Have Tenants Get Environmental Insurance to Protect Your Uncontaminated Building/Center

Many tenants—such as dry cleaners, photo processors, printers, gas stations, and nail salons—use or generate hazardous materials in their spaces. If those hazardous materials leak into your uncontaminated building or center, you could face big trouble. You and the tenant could be sued by anyone whose property is damaged by the contamination or who becomes ill or loses business because of it.

While you may think that the tenant's indemnification clause in your lease will protect you from those lawsuits, you may be wrong. The tenant could be wiped out financially—or go bankrupt—as a result of the lawsuit or the cost of performing the required cleanup, before it has a chance to indemnify you. Then you'll have to pay to defend yourself and for any damages the injured third party wins. Plus you may be forced to pay sky-high environmental cleanup costs and fines.

That's why you should require tenants that use or generate hazardous materials to get “environmental insurance,” say Connecticut environmental attorneys Andrew N. Davis and Catherine K. Lin. Environmental insurance protects you if the tenant contaminates your building or center. And although insurance covering environmental risks used to be expensive and full of “exclusions,” policies are now more affordable and designed to cover today's environmental risks.

Davis and Lin suggest putting 11 safeguards into your lease to ensure that the tenant's environmental insurance policy is adequate to protect your interests. We'll tell you about those safeguards and give you a Model Lease Clause on p. 3 that you can adapt and use in your leases. It has 10 of the safeguards; the 11th safeguard goes elsewhere in the lease.

Which Insurance Policy to Require

Don't rely on the tenant's commercial general liability (CGL) policy to protect you if your building or center becomes contaminated, warns Lin. Since the mid-1980s, most CGL policies specifically exclude coverage for claims or losses caused by environmental contamination. This is known as the absolute pollution exclusion, she explains. Today's environmental insurance products fill the gap by paying cleanup and legal defense costs and money to injured third parties, she explains.

What kind of environmental insurance should you require? Your building or center is on a site that's believed to be free from preexisting environmental contamination that could trigger governmental or third-party actions—in environmental terms, a “greenfield” site. So the appropriate environmental insurance coverage to require comes in a “pollution legal liability” (PLL) insurance policy, say Davis and Lin. This policy can provide coverage with limits ranging from $1 million to $100 million, depending on what's bought, says Davis. And its term typically ranges from one year to 10 years, with a five-year term being the most common, he adds. For more information about PLL insurance policies in general, see the box on p. 5.

11 SAFEGUARDS FOR ENVIRONMENTAL INSURANCE CLAUSE

Make sure that your environmental insurance clause, like our Model Lease Clause, includes the first 10 of the following 11 safeguards (you'll put the 11th safeguard elsewhere in the lease):

* Require Tenant to Get PLL Insurance Policy

Since the tenant is the hazardous materials user or generator, make it responsible for getting the PLL insurance policy. And require it to get that insurance before it moves into its space, says Davis. You shouldn't be responsible for getting the policy, he says. But make sure you get an opportunity to review and approve the language of the policy to ensure there's appropriate coverage, he adds [Clause, par. a(i)].

Practical Pointer: If the insurer requires you or the tenant to disclose environmental conditions in the space before it issues the policy, be careful, warns Lin. Only agree to disclose what you (or the tenant) “actually know,” rather than agreeing to disclose anything that “you knew or should have known,” she says. Also, make sure that this disclosure requirement is limited to providing existing written materials—such as previous environmental studies prepared on your behalf or environmental site assessments conducted by the tenant, says Davis. And make sure you tell the insurer that those written materials are the extent of your and/or the tenant's actual knowledge, he says. That reduces the potential for future disputes with the insurer over whether you provided all relevant information when the policy was issued, he explains.

* Require Tenant to Pay Costs of PLL Insurance Policy

Make the tenant responsible for paying all costs of getting the PLL insurance policy and keeping it in effect, says Lin. This should include the cost of premiums, deductibles, and providing the insurer with any required additional information resulting from environmental incidents or follow-up testing that the tenant must perform during the lease to continue its insurance coverage, she explains [Clause, par. a(ii)]. Without this lease requirement, the tenant may try to claim that you're responsible for paying some or all of these costs.

* Get ‘Named Insured’ Status

Require the tenant to list you as an additional “named insured” on the PLL insurance policy, says Lin. The tenant will also be a named insured on the policy [Clause, par. b(vi)]. This way, you can file your own claim for coverage without having to wait for the tenant to file one first, she explains.

If you and the tenant are both named insureds, which of you will get the proceeds from the PLL insurance policy if there's environmental contamination? The insurer will pay the party that performs the cleanup, says Lin. For example, suppose the tenant doesn't clean up environmental contamination, so you step in and do it yourself, exercising the self-help right elsewhere in the lease that lets you do that. The insurer will pay the policy proceeds directly to you, as one of the named insureds.

