Environmental Impairment Liability. for Real Estate companies

Transcription

1 Environmental Impairment Liability for Real Estate companies

2 2 Environmental Impairment Liability for Real Estate companies Introduction The traditional view amongst businesses has been that only a limited set of companies such as those dealing in Chemical Production, Utilities and Waste Management are likely to have any significant exposure to Environmental Liability. With new statutory provisions recently enforced across the EU and an increasing trend of large group litigations against many spheres of industry, this is simply no longer the case. The implemented Environmental Liability Directive has created statutory liabilities enforced by the competent authorities according to the polluter pays principle. This is not a civil law and there are no private claimants. The main focus of these new regulations is environmental damage (to nature, water and soil) rather than traditional damages (bodily injury, property damage and financial losses). The emphasis being to protect and restore the environment, not merely indemnify third parties. In this context the protection provided by a standard Property Owners Public Liability policy is quite limited, covering only third party injury or property damage resulting from a sudden, identifiable, unintended and unexpected incident. If environmental damage is caused by a tenant, liability would rest with them as the polluter in the first instance. However, the landlord may be deemed liable if identified to be the operator. Under current environmental law, regulators have the right to remedy damage and pass on the cost of such remediation to the polluter. In the event that the polluter cannot be found, the landlord will be ultimately responsible. It is worth noting that landlords have a responsibility to their tenants e.g. communal spaces will be their responsibility and with this comes potentially higher risk given drains and other interceptors. Even if the landlord is ultimately successful in defending their position the cost of defending can be significant. It is important to consider current, past and future property interests as liability can arise from historic or existing property activities. Environmental Impairment Liability (EIL) Insurance provides cover against the potential liabilities affecting either a single site or a portfolio of properties. Underwriters have developed streamlined underwriting approaches that can provide very rough indications in short timeframes with more detailed underwriting to follow once appetite has been established.

3 JLT Specialty Limited 3 Cover comparison The table below highlights possible losses arising from an incident that may not be covered by a standard Property Owners Public Liability and/or Property Damage policy and details the protection available under a standard Environmental Impairment Liability policy. Type of Loss/Incident Standard Property Owners Public Liability Policy Standard First Party Property Owners Buildings Policy Standard Environmental Impairment Liability Policy Gradual pollution Not covered Not covered Covered Gradual pollution during the policy period is covered. Cover for historical contamination occurring before the policy period can be routinely included On-site clean-up at own site Not covered Possible protection but only as a consequence of insured property damage and subject to wording of pollution exclusion No cover provided for contaminated soil Covered Investigation costs, defence costs and cover for biodiversity damage are all covered Environmental Not covered Not covered Cover available for non pollution type damage, not caused damages by a pollution incident Own Business Interruption costs Clean-up costs at third party premises Not covered Cover provided for third party bodily Not covered injury or property damage only. Extensions are available for clean-up costs (Bartoline extension) ordered by the authorities but solely in respect of sudden, identifiable, unintended and unexpected pollution Possible protection but only as a consequence of insured property damage. Indemnity period would not extend to include period of clean up of soil and be governed by any underlying pollution exclusion Cover is available as an option Covered Investigation costs, defence costs and cover for biodiversity damage are all covered Sudden, identifiable, unintended and unexpected pollution Cover only available for third party bodily injury or property damage Possible protection but only as a consequence of insured property damage and subject to wording of pollution exclusion Covered Cover is much wider and includes third party bodily injury, property damage as well as clean-up costs, mitigation costs (where Operative clause is extended to include pre-emptive action) and biodiversity damage Legal defence costs Cover only available for third party Not covered bodily injury or property damage resulting from sudden, identifiable, unintended and unexpected pollution Covered Cover is wider and legal defence costs are covered for bodily injury and property damage as well as for clean-up costs, mitigation costs (where Operative clause is extended to include pre-emptive action) and biodiversity damage

4 4 Environmental Impairment Liability for Real Estate companies Below we highlight standard policy exclusions and possible write backs that can be negotiated in the London insurance market. Environmental Impairment Liability (EIL) Policies EIL policies as standard will exclude: Criminal fines and penalties Contractual liability Identified underground storage tanks. Cover can however be considered where they are the subject of an insurer approved integrity test and have an operating statistical inventory system installed Deliberate acts or omissions Material change in use of a covered location Insured vs. Insured (although this exclusion would not apply to claims initiated by third parties) Asbestos containing materials. This can be altered to provide clean-up costs for the remediation of soil and groundwater Lead based paint installed or applied in, on or to any building Known prior incidents Terrorism War Voluntary site investigation Redevelopment (this can be insured under a Contractors Pollution Liability* (CPL) policy typically taken out by the contactor). The exclusion can also be amended to provide cover for specified acts e.g. regular inspection and maintenance works within one meter below the ground surface Sick Building Syndrome (although this exclusion would not apply to clean-up costs, bodily injury, property damage arising from the actual presence and accumulation of any contaminants in the buildings as a result of pollution conditions resulting from groundwater and soil contamination on, under or migrating from the insured property Legionella Abandoned property Cover can be endorsed to protect the interests of tenants. *A Contractors Pollution Liability policy may also be taken out be a Landlord to dovetail with the redevelopment exclusion under the EIL policy. Property Owners Public Liability Policies Property Owners Public Liability policies offer limited protection. Insuring clauses will also only cover civil law/tort liabilities. They do not pick up statutory environmental liabilities as was clearly demonstrated in the 2006 case of Bartoline Limited vs. Royal & Sun Alliance Insurance plc and Heath Lambert Limited.

