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Environmental insurance in residential real estate.

Our increasingly complicated business environment requires a continual learning process to identify and eliminate financial risk. Multi unit residential real estate owners rarely consider their business' need to consider pollution as an area of concern to them or mistakenly believe that their standard insurance program covers environmental claims.

Environmental (pollution) insurance was rarely considered a necessity for most property owners, especially those involved with non-industrial properties until issues involving indoor air pollution started to reach the public eye several years ago. This initial awareness was turbo charged with the beginnings of the mold scare taking off in 2000. The U.S. Environmental Protection Agency now lists indoor air pollution as their top priority in protecting the health and safety of Americans.

In the many years we have helped insurance agents provide their property owners and coop/condo board policyholders with environmental insurance, we have often heard the opinion that the issue of mold dangers and similar scares are concocted by personal injury attorneys and are not a legitimate cause for alarm.

While litigation involving mold claims continues, there is a record of large financial awards that is building, including a recent award of $925,000 to a apartment house tenant in Michigan and an earth rattling $23,000,000 out of court settlement in California awarded to the family of a severely brain damaged child. Among the most significant elements of the case was that it had been conceded that the child's exposure to mold within his home (caused by use of mold infested wood framing materials during construction) was the cause of the devastating injuries.

Indoor air quality issues such as these and other environmental risks of equal importance including leaking oil tanks, asbestos exposures, lead based paint and more, are legacy risks that can entrap an unsuspecting buyer of residential properties in a web of costly litigation typically not covered by any standard property or casualty insurance program.

For example, following acquisition of an apartment building, a long term tenant makes a claim based on a serious respiratory ailment allegedly caused by paint fumes he inhaled when a neighboring unit was painted before the building was purchased by the new owner.

As this is a pollution incident, it is not covered by any general liability and or umbrella policy held by the new or prior owner. This leaves the buyer to not only pay for legal fees and a potential judgment but will also require hundreds of man hours coordinating lawyers, experts and consultants to deal with a typically complex defense case.

Costly cleanups of contaminated soils or water sources are another set of risks that can manifest themselves following sale to the unsuspecting buyer. It is not uncommon for pollution incidents such as discovery of a long forgotten abandoned and leaking underground oil tank to be discovered by new owners.

Typically these types of discoveries are made as a result of expansion and or renovation activities requiring disruption to the property and once found automatically trigger orders by regulators for appropriate cleanups. Often the removal costs of the tank and contaminated soils are exceeded by restoration costs of portions of the structure that may be affected by the need to access the contaminated soils that have migrated below foundations.

Worse yet and a risk issue that is gaining prominence in the environmental community is the potential of vapor intrusion into structures emanating from pockets of contamination in soil or groundwater underneath structures.

Over time, toxic vapors created by the festering contamination make their way through porous foundations and basement walls polluting the living environments within the building. Remediation efforts in these types of situations can be profoundly complex and extremely costly, not to mention the financial loss caused by relocating tenants after the condition is discovered. A critical coverage feature provided by an environmental insurance policy is that the policy will pay claims for pollution that occurred before the policy was purchased provided the pollution event must be first discovered after the policy is in place. In similar fashion, if a claim alleging bodily injury is first made against the owner after the policy is in effect, then coverage is provided even though the injury is said to have occurred before the owner bought the property.

Often buyers take comfort in the fact that lenders will order a Phase I environmental survey of the property and will only close on the mortgage once that report is issued without recommendations for further studies. While a "clean" Phase I is a positive feature, it is important for the buyer to understand that those studies are primarily a records check that cannot find or predict all potential problems that may exist, especially when addressing environmental risks affecting residential building tenants.

The process of obtaining an environmental insurance policy is not difficult and premiums are generally affordable.

It is critical the owner's insurance agents who do not specialize in environmental insurance refer enquiries to experts in placement of these types of coverage in order to assure that the policy meets the expectations of the buyer and to obtain the best possible premiums.
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Publication:Real Estate Weekly
Date:Jun 28, 2006
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