DUAL Underwriting Perspectives: Environmental risk in transactions - how insurance can unlock your client’s deal

By Chris Gwynn - Lead Underwriter, Social & Public Law

Environmental issues are often associated with obviously contaminated sites. In reality, concerns can arise across a much wider range of assets. 

For example, a site may once have housed underground storage tanks. A modern office block may have been built on former industrial land. A logistics facility may have limited historic due diligence. A warehouse may have been acquired after liquidation, leaving gaps in the environmental record.

These factors don’t necessarily mean there will be an environmental liability, but they all create uncertainty. In the DUAL Transactional Risk team, we are seeing growing deal complexity, with an increasing range of risks presenting barriers to transactions. One of these is environmental risk.

The absence of a timely and comprehensive solution can stall a transaction or, worse, the uncertainty alone can sometimes be enough to reduce value or cause a buyer or lender to walk away. In a similar way to our other transactional products, our Environmental Investment Protection (EIP) insurance provides such a solution.

One recent example involved the sale of a 60-year-old light industrial unit. During transactional due diligence, a potential former underground storage tank was identified as having possibly been located on the site.

The purchaser required further investigation to confirm whether any tanks remained. If tanks were present, the buyer wanted them removed and any associated contamination remediated before completion.

The result was a delay of more than 12 months, with an estimated additional cost to the seller of over £500,000.

Over time, we encourage sellers to get ahead of any suspected or identified environmental concerns by seeking insurance early and agreeing terms, or having an in-principle offer in place before going into a transaction. With the right preparation, comprehensive solutions can be provided, or offers made, to allow a seller to avoid delays in transactions and maintain value. However, we can also provide timely solutions during a transaction to maintain momentum and remove uncertainty.

How EIP can help

DUAL’s EIP product is designed to help mitigate environmental and biodiversity risks that may affect property value. It can support transactions by giving sellers, buyers, lenders and investors additional confidence where environmental uncertainty could otherwise cause delay, price reduction or deal failure.

Depending on the circumstances, an EIP policy can be attached to the site and transferred to future owners upon completion of a transaction. This can provide comfort not only to the current owner, but also to future purchasers and financing partners.

Used proactively, EIP can help:

• Support a cleaner exit for sellers and developers
• Give buyers greater confidence in the environmental position of an asset
• Help lenders and investors assess long-term value
• Reduce the risk of price chipping
• Support transactions where environmental information is limited
• Help protect against diminution in first-party property value, where covered
• Provide protection for loss of rental income, where covered

Summary

Environmental issues do not need to become deal blockers. Early engagement is better and allows a seller to protect value and avoid delays, but in-deal solutions can also be provided to give certainty and help unlock a transaction.

DUAL’s Transactional Risk team has the experience to provide solutions for complex deals, and EIP is our solution to your client’s environmental risk.