Environmental Insurance Applications in Commercial Real Estate

Redeveloping Land Historically Used by a Gas Station Facility

June 19th, 2020

As the Greater Toronto Area evolves into a mature metropolis, it will continue to experience the growing pains that come from rapid expansion.

Rising prices, increased costs and regulations to build, and growing populations and congestion are but a few. However, the fact is that very little untouched, virgin land remains in the City, with the majority of new development and acquisitions being done of previously-occupied sites.

This is important, because, as each site may have several previous and current Occupiers, as well as neighbouring Owners and Occupiers, the likelihood of environmental contamination increases substantially. 

And with the serious ramifications and expenses that go along with Environmental Remediations, as well as potential fines and penalties, doing your environmental due diligence may not be enough to uncover or mitigate all of the possible risks and liabilities.

According to Berkley Canada, between 1991 and 2009, the average total value of fines and penalties levied across Canada was $1.4 million per year. In 2015, the total value of large fines and penalties was $3.9 million, with values consistently exceeding $10 million in subsequent years and peaking in 2017 at $17.2 million. 

When you are in the business of owning, occupying, or developing commercial industrial properties, you cannot even buy or sell unless you conduct these environmental assessments, and that those reports deem the site to be clean.

Even if you did not contaminate the site, but are an owner, you are still on the hook for cleaning it up. Officers of companies become personally liable and unable to hide behind corporate protection. In 2018, a director was ordered to serve 45 days in jail for failing to meet the requirements of the PCB regulations made under the Canadian Environmental Protection Act. 

Banks will generally not provide financing for environmentally-impacted properties. And people, generally, are not willing to take a risk and step into ownership without plans in place to remediate, as well as additional protection to guarantee that that happens.

That is why putting in place the proper environmental insurance policy may make all the difference.

While companies can focus capital expenditures on systems and controls that minimize contaminant releases to soil, groundwater, or air, the use of environmental insurance should be examined as a backstop to a company’s environmental management system, where possible.

With regards to environmental insurance, losses arising from non-compliance or wrongful acts are excluded, and thus, do not remove the responsibility of the policyholder to take the requisite actions to meet standard regulations.

That being said, cover for fines and penalties – which have grown considerably over the past 6 years – can be insured, even in the event of deliberate non-compliance, on a case-by-case basis after careful review of the circumstances (obviously, we do not encourage non-compliance as it generally will result in zero coverage). 

So, with this in mind, let us review a number of case studies provided by Berkley Canada, a boutique Environmental Insurance provider that delivers exceptional expertise and service to their broker partners and insureds.

This week, we are covering our second case study, so let’s begin…

Case Study: Vacant Land ($8 million) – Redeveloped for Mixed Use – Greater Toronto Area

Challenge:

Berkley Canada was charged with the helping to insure a 0.8 acre parcel of land, historically used as a gas station and service facility. Diesel, gasoline, oil and associated contaminant impacts existed beneath the property (and was migrating off-site). Further, the groundwater beneath the property was impacted by a neighbourhood dry cleaner.

Uncovering these facts introduced considerable risk to the Party looking to redevelop and needed to be properly addressed to avoid future roadblocks.

Purchaser’s concerns: claims from neighbours and future occupants.

Note: any likeness to an actual GTA building is accidental. Generic images and diagrams were used for the purpose of this case study illustration. Source: Berkley Canada

Process:

Required Underwriting Information:

• All available environmental reports (e.g., Phase I/II Environmental Site Assessments, Groundwater and Vapour Monitoring) 
• Penultimate Purchase and Sale Agreement 
• Redevelopment and remedial action plan (if applicable)

Cleanup strategy: source excavation of diesel, gasoline and oil impacts and installation of reactive barrier walls.

Outcome:

Pollution Policy Terms: 

• $5 Million Policy Limit 
• 5-year policy term 
• Cost: $295,000 

Benefits of Policy: 

• Purchaser protected against claims from neighbouring property owners and future occupants as of closing date. 
• Enabled financing (lender provided with additional Insured status). 
• Protects directors and officers from government orders (e.g., investigation and cleanup). 
• Covers future indoor air impacts or off-site migration of contaminants due to failure of engineering controls. 
• Risks associated with changes in standards post completion of cleanup are mitigated.

Overall, when it comes to redeveloping or constructing any property, you are already putting enough at risk. Implementing a tailored environmental policy can not only provide access to financing or capital but can allow you to focus on the project at hand. 

We would like to thank our friends at Berkley Canada for providing this professional insight to our readers.

For more information on how Berkley Canada can help you assess and manage environmental risk, as well as put in place the right policies for your protection, please visit www.berkleycanada.com or contact:

Carl Spensieri 
VP, Environmental
cspensieri@berkleycanada.com
416-594-5019

Conclusion

This is a continuously evolving situation…

Whether you are an Investor or Occupier or Lender we understand that the impact of the COVID-19 pandemic on your business may be significant. All parties involved have keen issues they are focused on and potentially different priorities at this moment. Proper and transparent communication is what will sustain and strengthen the relationships that will get us to the other side… Just remember…

We are all in this together…

DISCLAIMER: All information herein is for informational purposes only. This is not intended as professional legal, insurance, tax, or accounting advice. We are not liable for any damages, real or perceived, as a result of you receiving or consuming this information. Please consult your attorney, accountant, insurance broker, or other counsel prior to making any decisions… 

Goran Brelih, SIOR

Senior Vice President, Broker
Cushman & Wakefield ULC, Brokerage.
www.cushmanwakefield.com
Immediate Past President, SIOR – Central Canada Chapter
www.siorccc.org

Office: 416-756-5456
Mobile: 416-458-4264
Mail: goran.brelih@cushwake.com
Website: www.goranbrelih.com