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Keep real estate deals clean with pollution legal liability cover

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A rebounding industrial real estate sector only emphasizes the need for insurance to cover pollution legal liability, even the hint of which can derail a property sale. John J. Heft, a senior vice president and the director of the real estate practice at New Day Underwriting Managers L.L.C., discusses the state of the coverage and its future.

Despite fluctuations, there was steady growth in the American industrial real estate sector in the first quarter of 2015, several studies show.

According to the Realtors Commercial Real Estate Market Survey, 60% percent of commercial real estate agents have closed a sale in the second quarter, a 9% increase in volume from a year earlier.

In addition, the National Council of Real Estate Investment recently noted that “based on strengthening economic growth, solid job creation, low interest rates, declining vacancy rates, rising rents ... 2015 would mark the sixth year of positive CRE performance after the Great Recession.”

Even with this brighter picture, it's important to note potential pitfalls. Among them are on-site environmental issues, even suspicions of which can derail commercial real estate deals. This is especially true for the industrial marketplace given the nature of its businesses and their propensity to produce, store, ship and discard hazardous and/or dangerous materials.

So, over the years, pollution legal liability, or PLL, insurance has developed to cover specific businesses classes including manufacturing, commercial and habitational real estate, education, health care and hospitality.

Over the past several years, PLL cover has broadened to include the cleanup of viruses and bacteria, biological hazards and contingent business interruption coverage.

However, the heart of PLL insurance remains:

• On- and off-site clean-up/remediation expenses

• Third-party bodily injury, property damages

• Defense expenses

Pollution legal liability trends

Some 25 insurers offer various forms of PLL coverage. This represents a capacity of more than $350 million and up to $50 million in limits.

Terms for transactional policies, which can provide an extra measure of assurance in a real estate deal, have varied between five and 10 years. However, the number of insurers offering 10-year policies has declined in the last year and a half.

This is also true for insurers offering prospective, or ongoing, coverage for more than three years. If the business has manufacturing exposures, the maximum term is three years; five-year terms are common health care, hospitality, habitational and education risks with 10 years still available for high-end, or Class A, office buildings.

Several insurers offering 10-year transactional policies are requiring a $100,000 minimum premium.

PLL underwriting trends

Underwriting scrutiny will continue to increase for redevelopment deals. Exposures for redevelopment projects can involve urban fill, or material brought in from other locations, and lack of due diligence, especially at industrial sites.

The recent Legionnaires' disease outbreak in New York City that affected more than 100 people and killed 12 and the various Ebola outbreaks at the end of last year put the underwriting spotlight on habitational real estate and health care risks.

Why buy PLL?

The drivers to purchase PLL insurance fall into four categories: regulatory, contractual, lender requirement and risk management. These apply to companies that face federal and state regulations for underground storage tanks and hazardous waste units, as well as those looking to ease a real estate transaction with environmental indemnity backing.

For companies successfully refinancing or acquiring properties in 2015, lenders often required that the lender be listed as an additional insured/mortgagee on the PLL policy.

Coverage enhancements continue to evolve in the following areas:

• Occurrence transportation and non-owned disposal sites coverage

• Contingent business interruption — coverage applies to an insured affected by off-site pollution

• Methamphetamine (meth) labs, bacteria and electromagnetic fields included in the definition of pollution conditions

• Green remediation/green building materials — supplemental coverage for using environmentally sustainable/energy efficient materials and remediation technologies

• Crisis/strategic management/response — coverage provided for expenses associated with public relations, media management, etc.

• First-party diminution of property value

The future of the PLL market

Overall, competition remains robust in the PLL marketplace. Prospective/ongoing coverages are anticipated to stay in the five-year range, with a maximum of 10 years still available.

In addition, coverage terms and conditions tightened substantially during the latter part of 2014 and into 2015 as underwriting scrutiny of redevelopment sites and transactions rose.

On the flip side, “updated or enhanced” PLL coverage forms have been released during 2015 by Beazley Environmental Liability, a specialty unit of Beazley P.L.C., and AIG Environmental, a subsidiary of AIG Commercial Insurance Group Inc., with emphasis on real estate portfolios. Other insurers are poised to release new or updated PLL forms during 2016.

As the economy continues to recover, merger and acquisition/transactional activity is expected to continue to increase during 2016, driving the need for transactional PLL policies.

Overall, PLL premiums during 2016 are expected to grow modestly, though there is no sign of a hardening of the PLL market in 2016 or beyond.

John J. Heft is a senior vice president and the director of the real estate practice at New Day Underwriting Managers L.L.C. of Hamilton, New Jersey, where he specializes in construction-related professional liability and environmental liability insurance. Mr. Heft can be reached at john.heft@newdayunderwriting.com or 609-298-3516, ext. 105.