Environmental Liability Insurance

By: Mary S. Busby, Esq.
Environmental Practice Leader- Oswald Companies

Environmental Liability 101 – Real Estate

Environmental consultants performing Phase I Environmental Site Assessments to the All Appropriate Inquiry (AAI) Standard (ASTM 1527-05), know that the primary reason for performing these assessments is to help the client achieve a defense to CERCLA liability (e.g., innocent purchaser). We can often lose site of that in the hurry to get financing or close a deal, especially on such a tight budget. CERCLA makes an owner or operator of property liable for pollution conditions at, under or migrating through that property. This liability is “strict” and attaches without regard to fault. Although it has yet to be fully tested in court, the AAI Phase I ESA should allow a purchaser of property to assert that it did not know about adverse conditions (was innocent) at the property when it bought it, and therefore, it should not be held liable for those conditions.

So much environmental liability rides on the Phase I report, which costs on average about $2,700 and is often prepared in less than a two-week timeframe. When our clients stop to think about it in that light, it becomes clear that it would be risky to place all of their reliance on that one document.

Real estate attorneys will draft what are ostensibly iron-clad indemnifications that many clients also rely on to help them avoid environmental liability. For example, the seller may agree to hold the buyer harmless and indemnify the buyer for any environmental conditions existing at the property prior to sale. An indemnification is nothing more than a contractual right to sue and is only as good as the financial strength of the party giving it and the willingness of that party to abide by the terms of the contract. It does not provide any more liability protection than that. When things fall apart, it amounts to an invitation to litigation.

Once a client looks at the Indemnification in that light, both the client and the attorney realize it would be best to proactively engage in litigation avoidance. That is what insurance provides.

What Environmental Liability Insurance Covers

The broadest policy form will cover on- and off-site cleanup for new and preexisting conditions. It will also cover third-party claims for bodily injury and property damage as a result of those conditions. It will cover non-owned locations (such as non-owned disposal sites) for cleanup, bodily injury and property damage. It will also cover cleanup, bodily injury and property damage liability for pollution conditions arising from transported cargo or waste. In addition, the policy will cover business interruption suffered as a result of pollution conditions. None of these things are expressly meant to be covered on any policy other than an environmental liability policy.

You should advise your clients to seek the advice of a trusted insurance broker that specializes in environmental coverages, as it requires expertise in environmental and contract law. We often negotiate “manuscript endorsements” that we craft as a part of the insurance contract. As a trusted advisor, you would not want to recommend that your client seek the advice of a generalist on this subject.

The most overlooked reason for buying environmental liability insurance is legal fees. Legal fees are often the most costly portion of an environmental claim. Your client does not have coverage for the cost of these fees on any other insurance policy that it has and will be out of pocket for its defense costs if it does not have an environmental liability policy.

Case Study – Green Acre

This case is still in litigation. A small real estate developer wanted to purchase a vacant lot to build a strip center. He had an AAI Phase I performed, and no RECs were found. After purchasing the property, the EPA swooped in and took Corrective Action under RCRA against the new property owner, holding him liable for the cleanup of a 40-acre former RCRA facility. This buyer did everything (except one thing) right. What happened was that his one acre was the 40th acre from fence line to fence line of the former facility, and a 10-day storage pad (39 acres away and downgradient) at the facility had run afoul of RCRA. The former owner of the facility was gone, and the land was in Receivership. This innocent purchaser under CERCLA was the first to purchase a piece of the bankruptcy estate, and was the equivalent of the “Last Man Standing.”

The first question that I usually get asked when I tell this story, is “Did the environmental consultant have good Errors and Omissions Insurance?” I respond by stating that the environmental consultant was arguably correct in finding no RECs. The 10-day pad was 39 acres away and downgradient and very unlikely to have an adverse impact on the green acre that was the subject of the Phase I.

Now the innocent purchaser, who resembles many of your average clients, has completely lost the value of his real estate purchase, as he into the hundreds of thousands in legal fees. Had he simply gone one step farther and bought an environmental liability policy to cover this property at the time of purchase, his legal fees and ultimate liability would be covered.

A site with no RECs is inexpensive to cover, and is usually a drop in the bucket when compared to the value of the deal. Full coverage could have been placed for less than $10,000. This client is angry and ready to sue his consultants, his lawyers and anyone else he can find who led him into his current circumstance. This could all have been avoided.


Environmental Liability Insurance is one highly advisable component to any transaction involving real estate. As a trusted consultant, it is in both your clients’ and your best interests to guide them to the other experts that can help them.

For additional information, please contact Mary Busby at Oswald Companies at 216-367-4920 or at mbusby@oswaldcompanies.com.

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