Source: http://www.propertycasualty360.com, November 27, 2013
By: Amanda Duncan
Vacancy isn’t the only headache property owners can face: Empty buildings and land can cause pollution-related liability. Learn about possible options to mitigate environmental liabilities through insurance and risk management.
As America’s real estate crisis recovers along with our economy, more than 14 million properties remain vacant or abandoned across the country. Real estate is considered a vacant property when it is not currently occupied or in use. This includes empty lots as well as structures.
Cities like Detroit, Cleveland and Las Vegas are dealing with thousands of undeveloped lots, empty houses and even entire neighborhoods, as well as commercial, retail and industrial properties. This has resulted in an increase in crime and lower property values for surrounding areas. Local communities left to care for these properties by default do not have the time or resources to keep the properties in good condition, thus causing an increase in exposure to risks like vandalism, fire, theft and water damage. In turn, these risks hinder the possibility of resale and revitalization in the future as economic conditions continue to improve, leading to possible setbacks throughout our communities.
Several environmental risks are associated with all types of vacant properties. Older buildings may have existing asbestos insulation and tiles, as well as lead paint and lead piping. All buildings constructed before 1980 have the potential to contain both asbestos-containing materials and lead-based paint. Leaking heating oil tanks, pipes and appliances are prevalent, as well as any chemicals or lubricants stored on premises in garages or sheds.
Unknown underground storage tanks may exist onsite as well. Underground storage tanks that are not maintained regularly cause soil and groundwater contamination at the subject property itself as well as surrounding real estate. Retail shopping centers or commercial office buildings that have housed dry cleaners, printers, or restaurants have serious concerns pertaining to the improper storage and disposal of chemicals, inks, dyes and grease/oils.
Poor maintenance, concrete cracks, dilapidated roofing, clogged sewer pipes and broken sprinkler systems can result in water intrusion and mold growth. Mold grows rapidly in warm and moist environments—bathrooms, basements, under carpeting, inside walls and HVAC ducts—and easily can spread throughout a commercial, retail or residential structure, impacting others.
Weather-related events such as flash flooding exacerbate indoor water and mold issues, and cause excessive surface water and silt runoff affecting neighboring properties or waterways such as ponds, streams or rivers. Should a waterway become impacted, not only is the quality of water at risk, it threatens plant and animal life as well.
Vacant buildings and land are attractive locations to illegally dispose of hazardous waste, drums and containers—a practice commonly called “midnight dumping.” The drums and containers are almost never appropriate to properly contain the waste and the contents are easily released onto the property.
Criminal activity at abandoned sites is a major concern. Criminals establish illegal methamphetamine labs in abandoned properties, with the remnants left behind after they move on. These residual materials cause widespread contamination to a facility and can cost thousands of dollars to restore the property back to its previous condition.
Often city officials are unsure who is legally responsible for dealing with these environmental hazards. If the property owners can be tracked down, they may be held liable. Banks taking over properties via foreclosure and local municipalities are left with figuring out how to deal with these issues. Some local organizations even attempt adverse possession in hopes of improving their declining neighborhoods.
Adjacent property owners or additional on-site tenants also are affected by contamination stemming from a vacant property. Mold growth easily spreads between units. Leaks, toxic fumes and mold can devastate innocent landowners.
Generally, environmental issues are excluded from most general liability or property insurance policies, including defense costs. So property owners, cities and financial institutions that did not cause a problem may still have to defend themselves from suits that could arise from the threat of contamination.
Owners also must spend the time and money to figure out the source of the contamination, then implement a solution that can sometimes take many years to complete. Environmental insurance policies can be an effective tool for concerned parties to manage the risks while protecting their assets as the real estate market recovers.
Many city officials are moving forward with redevelopment plans, which include the demolition and removal of abandoned structures. The contractors hired to perform the work will come into contact with many of these environmental exposures during the course of debris removal, site preparation, demolition, grading, landscaping, and other activities.
A contractors’ pollution liability (CPL) insurance policy protects contractors if a pollution condition occurs as a result of their work or work performed on their behalf (i.e., subcontractors). Defense costs are also covered under this type of policy. For example, if a demolition contractor causes a release of asbestos fibers, causing unsafe air quality conditions, an injured third party could sue. An excavation contractor could unknowingly unearth an abandoned storage tank and puncture it, causing a leak and subsequent damage to a neighboring property.
Contractors do have options available to them to adequately protect themselves from any resulting claims or lawsuits, as a CPL policy provides protection for both ongoing and completed operations after the contractor has finished work on the project. Coverage can be purchased on a claims-made or occurrence basis and be tailored for specific projects/contracts. A CPL policy addresses potential contaminants such as asbestos, lead, silica and mold. Additional features of a CPL program may include coverage for over-the-road spills during transit and disposal of waste at a non-owned location, such as a landfill. Limits of liability generally start at $500,000 and can go upward to $50 million.
Environmental insurance also exists for the property owner or manager, including banks or other financial institutions that have taken over vacant properties via foreclosure. Occupied buildings have various environmental exposures, but empty structures with no supervision or maintenance can turn a small issue into a multi-million-dollar remediation project.
Site pollution, or pollution legal liability, is a policy crafted to cover both third- and first-party claims, including defense costs, resulting from pollution conditions at, on, under, or emanating from scheduled locations (in this instance, vacant properties). Variations of this policy include secured creditor environmental insurance and lender liability, which protect financial institutions and borrowers throughout the buying and selling process. Many policies are crafted especially for commercial property portfolios, and there is no exclusion for vacant properties.
These policies can be tailored to cover environmental hazards including mold, storage tanks, transportation pollution, illicit abandonment, in-place asbestos and lead, soil/groundwater contamination, air and noise pollution, and waste disposal to non-owned locations. Business interruption image restoration may also be purchased and some policies today even assist with green standards compliance.
Most policies include coverage for natural resources damages within the policy form itself. Coverage is written on a claims-made basis and policy terms generally vary from 1 to 10 years in length. Policy terms can be built to fit the needs of the specific property owner, lender requirements and the risks associated with that particular location. Much like the CPL policy, liability limits can range from $500,000 to beyond $50 million, depending on the complexity of the property schedule and any transactional requirements.
Vacant properties will remain a large part of real estate landscape for the next several years. Focusing on the potential issue now will lend to a more successful outcome as our economy continues to recover. When at all possible, property owners, municipalities, and financial institutions will need to best provide protection for these properties as well as adjacent property owners or tenants. Supervision, security, maintenance, and environmental awareness—including the purchase of adequate insurance—will manage challenges as well as create proactive solutions for redevelopment in the future.