Negotiate 11 Safeguards in Insurance Clause for 'Hazardous' Materials Tenant

A big part of successfully running a shopping center is ensuring the safety of tenants, their employees, your employees, and customers. With security cameras or a security guard and alarms, you might think that you have the safety aspect of your operations locked down. But here’s something that could be overlooked and that can come back to burn you, figuratively and literally: inadequate or no insurance for tenants whose businesses create waste that’s dangerous, either in the short or long term. And if you haven’t thought of this, your leases might not include provisions that use insurance as the stopgap measure that can leave you liability free and put the onus on the tenant for whatever risks it’s opening you up to. Here’s how to negotiate a lease that protects you from risky tenants.

Don’t Rely on Indemnification

Dry cleaners, printers, and nail salons are just a few types of tenants that work with potentially hazardous materials. If those hazardous materials leak into your uncontaminated building or center, you could face some serious problems. 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 might 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—that is, protect you against damage or financial loss. 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 specific insurance called “environmental insurance.” The entire point of environmental insurance is to protect you if the tenant contaminates your building or center.

What to Put in Clause

Make sure to negotiate a lease clause that ensures that the tenant’s environmental insurance policy is adequate in case of an emergency. Like our Model Lease Clause: Require Tenant to Get Environmental Insurance Clause, below, yours should include these 11 safeguards. 

Safeguard #1: Require tenant to get PLL insurance policy. Since the tenant is the hazardous materials user or generator, make it responsible for getting a “pollution legal liability” (PLL) insurance policy before moving into its space. Also, make sure you get an opportunity to review and approve the language of the policy to ensure there’s appropriate coverage [Clause, par. a(i)].

PLL policies are appropriate coverage for “greenfield sites”—that is, sites believed to be free from preexisting environmental contamination that could trigger governmental or third-party actions. A PLL policy can provide coverage with limits ranging from $1 million to $100 million, depending on what’s bought. If the insurer requires you or the tenant to disclose environmental conditions in the space before it issues the policy, be careful. Only agree to disclose what you (or the tenant) “actually know,” rather than agreeing to disclose anything that “you knew or should have known.” It’s also crucial to work with your attorney when disclosing this information.

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. Be sure to tell the insurer that those written materials are the extent of your and/or the tenant’s actual knowledge. That reduces the potential for future disputes with the insurer over whether you provided all relevant information when the policy was issued.

Safeguard #2: Require tenant to pay costs of policy. Make the tenant responsible for paying all costs related to getting the PLL insurance policy and keeping it in effect. This should include:

• The cost of premiums and deductibles;
• Providing the insurer with any required additional information resulting from environmental incidents;
• Follow-up testing that the tenant must perform during the lease to continue its insurance coverage [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.

Note that a PLL policy has a one-time, up-front cost based on a small percentage of the policy’s aggregate limit of liability. 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. For example, 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).

Safeguard #3: Get ‘named insured’ status. Require the tenant to list you as an additional “named insured” on the PLL insurance policy. 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.

If you and the tenant are both named insureds, which of you will get the proceeds from the PLL insurance policy if there is environmental contamination? The insurer will pay the party that performs the cleanup. For example, suppose the tenant doesn’t clean up the 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.

Safeguard #4: Require coverage for new and preexisting conditions. Specify what the PLL insurance policy must cover, and over what time period. It’s critical to have coverage for claims arising from “new conditions.” New conditions coverage protects insureds from claims associated with environmental contamination that occurs after the policy is issued.

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 [Clause, par. b(i)].

Practical Pointer: Even though your building or center is on a greenfield site, there is always the possibility that unknown preexisting conditions might be present. For this reason, the PLL insurance policy should cover these conditions.

Safeguard #5: Specify scope of coverage. Whether the policy covers only new conditions or preexisting ones, 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, as well as the cost to defend those claims. 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—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 [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 [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.

Cleanup of off-site hazardous materials. Require that the policy 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 [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.

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 [Clause, par. b(iv)]. For example, if toxic chemicals (dry cleaning solvents such as PCE) leak from the tenant’s space into your building’s or center’s common areas and the areas are evacuated for several days or even weeks, the PLL insurance policy should cover resulting business losses for you, the tenant, and your other tenants.

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 [Clause, par. b(iv)]. Environmental contamination from the tenant’s space may seep through the ground or groundwater into neighboring properties. The owners, tenants, and occupants of those properties might sue you for their resulting losses—and win, he warns. Business interruption coverage isn’t in a PLL policy automatically. You should require the tenant to negotiate with the insurer for it.

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 [Clause, par. b(v)]. 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 can be difficult.

Additional coverage. A typical PLL insurance policy defines covered “pollution conditions” 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. These conditions must not be naturally present in the environment in the amounts or concentrations discovered.

However, certain types of environmental conditions aren’t typically covered by the PLL insurance policy unless they are specifically included through endorsements to the policy. For example, 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)].

Safeguard #6: Set limits on deductible. Make sure you limit the amount (both individually and in aggregate) of the deductible the tenant can have on the policy. Otherwise, to keep its premiums low, the tenant might choose a policy with excessive deductibles [Clause, par. b(viii)], which means that if environmental contamination does occur, it may not have enough money to pay the deductible—and you could be left holding the bag.

Safeguard #7: Set limits on liability. Set a minimum amount for the required insurance coverage. You’ll need to set both per-occurrence and aggregate liability limits [Clause, pars. b(ix) and b(x)]. Ask your insurance broker how much insurance the tenant should carry. Make sure that the amounts you set are high enough to pay possible cleanup and legal defense costs.

Safeguard #8: Make failure to get insurance an ‘event of default.’ Ensure that the tenant knows that 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” [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.

Safeguard #9: Keep tenant answering 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 [Clause, par. c]. This way, the tenant’s PLL insurance policy isn’t the sole protection available to you.

Safeguard #10: 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. 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—for example, 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 [Clause, pars. a(ii)(A) and a(ii)(B)].

A claim may arise after the tenant moves out of its space, 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.

Safeguard #11: 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. Although you will 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. Second, it helps you identify any additional claims to be made in time to notify the insurer before the policy expires.

The inspection right is extremely important, but should not be included in the environmental insurance clause. Instead, put it in the section of the lease in which you give yourself a right to gain access to and inspect the space. This helps put the inspection right in a less contentious light.

Also, make sure 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.