Environmental Insurance: A Risk Management Tool for Real Estate

Abstract

Traditional risk management tools including contract allocation and reliance upon statutory defenses or government releases can be incomplete, contentious, and costly solutions to address risks associated with environmental liability and cleanup obligations in real estate transfer and property ownership. Such traditional methods leave environmental risk for the interested parties in the real estate transaction to bear over time and bring added new risks to the parties. Environmental insurance transfers all or part of the risk to a third-party insurance company (insurer) that is not a participating party in the transaction, thereby taking insurable environmental risk out of the transaction. Further, environmental insurance can add positive value to the transaction by bringing necessary risk identification and validation, and loss minimization and claims handling expertise to the transaction by virtue of the underwriting and claims management process, and add the financial strength and expertise of a qualified insurer. Insurance is often perceived by lenders, investors, developers, contractors, tenants, and future purchasers as a positive assurance against environmental risk associated with the property, allowing business relationships and financing to proceed more smoothly. In this way, environmental insurance serves as a more comprehensive and complete risk management tool for the real estate transaction and property ownership.