5 JLT Specialty Limited 5 Bartoline vs. RSA and Heath Lambert The case involved water pollution resulting from spilled chemicals and foams used to fight a fire at Bartoline s warehouse. The Environment Agency, using its statutory powers took measures to clean up the pollution as it was entitled to do and sent Bartoline the bill. It also ordered Bartoline to carry out further clean up works. Bartoline claimed its clean-up costs totalling circa GBP 150,000 and the Environment Agency s clean-up costs bill (in excess of GBP 600,000) under its general Public Liability policy, which indemnified Bartoline against legal liability for damages in respect of accidental loss of or damage to property nuisance, trespass to land or trespass to goods or interference with any easement right of air, light, water or way. The Mercantile Court in Manchester that heard the case, determined that the sums claimed did not constitute damages and were not therefore covered under Bartoline s Public Liability policy. Following this case a number of general Public Liability insurers have offered a Bartoline extension. Whilst this is helpful it does not provide the wider protection of a bespoke EIL policy as the extension is unlikely to cover: - any liability incurred as a result of gradual pollution statutory liability for remediation of own site pollution statutory liability for costs of regulator relating to own site pollution statutory liability for biodiversity damage statutory liability for dealing with imminent threats of environmental harm Property Damage Property policies provide cover for claims resulting from insured damage; but cannot be relied upon to provide full protection for environmental liabilities because: cover is only provided in respect of specific buildings and does not as a general rule extend to include land whilst (resultant) environmental damage to insured buildings may be covered; if the contamination enters the soil, any remediation costs are unlikely to be picked up many policies incorporate a qualified or absolute pollution exclusion Peter Chart, Director, VRS Vericlaim If you have a fire that ruptures a heating oil tank and oil flows down through the building and into the subsoil below, then the Material Damage and Public Liability policies are unlikely to pick up the cost of removing the subsoil and replacing it. This can be very costly. It is possible that some extensions to the policy could assist e.g. loss mitigation expenses, but not always. Furthermore, subsoil affected outside the curtilage of the building is unlikely to be covered. Where there is a Landscaping clause, it may provide some assistance, but subsoil is unlikely to be construed as Landscaping. The Debris Removal clause might provide limited protection to adjoining land, but this will be very restricted and in the event of oil getting into the water course or water table, the cost of disposal of oil contaminated subsoil can be huge. EIL cover is, to my mind, cover that a prudent property owner should take out.

6 6 Environmental Impairment Liability for Real Estate companies Claims examples & illustrations Office flooring issue A PAH based glue was used to lay floor tiles at a Swedish office building. The glue degraded over time causing PAH fumes to be released into the building. Claims were made for the tenants loss of use and clean-up costs associated with removal of all flooring surfaces and refurbishment of the office. Claim payment to date in excess of SEK 400,000. Oil storage tank leakage An oil storage tank on the roof of an office building leaked. The oil destroyed the waterproof membrane on the surface of the roof. Costs to replace the roof membrane and cleaning of the underlying slab were incurred. Claim settled circa GBP 350,000. Corrosion of pipe in multi tenanted building A pipe corroded in the basement of a multi tenanted building leading to gradual loss of heating oil throughout basement level. Oil damaged the waterproof concrete lining. Clean-up costs were incurred to remove the oil and repair/reline the waterproofing on the concrete floors and wall of the basement. Potential third party claim may arise and a business interruption claim was also received from the tenant for their loss of use. Claim payments in excess of GBP 500,000.

7 JLT Specialty Limited 7 Underwriting considerations Each case will have specific underwriting requirements; however there is standard underwriting information that needs to be made available, namely: property schedule detailing the postal address (including Post Code) the property(s) size occupation due diligence procedures in place for property acquisitions environmental surveys (where undertaken) acquisition appetite and models of growth (including previous rates of acquisition) limit of indemnity deductible level (for new conditions only these start at GBP 10,000 although for preexisting conditions (where cover is provided) these start at GBP 25,000) The London EIL market is able to tailor policies to meet the needs of commercial Real Estate companies. As an example, automatic cover can be provided where properties are acquired and policy mechanics can include: automatic inclusion for certain land uses automatic inclusion where due diligence assessment has returned a satisfactory conclusion/environmental risk rating for the property premium charging structure for additional sites to be included (in some cases there may be an allowance/tolerance for an increase in property number within a certain range where no additional premium would be due and over which the charging structure would apply). Mainland Europe The London EIL market has the ability to underwrite throughout mainland Europe. Under European law insurers are able to provide Freedom of Services cover in all EU countries. This would mean a policy being issued in the UK with UK law governing the interpretation of policy language, but environmental law being where the risk is physically located. Certain territories present an underwriting challenge; for example, Belgium and Holland are unusual in that any change in tenant/business structure/landlord will require an environmental investigation into the condition of the property, which may involve an intrusive site investigation. This is potentially an issue for insurers as it could trigger the need for environmental clean-up. The way these surveys are managed is at odds with the way things are done in the UK the Flemish environmental regulator (OVAM) may nominate an environmental consultant to do their bidding; if left unchecked, the consultant has the potential to run up a sizeable bill. Belgium, Holland and France also have extended reporting periods written into their insurance laws that are longer than the UK; Benelux being three years, France being anything up to five years.

8 Contacts Terry Edwards Tel +44 (0) Gavin Wren Tel +44 (0) David Schofield Tel +44 (0) JLT Specialty Limited The St Botolph Building, 138 Houndsditch, London EC3A 7AW Tel +44 (0) Fax +44 (0) Lloyd s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No VAT No August