PLL: The Foundation of the Environmental Marketplace
By John J. Heft, Construction Executive
Contamination caused under intended and accidental purposes poses a variety of public health and environmental risks to the surrounding area and its inhabitants. This includes thousands of locations nationwide, which range from abandoned buildings to industrial sites tainted by improper disposal of toxic materials, accidental spills, illegal dumping, leaking underground storage tanks, and other hazardous practices and incidents.
While some of these sites may not constitute a significant risk to humans, wildlife or the landscape, others involve intensive cleanups, massive remediation costs and efforts performed over years. Under such circumstances, many investors and developers have been known to walk away from commercial real estate deals even suspected of hazardous conditions.
For these reasons, among others, Pollution Legal Liability (PLL) continues to be the foundation of the environmental insurance marketplace and the vehicle of choice for companies that must satisfy federal and state regulatory requirements for underground storage tanks and hazardous waste units. It is also the go-to vehicle for facilitating real estate transactions. This includes structuring PLL policies as a regulatory re-opener for existing pollution conditions or backstop for environmental indemnity provisions needed to facilitate asset purchase agreements. Companies also use it to refinance or acquire properties that require coverage and the inclusion of automatic assignment forms in the event of default or foreclosure.
PLL at its core has changed little during the past 30 years. Buying motivators continue to fall into four categories: regulatory, contractual, lender requirements and risk management. The main coverage parts entail: onsite and offsite cleanup/remediation expense, third-party bodily injury and property damage, and defense expense .
However, in addition to the ongoing coverage of these areas, PLL has evolved to meet the risk management needs of specific business classes. Today, there are more than 20 markets offering PLL coverage through their own environmental units. In addition, broad coverage forms are available and widely used in the PLL marketplace for terms such as:
- defense expenses in addition to the aggregate limit of liability for risks seeking a lower limit;
- contingent business interruption, applying to an insured in the event it is impacted by offsite pollution conditions;
- a broadening definition of pollutants/pollution conditions to include bacteria from several markets; and
- first-party diminution of property value.
Consequently, environmental claims are on the rise, with bodily injury and microbial matter/mold problems at the forefront. Several claims were even in the seven-figure range, leading markets to manage mold exposures through sub-limits that included higher deductibles or per “door” deductibles for hospitality and habitational risks.
Another uptick in claims came from challenges related to site development or redevelopment projects, which also led to increased pricing, decreased appetites and more underwriting scrutiny. This is true even for long-term policies associated with redevelopment deals, locations with urban fill and historic fill materials, industrial sites that exhibit a lack of due diligence and microbial matter/mold exposures within certain classes of business.
Furthermore, providers are continuing to approach new business by evaluating various types of prospective (ongoing) versus legacy coverage opportunities in development or redevelopment projects. Markets are also reviewing their mold capabilities with several retracting full mold coverage for hospitality/habitational risks.
As for policy terms, the market is expected to remain stable. In 2016, transactional purchases and terms varied between five and 10 years. This was consistent from 2015, with a few carriers offering 10-year policy terms for operational coverage, while others offered 10-year terms for transactions.
However, the average term was three years for prospective coverage types, with only a few markets providing PLL coverages for up to 10 years for select classes of business (commercial office buildings). This was performed while the remainder of the market continued to write short-term policies between one and three years.
In early 2016, short-term policy (one- to three-year terms) renewal rates were relatively flat, but started to shift upward for longer term transactional policies toward the end of the year. This year, rates are between 5 percent to 10 percent higher for 10-year terms with a flat 3 percent increase for five-year policy terms.
But, carriers are pushing rate and deductible hikes related to mold. In comparison, claim-free, low hazard business (commercial office/warehousing) PLL rates are likely to drop in a very competitive environment.
Although there is a rising frequency of pollution losses, competition in the PLL marketplace is expected to remain robust in all market segments, including mergers and acquisitions, real estate portfolios and one-off transactions. As a flexible risk management tool, PLL is ideal for ensuring business continuity, stability and sustainability when potentially catastrophic onsite or offsite challenges arise. This is especially true given the consistent nature of the policies, which are expected to remain remarkably stable in terms and pricing, while providing balance sheet, transactional, operational and regulatory protection against environmental loss.