coverage for the known and disclosed contamination conditions addressed by the NFA. The policy also addressed third-party claims issues and the potential for regulatory "re-openers" related to changes in regulatory conditions, including lowering of levels at which a contaminant is required to be cleaned up. Thus protected, the LLC successfully sold the property at fair market value after agreeing to assign the insurance policy to the new owner. The LLC was designated as an Additional Insured, so it was covered for both known and unknown environmental liabilities.

Under "Superfund" regulations (Comprehensive Environmental Response, Compensation and Liability Act), every party that ever owned a property can be held liable for environmental damage arising from it--even if the damage occurred years ago when the property was owned by others.

This does not mean deals involving already-contaminated Brownfield properties are not feasible and even attractive. Appropriate insurance coverage can help to protect the financial health of sellers, buyers and developers while returning such properties to profitable use.

A national real estate development company identified a property--a former truck manufacturing facility taken over by the lender--as a promising site for high-end commercial development.

Isolated areas of soil contamination were found, but the experienced developer believed the identified pollution could be adequately managed and remediated. The lender was willing to sell the site at a discount provided the buyer agreed to assume liability for all cleanup costs and any pollution-related damages or claims. While the potential buyer felt the identified contamination was manageable, it was concerned about the potential for costs arising from cleanup related to unknown contamination and/or other pollution-related damages and claims. The issue was resolved when the buyer negotiated a fixed-site environmental liability insurance policy that covered it for claims for unexpected cleanup costs, third-party claims, property and natural resource damages. This policy made it possible to complete their transaction and indemnify the seller for environmental liabilities associated with the site.

With environmental issues on the table early in negotiations, parties can work with their insurance broker and carrier to secure coverage that affords all parties protection from an unexpected environmental event.

While most fixed-site environmental liability policies are customized to fit the unique circumstances of each transaction, they generally provide coverage for discovery of unknown pre-existing contamination, regulatory reopeners that mandate additional cleanup of already remediated conditions and new pollution events at an insured site.

Environmental liability insurance may also cover third-party bodily injury and property damage claims and defense costs arising out of a pollution event. Special enhancements can address other unique and potentially catastrophic aspects of environmental liabilities--such as business interruption expenses and lawsuits arising from materials discarded at non-owned disposal sites.

With proper due diligence and the right insurance protection, the deal can be profitable for all parties.

BY KEN BERGER, EXECUTIVE VICE PRESIDENT

ZURICH ENVIRONMENTAL