* Require Coverage for New and Preexisting Conditions

Specify what the PLL insurance policy must cover and over what time period, says Davis. It's critical to have coverage for claims arising from “new conditions,” he says. New conditions coverage protects insureds from claims associated with environmental contamination that occurs after the policy is issued, says Lin.

Depending on your building or center and its location, you may also want to consider getting coverage for “preexisting conditions,” which is environmental contamination, known or unknown, that existed at the site before the policy was issued, advises Davis [Clause, par. b(i)]. (Even though your building or center is on a greenfield site, there's always the possibility that unknown preexisting conditions might be present, Davis warns. That's why the PLL insurance policy should cover these conditions.)

* Specify Scope of Coverage

Whether the policy covers just new conditions or preexisting ones, too, its coverage should include:

Injury and damage caused by contamination. Require the policy to cover personal injury and property damage claims caused by the tenant's environmental contamination, says Davis, as well as the cost to defend those claims. And it should cover the tenant's costs of investigating and cleaning up the environmental contamination in or outside the space, either voluntarily under any state or local voluntary cleanup program or as required by any governmental authority or court ruling, he adds—including any required post-cleanup monitoring. Be sure that the policy covers personal injury and property damage claims by both first and third parties, including owners, operators, and occupants of any nearby properties, Davis adds [Clause, par. b(i)].

On-site cleanup costs. Make sure the policy covers all costs associated with environmental investigations and cleanups of the environmental contamination caused by the tenant's operations at the space, says Davis [Clause, par. b(ii)]. Otherwise, you may be held responsible for paying those costs. Plus if the tenant goes bankrupt trying to pay those costs, you're out a tenant, he warns.

Cleanup of off-site hazardous materials. Require the policy to also cover costs connected to the investigation or cleanup of hazardous materials at any of the off-site treatment, storage, or disposal facilities—that is, “non-owned, off-site locations” in insurance lingo—to which the tenant sent its waste, says Davis [Clause, par. b(iii)]. How does this coverage help you? If the tenant must clean up off-site contamination—a long, drawn-out, and expensive process—without the help of insurance, it may not have enough money left to pay your rent or any required on-site cleanup costs, he warns.

Business interruption. Make sure the insurance covers business interruption. This should cover any loss from any business interruption that you, the tenant, or other tenants suffer as a result of the tenant's environmental contamination, says Lin [Clause, par. b(iv)]. So, for example, if toxic chemicals (say, dry cleaning solvents such as PCE) leak from the tenant's space into your building's or center's common areas and everyone is evacuated for several days or even weeks, the PLL insurance policy should cover resulting business losses for you, the tenant, and your other tenants, she explains.

Practical Pointer: You may want to broaden the coverage you require to include any business interruption suffered by owners, tenants, and occupants of nearby buildings and centers, too, says Lin [Clause, par. b(iv)]. Environmental contamination from the tenant's space may seep through the ground or groundwater into neighboring properties. And the owners, tenants, and occupants of those properties might sue you for their resulting losses—and win, she warns. Business interruption coverage isn't in a PLL policy automatically, she says. So you should require the tenant to negotiate with the insurer for it, she says.

Loss of property value. Ideally, you'll want the policy to cover any loss of value to your building or center resulting from the tenant's environmental contamination, says Lin [Clause, par. b(v)]. But getting this coverage can be tough. And if the tenant does get it, you may have trouble collecting on it because proving a loss in value for a building or center is hard, she warns.

Additional coverage. Certain types of environmental conditions aren't typically covered by the PLL insurance policy unless they're specifically included through endorsements to the policy. For example, Lin says, you may require that the tenant have its insurer add endorsements covering claims relating to:

• Underground storage tanks;

• Asbestos-containing materials; and

• Mold [Clause, par. b(vii)].

* Set Limits on Deductible

Make sure you limit the amount (both individually and in the aggregate) of the deductible the tenant can have on the policy, warns Davis. Otherwise, to keep its premiums low, the tenant might choose a policy with excessive deductibles [Clause, par. b(viii)]. Then, if environmental contamination occurs, it may not have enough money to pay the deductible—and you could be left holding the bag, he warns.

* Set Limits on Liability

Set a minimum amount for the required insurance coverage, says Davis. You'll need to set both per occurrence and aggregate liability limits, he explains [Clause, pars. b(ix) and b(x)]. Ask your insurance broker how much insurance the tenant should carry, Davis says. Make sure that the amounts you set are high enough to pay possible cleanup and legal defense costs, he warns.

* Make Failure to Get Insurance an ‘Event of Default’

Say that the tenant's failure to get and maintain the PLL insurance policy in effect in accordance with the terms in the lease will be an “event of default, says Davis” [Clause, par. a]. This is important if the tenant violates these insurance requirements and the violation isn't cured—that is, fixed—by a certain deadline. You can then use the remedies the lease gives you against the tenant for an event of default, such as terminating the lease, Davis notes.

