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Environmental Exposures - Pension Fund Real Estate Portfolios

This factsheet highlights the main sources of environmental liability exposures for owners of Pension Fund Real Estate Portfolios along with an assessment of insurance programmes typically purchased for this class of business.

Environmental Liability Exposures

On first assessment, such portfolios do not pose a significant threat to the environment. However in certain circumstances, significant hazard issues can arise and the client is unlikely to be insured for them, including:

  • The use by tenants of the property;
  • The historical use of the property for which the current owner may be responsible for;
  • The presence of asbestos containing material within the building fabric; and
  • The bulk storage of fuels for heating or emergency power generation.

Focus on Tenants

Tenants within Real Estate Portfolios may undertake hazardous activities. While the tenant is in place, the liability for damage will remain with them. However, if a tenant were to liquidate, the liability will fall back to the owner of the property. Often an environmental incident can cause the tenant to liquidate. Similarly, if a tenant vacates and leaves a property contaminated then the landlord can incur significant clean-up and legal costs whilst chasing the vacated tenant.

Environmental insurance can be used to protect both the landlord and the tenant as an additional insured – in some cases, the tenant can be made to pay for the insurance alongside the property programme.

Focus on Historical Liabilities

Under UK legislation, if the polluter cannot be found, the current occupier or owner of a property is most likely to be held responsible for pollution present on the site. Therefore, while a current activity may be low risk, it is not necessarily the case that historical use of the property has been the same. As you would expect, this risk increases as the number of properties within the portfolio increases.

Further liabilities may also attach from the ownership of other properties or companies – say through the sale and purchase of properties in the past.

Carrying out investigation may not be appropriate – not only due to cost and disruption, but also dealing with the outcome of the investigation – what do you do if you discover a problem and you have no protection?

Focus on Bulk Fuel Storage

Although predominantly associated with industrial use, even office locations have bulk fuel storage for emergency power or heating support. However, unlike more hazardous industries the individuals responsible for this bulk storage are not experienced or trained in its management. Combined with the intermittent use of the fuel and increasing age of the infrastructure, the frequency of events caused by these tanks leaking is increasing.

Potential Scale of the Issue

From experience, in the event that a source of historical pollution is identified under an office location, it is often the disruption to the activities within the office that cause the most impact – how will the tenant continue to operate while remediation is on-going.

Notwithstanding the above, clean-up of these conditions can often exceed £100,000, depending on the scale of the building and its proximity to sensitive neighbours. Environmental Insurance Factsheet Pi-Property Insurance Page 2 of 2

Gaps in Existing Cover

An element of pollution cover is provided within General Liability (GL) policy wordings through an amendment to the pollution exclusion that includes cover for “unintended and unforeseen, sudden and accidental” events. However, certain definitions, exclusions and conditions attached to the broader GL wordings give carriers the ability to challenge the validity of the cover in the event of a loss. The main areas of concern are:

  • Definition of damages does not include costs incurred by Regulators;
  • Wear and tear results in gradual pollution events; and
  • Lack of monitoring could result in an event being foreseen.

Notwithstanding these concerns over the extent of pollution cover actually provided under GL policies, there are further more obvious gaps in cover where the GL wordings intend to provide no cover whatsoever, including:

  • No cover for gradual pollution;
  • No on-site or under-site (first party) clean-up costs;
  • No cover for statutory (regulator) claims for costs;
  • No cover for Environmental Damage;
  • No cover for own business interruption due to an environmental incident; and
  • No cover for pre-existing ground contamination.

Environmental Insurance Solutions

In response to these deficiencies in GL wording, we have worked with some of the UK’s leading underwriters to develop an environmental damage policy aimed at providing broad environmental liability protection for clients within this sector. These policies offer the following enhancements to pollution cover:

  • Cover for gradual and “sudden and accidental” events;
  • On-site as well as off-site clean-up costs – including those resulting from damage to biodiversity;
  • Regulator “statutory debt” claims as well as third party “damages” claims;
  • Cover for third party bodily injury and property damage claims;
  • Positive cover for third party asbestos liability;
  • Positive cover for historical pollution events;
  • Costs incurred to prevent an environmental damage;
  • Loss of Rental Income; and
  • Recognition of the insured’s need to immediately notify, and act with, regulators

Underwriting Information

The following underwriting information is required to assess these risks:

  • The sites age and previous use;
  • The sites location – considering the sites neighbours, underlying geology proximity to water bodies;
  • The value of the businesses operating from the properties.

Further Considerations

The following consideration should be made with respect to Environmental Insurance Programmes

  •  Asbestos – most policies will have this type of exclusion, however they can be modified following review of the asbestos management plan;
  •  Historical Conditions – such conditions are likely to be the most significant at office locations, it is therefore essential that such cover is purchased.
  •  Pension Fund Trustees – protection extended to Trustees

What to do next?

For more information on the environmental exposures regarding Pension Fund Real Estate please do not hesitate to contact us.

Call 01789 761660

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