How Environmental Insurance Due Diligence Can Impact Commercial Real Estate Transactions | Insurance business America
Success is about “understanding the intricacies”
As the commercial real estate landscape undergoes significant change, environmental insurance becomes even more important in real estate transactions. This type of insurance is critical to managing the risks associated with environmental liabilities, which can vary greatly depending on the history and location of the property.
In an industry where the risk of contamination can impact property values and legal liabilities, environmental insurance provides protection that allows for smoother negotiations and safer investments.
Chris Alviggi (pictured above), managing director and head of the environmental practice group at NFP, highlighted the crucial role that environmental insurance can play. However, in many transactions, particularly those in previously undesirable locations that are now in demand, environmental due diligence may be ignored.
“Depending on how the previous owner used the site, there are many ways a site can become contaminated,” he said. “When commencing commercial real estate transactions, local environmental conditions should be considered and known contamination should be quantified and managed.”
Environmental insurance is an important tool for real estate professionals who want to protect their clients from unforeseen liabilities.
“For real estate professionals looking to maximize value for their clients, environmental insurance is an important tool in commercial transactions,” explains Alviggi. “The key to successful brokerages is understanding the intricacies of purchase and sale agreements.”
This type of insurance bridges the gap between known and unknown contamination, especially if additional testing is either limited by the seller or reveals further complications.
Protection for buyers and sellers
Alviggi noted that achieving a mutually acceptable outcome in commercial real estate transactions often requires complicated negotiations over environmental liabilities to be assumed by the buyer or borne by the seller.
“Environmental insurance provides a third party to this transaction and provides both parties with the opportunity to transfer environmental risks to the potential insurer,” he said.
The design of environmental insurance can have a significant impact on the transaction. Buyers generally prefer to be listed first on policies to maximize their protection against unknown contaminants. However, including sellers in post-closing policies can make it easier to complete the transaction and provide mutual protection.
Alviggi notes that sellers and buyers can also agree on how to handle potential uninsured pollution discoveries, dilutions of policy limits, and payment obligations for premiums and deductibles.
“Often sellers are reluctant to allow buyers to perform additional testing,” he said. “In this case, buyers’ knowledge is limited to information from previous transactions that is already publicly available. In this case, pollution liability insurance can bridge the gap between “known” and “unknown” pollution and the intended future use of the property.”
Environmental indemnity is a key feature of these policies and provides protection and coverage for losses caused by environmental pollution, regardless of whether the property is leased, owned or rented. Alviggi urges real estate professionals to learn how liabilities are allocated in contracts, as many choose to have sellers retain certain environmental liabilities or escrow funds until the transaction closes.
Coordinating purchase contracts with environmental insurance companies is also a complex but essential task. “Ensuring alignment between purchase agreements and future insurance policies is a daunting task. However, the lack of distinction between contract terms and insurance conditions can lead to misunderstandings and painful claims settlements,” emphasized Alviggi.
A joint effort
Alviggi also discussed the role of tertiary contracts such as credit contracts and access contracts in environmental insurance.
“In loan agreements, insureds who rely on commercial debt to purchase property enter into environmental compensation agreements with a lender. It is important to note that these agreements can be joint and often involve personal or business guarantors,” he said.
These contracts, which often include indemnification obligations, can extend insurance coverage to additional parties involved in the transaction, but can also complicate the insurance landscape if not managed carefully.
Successfully placing environmental insurance requires a team approach that includes legal, environmental, tax and other professionals. This collaborative effort ensures that all aspects of a deal are covered and that insurance terms accurately reflect contractual obligations and intent.
“Ensuring alignment between purchase agreements and future insurance policies is a daunting task. However, failure to differentiate between contract terms and insurance terms and conditions can lead to misunderstandings and painful claims settlements,” he said.
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2024-04-19 14:14:54
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