How Environmental Insurance Due Diligence Affects Commercial Real Estate Transactions | Insurance Business America Environmental How Environmental Insurance Due Diligence Affects Commercial Real Estate Transactions
The key to success is “understanding complexity”
environment
Kenneth Araullo
As the commercial real estate industry undergoes significant change, environmental insurance has become even more important in real estate transactions. This type of insurance is essential to manage the risks associated with environmental liability, which can vary greatly depending on the history and location of a property.
In industries where potential contamination can affect property values and legal liability, environmental insurance can provide a safeguard, facilitating negotiations and allowing for safer investments.
Chris Albidge (pictured above), managing director and environmental practice group leader at NFP, highlighted the important role that environmental insurance plays: Yet in many transactions, particularly those involving land that was previously undesirable but is now in demand, environmental due diligence is often overlooked.
“There are various possibilities for a site to be contaminated depending on how the previous owner used the site,” he says. “When entering into a commercial real estate transaction, the environmental conditions on the site must be considered and any known contamination must be quantified and controlled.”
Environmental insurance is an important tool for real estate professionals looking to protect their clients from unexpected liabilities.
“For real estate professionals looking to maximize value for their clients, environmental insurance is an essential tool in any business transaction,” Albidge explains. “Understanding the intricacies of purchase and sale agreements is key to a successful transaction.”
This type of insurance bridges the gap between known and unknown contamination, especially if further inspections are limited by the seller or if further complications are uncovered.
Protection for both buyers and sellers
Alvidge noted that achieving an acceptable outcome for both parties in a commercial real estate transaction often requires complex negotiations regarding which environmental liabilities the buyer will assume and which will be retained by the seller.
“Environmental insurance provides a third-party intermediary to the transaction, giving both parties the opportunity to transfer environmental risk to a prospective insurer,” he said.
The structuring of the environmental insurance policy can have a significant impact on the deal. The buyer typically prefers to be listed first on the contract to maximize coverage for unknown contaminants. However, including the seller on the contract after the contract has been signed can make the deal easier to close and provide mutual protection.
Alviggi advises that buyers and sellers should also agree on the possibility of uninsured contamination discovery, dilution of insurance limits, and responsibility for paying premiums and deductibles.
“Sellers are often hesitant to allow buyers to complete additional inspections,” he says. “In this case, the buyer's knowledge is limited to information from past transactions that are already publicly available. In these cases, contamination liability insurance can bridge the gap between 'known' and 'unknown' contamination and the property's future intended use.”
Environmental coverage is a key feature of these policies, providing defense and coverage for pollution-related losses whether the property is leased, owned or rented. Because many real estate agents choose to have the seller retain certain environmental liability or escrow funds until the transaction closes, Albidge urges agents to learn how liability is allocated in the contract.
Aligning purchase and sale contracts with environmental insurance policies is also a complex but important task. “Aligning purchase and sale contracts with future insurance policies is a challenging task, but failure to distinguish between contract terms and insurance terms will lead to misunderstandings and difficulties in claims adjustment,” Albidge emphasized.
group work
Mr. Alvidge also discussed the role of tertiary contracts, such as loan agreements and access agreements, in environmental insurance.
“In a financing arrangement, the insured, who acquires the asset using commercial debt, enters into an environmental indemnity agreement with the lender. It is important to note that these agreements can be joint agreements and often include personal or corporate guarantors,” he said.
These agreements often contain indemnification obligations and can extend coverage to additional parties involved in the transaction, but can also complicate the insurance situation if not managed carefully.
Successfully implementing environmental insurance requires a team approach involving legal, environmental, tax, and other experts. This collaboration ensures that all aspects of the transaction are covered and that insurance clauses accurately reflect contractual obligations and intent.
“Ensuring consistency between the purchase and sale agreement and future insurance contracts is a difficult task. However, failure to distinguish between contract terms and insurance terms will lead to misunderstandings and difficulties in reconciling insurance claims,” he said.
What do you think about this story? Please leave a comment below.
Related article
Check out the latest news and events
Join our mailing list – it's free!