Title agents, examiners and employees all know environmental problems can postpone or even kill a deal. Developers and lenders are often reluctant to purchase or finance the purchase of contaminated property, because they want to avoid environmental liability.

There is, however, a relatively new product, called pollution insurance, which can help bridge this gap. Pollution insurance can foster a "win/win" situation and benefit just about everyone involved with the anticipated transaction.

In most real estate transactions, the buyer or lender will require a Phase I environmental site assessment to determine whether the property may be contaminated. As part of this, title companies are often asked to prepare a 50-year title search which includes a Document Guarantee. If the property is contaminated, then a relatively new Michigan law permits buyers to avoid environmental liability for existing contamination, if they follow certain requirements. These requirements include establishing a "baseline" for existing contamination, and disclosing that information to the Michigan Department of Environmental Quality ("MDEQ") and subsequent buyers. Further, upon request, the MDEQ will tell the buyer, in writing, that, except for certain statutory "due care" obligations, the buyer will not have liability for existing contamination.

Sometimes, however, all lingering environmental problems cannot be fully solved by the buyer obtaining a letter of nonliability from the MDEQ. Under these circumstances, the parties might consider obtaining pollution insurance to address these problems.

The purchase and sale of real estate is a financial transaction, and the transaction may not make good economic sense after considering potential environmental liability. Sometimes the amount of potential environmental liability may well exceed the purchase price of the property. Perhaps there may not be enough money in the deal to cover the cost of environmental clean-up. Or, it may be difficult or impossible to determine the amount of potential environmental liability.

Pollution insurance lets the parties shift the risk of some types of environmental liability to some independent (and presumably solvent) third party insurance company. In some ways this is like title insurance. A buyer does not want to assume the risk of title defects, and does not want to rely exclusively upon chasing a seller who may be taking the money and moving to Tahiti. Enter the title company, which receives a premium in exchange for insuring the condition of title at the time of closing. If a title problem was in existence at closing, the insured buyer or lender may look to the title insurer to satisfy their claim. Similarly, the insured under a pollution insurance policy may look to the company who issued the pollution insurance to satisfy their claim.

A second reason to obtain pollution insurance relates to timing. Often the parties will want to complete the transaction before the property has been fully remediated. It may not make economic sense for the buyer to wait 6 months or longer until the property is clean, before going forward. Pollution insurance may facilitate closing the transaction by providing assurances from an independent third party insurer that the property will be remediated to acceptable levels, on a timely basis.

In addition to issues of time and money, pollution insurance is an extremely flexible product which can be tailored to meet the varied interests of the parties. Buyers, sellers, lenders, tenants, contractors and regulatory agencies each may be involved with the contaminated property, and pollution insurance may offer certain benefits and opportunities for just about everyone involved.

There are four basic types of pollution insurance currently available:

Clean-up "Cost Cap" Property Coverage. This type of environmental insurance provides the insured with a cap on the total cost to remediate known contamination. Under a variation of this, some environmental contractors will perform all work necessary to remediate the property and even obtain a government approved closure, in exchange for a guaranteed fixed price.

Pollution Legal Liability Insurance. Pollution legal liability insurance protects against third party liability claims arising from environmental matters. Third party claims can include bodily injury, property damage, and clean-up costs caused by contamination which came from the property.

Owner Controlled Insurance Program. Owner controlled insurance is a type of "wrap-up policy" that addresses all of an owner's insurance needs regarding an entire project, including environmental liability.

Secured Lender Coverage. Secured lender pollution insurance is specifically designed to protect commercial lenders by providing them with a form of additional collateral. The policy will pay the lender the lesser of the outstanding balance of the loan or cleanup costs, if contamination is discovered and the loan is in default.

Pollution insurance is an exciting product that can help some of your major real estate clients limit their potential environmental liability for transactions involving contaminated property. Pollution insurance may also provide a way for parties who are otherwise reluctant to purchase or finance contaminated property, to close the deal. As a full-service commercial title insurance provider, you might benefit by being familiar with products such as pollution insurance. And, by sharing this information with your commercial real estate clients, you could be reinforcing your role as a concerned and knowledgeable resource.

Gregg A. Nathanson is a shareholder with the law firm of Couzens, Lansky, Fealk, Ellis, Roeder & Lazar, P.C. in Farmington Hills, Michigan. Mr. Nathanson maintains a transactional practice with emphasis on real estate, environmental and corporate matters. Mr. Nathanson is a frequent speaker at Michigan State Bar and Institute of Continuing Legal Education programs, and he has published articles on various topics in real estate law. Mr. Nathanson also chairs the Michigan State Bar Real Property Law Section Committee on Residential Transactions. He may be reached at (248) 489-8600; or by E-mail at Gregg.Nathanson@Couzens.com.

© 1999 Couzens, Lansky, Fealk, Ellis, Roeder & Lazar, P.C. All Rights Reserved.

Reprinted with permission from The Title Examiner (February/March 1999), publication of the Michigan Land Title Association.