All companies in the United States have
pollution liability exposures. From
construction to oil and gas exploration to banking, the potential for pollution
issues that could affect a company’s bottom
line is endless. Property owners are scrambling to mitigate these exposures.
“A major problem occurs when sales of
valuable commercial real estate are hindered because of known, suspected, or
unknown environmental conditions,” says
Joseph Kulak, managing director, National
Environmental Practice, Hilb, Rogal &
Hobbs. “Environmental insurance coverage simplifies property transactions by
removing difficult environmental issues
from the negotiations.”
Smart Business spoke with Kulak about
how the use of environmental insurance
can alleviate pollution liability concerns
and how new federal regulations are
changing environmental liability reporting
and accounting for public companies.
What are common and hidden environmental
exposures?
Contractors have on-site operational
exposures such as silt runoff and working
around underground utilities and pipelines.
The oil and gas business impacts the environment from drilling operations, ground-water contamination and waste stream
mismanagement. Property managers and
real estate portfolios have exposure from
underground storage tanks and mold.
In the past few years there has been a
large amount of publicity given to mold. So
many claims have been filed in various state
and federal courts that the insurance industry has specifically responded by excluding
coverage for mold related claims.
What is the basis for mold concern?
The combination of the dramatic
increase in construction defect litigation,
the escalation of expenses for water damage, modern building materials, and
increased public awareness of the health
effects of mold exposure has resulted in a
significant new liability for property owners to manage.
Building construction practices during the 1970s, ‘80s, and ‘90s resulted in buildings that are tightly sealed, but may lack
adequate ventilation, potentially leading to
moisture buildup.
How should a company safely approach a
property transaction?
A Phase I Environmental investigation
provides a glimpse into the history of a property but offers no protection. Companies
are turning to real estate transaction coverage as a cost effective method to mitigate
exposure for all types of commercial and
industrial property transactions. It is most
often utilized with transactions involving
properties that have a higher risk of environmental exposure including those located
in areas of former and existing commercial
and industrial development.
How does insurance facilitate real estate transactions?
The risk of environmental liability stigmatizes property and makes developers,
investors, and lenders uncomfortable or
unwilling to acquire, finance, or redevelop
the property. Transaction insurance coverage is utilized to promote sale, investment,
and redevelopment by transferring environmental risks away from owners and
purchasers to an insurance policy.
What are the benefits afforded by environmental insurance?
Environmental coverage provides broad
protection against potential environmental
liabilities including legal expenses and
defense costs. Coverage is available for
known and unknown environmental conditions, residual contamination following
cleanup, and potential impacts from off-site
sources.
This insurance also includes claims arising from federal, state, and local statutes
including changes to existing laws and regulations made after the policy inception
date. Additionally, insurance may substitute for or augment environmental indemnity agreements. Protections afforded by
these policies are transferable to future
property owners, thereby facilitating “full-value” future resale.
How are new environmental-related regulations altering certain accounting practices?
In the wake of numerous corporate financial scandals, Congress has begun to question the adequacy of existing SEC rules and
policies. Investors need and deserve
increased transparency. Corporations are
being put on notice to establish protocols for
identifying, tracking, estimating and judging
the materiality of environmental matters.
Sarbanes-Oxley requires that CEOs and
CFOs submit written certifications of their
company’s quarterly and annual SEC reports
as well as the procedures for preparing and
disclosing the required information. FAS 143
clarifies the need to recognize environmental
related Asset Retirement Obligations
(AROs). What is at stake? Shareholder suits,
personal liability of directors and officers,
financial re-statements, SEC investigation
and violation of debt covenants. Clarifying
environmental liability and risk may be a
complex task, but it is a task worthy of the
effort.
JOSEPH KULAK is managing director, National Environmental
Practice, Hilb, Rogal & Hobbs, in Plymouth. He can be reached at
(610) 203-5922 or [email protected].
