Environmental liability and your real estate portfolio

Authored by AXA XL Senior Underwriter, Environmental, Jenna Prettitore

A hotel water system upgrade resulted in a $1.1 million Legionella bacteria remediation. An abandoned warehouse full of electronic waste cost $2.1 million to dispose and decontaminate. These are just two examples of how costly operational environmental liability claims can become.

Most real estate firms are well aware of the need to for environmental due diligence prior to a transaction to identify historical site contamination and other risks. However, they often spend less time and attention considering the on-going environmental exposures associated with tenants and building operations.

Anyone owning a commercial project or property should know that environmental risks are complex and can change depending on the site conditions, materials used, existing pollutants, even changing weather patterns. Take the commercial property that has an environmental exposure because of its location in a hurricane zone. Likewise, an exposure that comes with an existing property dealing with asbestos remediation. Each of these risks are unique to the properties yet can cause costly claims.

Then there are the exposures owners do not often think about. For example, a business whose environmental exposure is tied to the delivery of hazardous or environmentally harmful materials could experience accidental spills. One dropped container or pallet could result in a costly environmental loss. Or how about the contractor performing work onsite that causes an indoor air quality problem. This could be inside work involving paints, adhesives, or solvents or outside work using a generator or heavy equipment near an air intake that results in bodily injury claims and business interruption.

While all real estate portfolios carry different exposures based on a variety of factors, there are some risks that are constant across nearly all properties. Mold, asbestos, water intrusion, water quality, vapor intrusion and indoor air quality, even the inventory onsite are the most common risks shared across nearly every industry.

These are just some of the considerations that underwriters consider when evaluating coverage for businesses. The wide variety of exposures that can impact your operations depends on many different factors – ones you may not have considered when putting together your mitigation plans.

Assessing properties’ environmental risks

No matter what types of property you own or what stage of construction or renovation you are engaged in, underwriters look for the same type of insight into how you manage your assets. The goal is to ensure that you have loss prevention and risk management plans in place, particularly for water intrusion and mold.

Other things underwriters look for include:

Heating/cooling systems that are subject to preventative maintenanceStorage and use of cleaning supplies and water treatment chemicalsUse of petroleum tanks for emergency generators or space heatingRegulatory compliance with building codes and environmental regulationsAny tenant or operational activities that could generate a third-party environmental claimEnvironmental and risk management staff involvement and external advice/supportRisk management protocols, operations & maintenance plans, and prevention/response plans for hazardous building materials and stored chemicalsThe amount of environmental liability insurance that is protecting your operations

For properties that are leased, underwriters look at tenant activity. What are tenants using or storing? Could any activity or material used in operation create an environmental liability? Are there storage tanks onsite? What is being delivered? Are hazardous materials being handled properly? What is the protocol for accidental spillage or release of harmful materials? Are routine site inspections performed? Do tenants have pollution liability insurance?

A good risk management plan for managing your property’s environmental exposures should include:

Proper disposal of wasteManagement of HVAC systems for preventing mold or Legionella growthWater intrusion detection, inspections, and response plansRenovation and abatement processes for handling mold, asbestos, lead and radon.

Trends driving change

Water intrusion and mold exposures are two of the bigger risks that properties face. As climate change results in a higher severity of weather events, property owners must consider those increased loss exposures and work with a risk management team to decrease loss potential. Recent changes in flood zones may place your property in a flood plain or otherwise increase water intrusion risk.

Building codes are changing, as well. For instance, in Florida, tidal flooding and sea level rise have authorities reconsidering development plans in flood-prone areas. That in turn will push developers into redeveloping existing properties, which increases exposure to asbestos, lead, mold and water intrusion issues from old roofs or plumbing systems.

Another factor that could impact environmental exposures – sustainable business practices. As companies begin moving toward a lower carbon footprint, municipalities and other government entities are putting measures in place to push companies toward net zero carbon operations. Any company not doing so could be facing added fines or penalties as well as reputational damage.

The environmental liability gap

Unfortunately, these and many other environmental risks are not covered by general liability insurance. As severity increases, insurance carriers are adding more environmental and pollution exclusions to the general liability policies, leaving a significant gap in coverage. Pollution exclusions are becoming more frequent and commonplace.

We recommend that commercial real estate owners review their current policies, paying particular attention to exclusions. When in doubt, consult your carrier or broker for a better understanding of what is covered and more importantly, what is not.

In most cases, environmental liability insurance is an essential part of risk transfer and mitigation. Most real estate portfolios should carry environmental and pollution liability that is tailored to the business, its location, and its operations. Coverage can help alleviate losses associated with unexpected release of pollutants, bodily injury claims, property damage, cleanup costs, and any associated business interruption.

A separate flood insurance policy is also recommended.

Attention to loss prevention

Beyond insurance coverage, mitigation protocols and plans should be in place. Your plans should include both a prevention and a response process. When underwriters review real estate portfolio business, we look for active management of environmental risks. We also look to see the viability of these plans against the backdrop of your business operations, tenants, locations and more.

AXA XL’s environmental insurance team can review your current processes. Our in-house risk engineering team can provide guidance, help enhance plans and controls, or even aid in creating new programs. The more properties you have, the more important it is to have an experienced team in place to build a solid mitigation strategy for each location.

Closing the gap

Environmental risks are on the rise. Whether it is climate-related changes or existing exposures that are not mitigated properly, a claim could be costly. As property owners assess their risks, they should be looking beyond the soil and groundwater risks and more deeply into their operations, their tenants’ actions and the changing landscape around climate-related storm activity.

Your real estate portfolio is unique, as are the risks associated with your properties and business operations. Working with a carrier that specializes in environmental risks can connect you to both the coverage and the expertise you need to best prepare for and recover from any environmental loss.