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 firstname.lastname@example.org.