Why strong housing markets have builders tweaking their insurance

Booming real estate markets in many Canadian cities have top-tier developers considering building sites they might previously have written off.

“Here in Toronto, we know the city was heavily industrialized with old manufacturers that were there 100 years before going out of business or vacating a site. And nobody wants to buy [that site] because they’ll have to clean it up,” says Christine Nauth, vice president and environmental impairment liability (EIL) practice leader at SUM Insurance.

“But now the [strong real estate] market and the need for housing…makes it economically viable to take the gamble and pursue redevelopment.”

To blunt the edge of that gamble, landowners will consider insurance, including EIL and contractors pollution liability (CPL) policies.

Those specialty coverages were developed in the 1970s, after courts began putting some numbers to pollution liability and governments created regulations requiring land and building owners to abate hazards.

In those early days, pollution liability insurance claims were aimed at companies’ commercial general liability (CGL), errors and omissions (E&O), and directors and officers (D&O) coverage, leading insurers to place pollution exclusions on those policies.

“That’s how a lot of specialty insurance product lines come about,” Nauth says. “There was a gap in coverage [and CPL and EIL] fills in that gap.”

Today, such coverages are expected for contracts with larger, Tier 1 developers, based on standards developed by the Canadian Construction Documents Committee (CCDC).

“The CCDC is enforcing that everyone carry $5 million in CPL coverage, even if the insured doesn’t believe they have this exposure,” she says. “And, so the larger owners of these projects…are now putting that as a standard for their subcontractors [at the Tier 2 and Tier 3 levels].”

An example of a Tier 2 company would be a something like a concrete mixer subcontractor, while a Tier 3 company would do things like fuel trucks or equipment not directly involved in the construction.

While CCDC implemented stricter coverage requirements in December 2020, only now are they affecting contractors below the Tier 1 level. “It’s only in this first half of 2023 that we’ve seen the rise in the request for the $5-million limit because of these CCDC [requirements],” Nauth adds.

However, just as insurers won’t write a fire policy on a house that’s already burning, they won’t offer EIL coverage for a heavily polluted development site.

Which is why EIL providers prefer landowners to have environmental site assessments (ESAs) that detail known, unknown and suspected hazards.

In urban areas, the primary contamination concern is fuel oil or motor fuel stored in underground tanks, Nauth notes. In rural areas, engineers look for agricultural pesticide residues.

“We will want some kind of engineer’s report, a Phase I ESA – or Phase II, depending on what the Phase I said,” she says. “That’s where we would understand the level [of contamination] that we’re dealing with.”

From there, the discussion moves to how a landowner will manage any known contamination.

“If a report shows [a hazard is] in an isolated section [and] it’s actually contained, then we can still give you coverage on that location,” Nauth says.

But concerns arise when landowners seem unwilling to abate problems. “If somebody knows that something is on their property…and they don’t have any plans to do anything about it, but they want insurance, that’s a problem.”