* Keep Tenant on the Hook to You

Make it clear in the lease that even if the tenant gets the required PLL insurance policy, you're not releasing it from its responsibilities to you as set out in the tenant's indemnification clause, says Davis [Clause, par. c]. This way, the tenant's PLL insurance policy isn't the sole protection available to you, he explains. That is, if a spill or any other type of environmental incident isn't covered by insurance, the tenant is still obligated to indemnify you.

* Require Insurance to End After Lease Ends

Don't let the PLL insurance policy end before or at the same time that the lease ends, says Davis. Instead, require the tenant to keep the insurance in effect—that is, include an “extended reporting period” endorsement—to allow claims to be made for a certain amount of time—say, from 90 days, up to a year—after either the lease ends or the investigation or remediation of an environmental condition is completed to the satisfaction of the appropriate government agency, whichever is later, he says [Clause, pars. a(ii)(A) and a(ii)(B)].

A claim may arise after the tenant moves out of its space, Davis points out. But since PLL insurance policies are typically written on a “claims-made basis”—not on an “occurrence basis”—the policy protects you only while it's in effect. Once it expires, you can't file any more claims under it, even if the contamination began before the policy expired, he explains.

* Get Right to Conduct Post-Lease Inspection

Get the right to conduct an environmental inspection of the space just before or after the lease ends but before the PLL insurance policy expires, say Davis and Lin. Although you'll probably have to pay for this inspection, there are two good reasons to conduct it. First, it lets you create a post-lease environmental baseline that you can use as a starting point for the next tenant in the space, says Lin. Second, it helps you identify any additional claims to be made in time to notify the insurer before the policy expires, says Davis.

But don't put this inspection right in the environmental insurance clause, advises Lin. Instead, put it in the section of the lease in which you give yourself a right to gain access to and inspect the space, Lin says. This helps put the inspection right in a less contentious light, she explains.

And make sure that you include language that makes it clear you don't have to inspect the space—that it's a right and not an obligation. It should say that if you choose not to inspect the tenant's space, you have not waived your rights under the lease, including those relating to the PLL insurance policy, adds Lin.

CLLI Sources

Andrew N. Davis, PhD, Esq.: Partner, LeBoeuf, Lamb, Greene & MacRae LLP, Goodwin Sq., 225 Asylum St., 13th Fl., Hartford, CT 06103; (860) 293-3514.

Catherine K. Lin, Esq.: Special Counsel, LeBoeuf, Lamb, Greene & MacRae LLP, Goodwin Sq., 225 Asylum St., 13th Fl., Hartford, CT 06103; (860) 293-3568.

Howard M. Tollin: Managing Director, Breitstone & Co. Ltd., 534 Willow Ave., Cedarhurst, NY 11516; (516) 569-2550.

Sidebar

* Q&A on Pollution Legal Liability Insurance

Here are some commonly asked questions and answers about pollution legal liability (PLL) insurance:

WHAT DOES PLL INSURANCE COVER? PLL insurance covers the cost of cleaning up pollution on or under the insured property and third-party claims (such as claims by other tenants or regulatory agencies) resulting from “pollution conditions” on, under, or beyond the boundaries of the insured property, says insurance expert Howard M. Tollin.

Coverage can include:

• On-site and off-site cleanup of pollution conditions;

• Claims by third parties for on-site and off-site bodily injury and property damage;

• Claims by third parties for on-site cleanup of disposal sites used during the cleanup of pollution conditions;

• Claims by third parties for off-site cleanup from pollution conditions;

• Costs related to the transportation and disposal of hazardous materials generated at the site;

• Costs of defending claims and lawsuits (within the limits of liability); and

• Business interruption expenses.

WHAT ARE ‘POLLUTION CONDITIONS’? “Pollution conditions” are typically defined as the discharge, dispersal, release, or escape of any solid, liquid, gaseous, or thermal irritant or contaminant—such as smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, medical waste, and waste materials—into or on land, a structure on land, the atmosphere, or a body of water, says Tollin. These conditions mustn't be naturally present in the environment in the amounts or concentrations discovered, he adds. They include preexisting and new conditions discovered during the policy period, he says.

HOW MUCH DOES PLL INSURANCE COST? PLL insurance for an office building or shopping center on a “greenfield” site—that is, an uncontaminated site—is affordable, says Tollin. It's a one-time, up-front cost based on a small percentage of the policy's aggregate limit of liability, he says. This percentage will vary, depending on the nature of the risk, the amount of the deductible, the length of the policy's term, and the liability limit, he explains.

For example, Tollin typically sees a cost of 2 percent for a five-year, $1 million PLL policy ($20,000), or 1 percent for a 10-year, $10 million PLL policy ($100,000).