Organizations in the real estate industry can face a wide range of environmental risks. Modern developments may sit on top of historic pollution from previous industrial use; landlords can find themselves liable for issues caused by their tenants. Managing such risks effectively is therefore crucial.
First, it is important to recognize the different types of pollution that could pose problems in the real estate sector. These include:
In practice, real estate businesses need to think about both existing pollution risks and operational vulnerabilities.
In the first of these categories, the reality is that commercial buildings and development projects can often be unknowingly sited on top of contamination in soils or groundwater that dates from legacy industrial use.
This pollution may be discovered during a redevelopment or general maintenance work; it could also be found by third parties including neighbouring businesses, contractors and local authorities.
As for operational risks, landlords whose tenants become insolvent may find themselves liable for pollution caused by these businesses’ activities. Understanding how the property is being used – and assessing the potential environmental risk of such usage – is therefore vital.
Real estate businesses need strong systems and controls in place to deal with the environmental risks they may face at all the properties they own and manage.
That starts with thorough due diligence processes for acquisitions of all new properties and sites.
Even assets considered low risk – office buildings, for example – may occupy sites that were industrial in the past. It’s important to identify all known conditions and to understand what remediation is planned, if any.
Acquirers should check they understand the regulatory position in relation to any contamination identified. And if a change of use is planned, that may have implications too.
Risk management also needs to be ongoing. Robust environmental management plans set out how each of the business’s properties could impact the environment – and how these impacts will be mitigated.
Waste management plans set out clear processes for dealing with waste, including air and water emissions. Long-term monitoring may also be required – ongoing testing of groundwater, for example.
In practice, it is impossible to remove all risk entirely. Insurance therefore has a crucial role to play in helping real estate businesses to manage their exposures.
Traditional general liability and property policies may provide some cover, but this is typically limited only to damage caused by sudden and accidental pollution.
To close the gaps in such policies, growing numbers of real estate businesses are taking out environmental impairment liability (EIL) insurance.
Importantly, EIL can cover pollution no matter how long ago it was caused or how gradual its effect has been.
Such cover extends to both first- and third-party costs.
Here are some potential liabilities and costs that may be covered:
EIL can also help with the cost of prevention and recovery.
For example, it covers the cost of crisis management resources, such as public relations advice, to help deal with reputational damage. It may pay for pre-incident loss mitigation if there is an immediate risk of environmental damage from pollution. It can cover site investigations and ongoing groundwater monitoring.
Restoration of biodiversity, and soil and groundwater remediation work are also in-scope. And policyholders may be able to claim for business interruption too.
There are two main types of EIL cover. Premises pollution liability (PPL) insurance covers the sites that the policyholder owns or operates. Contractors pollution liability (CPL) insurance covers work done on construction sites by contractors – during real estate development projects, for example.
EIL policies can provide real estate businesses with a broad range of benefits in addition to protection against the cost of pollution claims and remediation actions. For example, the insurance may help the business to secure finance from banks and other funders for property deals and construction projects.
Cover can support the balance sheet, enabling real estate businesses to transfer reserves against unknown environmental costs off these accounts.
EIL cover can also help real estate businesses minimize reputational damage and cover their exposure to legal costs.
Importantly, EIL can also help real estate businesses to deliver their environmental, social and governance (ESG) strategies.
The cover can be an integral element of their approach to managing both immediate and long-term environmental impacts.
For example, EIL policies can cover climate risks, such as the impacts of air emissions, which are typically excluded from traditional general liability policies.
EIL also covers biodiversity damage, also routinely excluded from other insurance. More broadly, the cover can help real estate businesses to understand and report on their environmental risks – and to demonstrate that they are managing their ESG exposures effectively.
For smarter ways to managing your environmental risk exposures, please get in touch with our specialists.
