Whether directly or vicariously, real estate companies face a wide range of pollution liability exposures. From legionella to mold to vapor intrusion, there is no shortage of environmental hazards that can cause death, serious bodily injury, property damage or diminution in value (DIV), and create costly liability claims.
Real estate companies are frequently held liable for historical contamination they did not create or knew little about. To manage these various exposures, which can be financially devastating, property managers and owners need a solid understanding of environmental exposures, including regulatory standards. They should also work with experts to develop a comprehensive environmental risk management plan that addresses potential liabilities and claim drivers.
When evaluating your organization’s environmental risk readiness, consider the following:
Environmental insurance market challenges
Due to the potential for large losses, general liability insurers tend to stay away from environmental risks. While many commercial general liability (CGL) and property policies contain an absolute pollution exclusion, this often creates gaps in coverage for real estate companies.
Fortunately, the environmental insurance market, which is made of specialty underwriters, remains very dynamic. There are many environmental insurance policies currently on the market offering site-specific pollution coverage with a wide range of terms and conditions. Underwriters generally have a lower risk tolerance for habitational exposures, compared to commercial risks, and will conduct due diligence on individual properties to understand any new or historical exposures.
Common environmental exposures and risk mitigation considerations
Even though most pollution policies cover legionella as a “pollutant,” increased claims have led to greater underwriting scrutiny of potential risk. General liability insurance policies may have pollution and/or bacteria or viral agent exclusions.
Locations with water features, such as indoor spas, swimming pools, hot tubs, fountains, humidifiers and cooling towers, have a higher risk for legionella. While many legionella outbreak settlements have been kept confidential, recent class action lawsuits have sought compensatory and punitive damages between $190 million and $600 million. In 2015, the Center for Disease Control and Prevention (CDC) reported that the disease is fatal for one in 10 victims, which increases to one in four for healthcare facilities.
Companies can create a formal risk management plan for legionella that can be used to structure meaningful insurance protection against this exposure and greatly reduce the risk.
Mold can cause health problems that range from allergic reactions and irritations to potentially toxic effects, and it can be expensive to clean up. Mycotoxin producing mold can have a much greater health impact on individuals that are young, elderly and those with impaired immune systems.
Due to high claim volumes, underwriting of mold has become more stringent, with potential coverage limitations in the form of specialized exclusions, due diligence requirements or conditions precedent to coverage. The average cost of mold remediation is between $2,000 and $6,000 per room, but can climb to as high as $20,000 if there is complete replacement of drywall, wood, carpeting and furnishings.
To minimize mold exposure, real estate companies must be prepared to create a properly developed, formal, written Water Intrusion, Mold & Moisture Management Plan (WIMMP), which must include managing atmospheric moisture (DP/RH) in indoor air. Building a formal WIMMP will support the development of a meaningful insurance program design that will minimize the risk for the property owner and/or manager.
Vapor intrusion can occur when chemicals, mostly volatile organic compounds (VOCs), or petroleum products, are spilled on the ground or leak from an underground storage tank. VOCs can migrate through soil and geologic structures, ultimately entering the groundwater. As they volatize, they enter the indoor building environment, putting the occupants at risk of chronic long-term, low-dose exposures.
The first step to mitigating vapor intrusion is identifying whether potential conditions for vapor intrusion exists on a specific site. This can be done through a Phase I Environmental Site Assessment (ESA), which may need to be followed by a Phase II ESA to fully assess the potential impact to the indoor building environment and occupants. Once the potential is affirmed, a vapor mitigation system and/or remediation may be required.
Urban fill has been found to contain toxicants (VOC’s, Heavy Metals, etc.), and depending on the exposure dose, these potentially harmful materials can cause bodily injury or property damage. The presence of these substances can lead to expensive claims, unexpected cleanup costs and construction delays.
Meanwhile, pollution insurance coverage for urban fill is limited because of its unpredictable, often uncharacterized nature. There are several ways to mitigate exposure from urban fill, such as ESAs, soil management and worker safety plans, and utilizing government programs like Brownfields.
Partnering with knowledgeable experts
To illustrate the importance of having an environmental risk management plan in place, consider a real estate developer active in the demolition of old industrial properties and development of new multi-use buildings. After partnering with a team of environmental risk management professionals to evaluate a newly acquired development site, the team determined that remediation was needed for vapor intrusion due to past usage of chemicals on the site. Once the remediation was completed, the team was able to secure pollution coverage for the potential vapor intrusion liability cost of $2.5 million.
By partnering with an experienced environmental risk management and mitigation assessment team prior to the acquisition of a property, real estate companies can effectively augment existing maintenance or due diligence programs in advance, review and improve insurance requirements for newly hired contractors or consultants in accordance with regulatory standards and help to implement a customized environmental risk management plan.
Gregg Roberts serves a senior vice president and national managing director for USI’s environmental risk mitigation group, based in Houston, Texas. He can be reached at [email protected].
Brian Dove is the national real estate practice leader at USI Insurance Services, based in Dallas, Texas. He can be reached at [email protected]