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Real estate, land use and zoning attorney. I use my twenty-five years of experience and bar licenses in CA, NV, OR and WA to assist landowners and land trusts in large-scale conservation easement projects.

Risk Management in Conservation Easements

Risk, liability, exposure — whatever one calls it, no one wants it.  In today’s perilous economy and litigious legal environment everyone is becoming more risk averse.  From individuals of every income strata to partnerships, corporations, utilities and governments, no one wants to take on additional risk in a transaction.  This is particularly true for individuals and entities that engage in multiple risk creating transactions and so must manage cumulative risk which increases over time.

Land trusts and landowners engaged in conservation transactions are not only not an exception, they constitute especially high risk categories as land ownership and management are essentially “risk magnets.”  This applies not only in fee title transfers, but also in conservation easement grants, which is the subject matter of this blog.

Among the types of risk that landowners, and potentially conservation easements holders, are subject to are (1) civil liability for injuries to third parties and personal property on a property, (2) civil and criminal liability for illegal disposal of hazardous materials on a property, (3) financial liability from liens on the property, including tax liens and (4) and civil and liability for injuries to third parties and property off the property from hazards created on the property, for example from fires started on the property.  This is only a partial list, but the examples demonstrate the need for care in managing risk associated with land ownership and management.

Using a simple conservation easement transaction between a single landowner and a single land trust holder as an example, the landowner and holder must negotiate to decide which party bears which risks and whether one party will contribute to the risk management and risk reduction of the other.  The outcomes of such negotiations must be reduced to written contractual terms, preferably by legal counsel for each party.  The locations of such contractual terms may be in the real estate documents associated with a grant of conservation easement, for example purchase and sale agreements and related side agreements, and in the conservation easement itself.

The precise manner in which the parties divide or allocate the risk in a conservation easement transaction, and the methods they use, can be enormously complex and will vary from transaction to transaction.  Nevertheless, the following generalizations can serve as useful guides in such transactions.

Most conservation easement transactions use a “belt-and-suspenders” approach to risk management in that the respective risk of each party is managed either by insurance or by indemnification by the other party.

Insurance is typically the most important means of risk management for both parties.   For example, landowners should always have at least some form of premises liability coverage for their land.  To the extent that placing a conservation easement on a landowner’s property will result in high risk activities that would normally not occur, the landowner should studiously seek out additional lines of insurance whether from the primary insurance carrier or other carriers.  In so doing, landowners should be creative, resourceful and above all willing to do some extensive legwork.  Likewise, land trusts should engage in discussions with their insurance carriers as to what types of risks a conservation easement acquisition will entail and whether the insurance carrier will insure such risks and at what cost.  Like the landowner, the land trust should be willing and ready to do its homework and to leave no stone unturned in reducing its risk on a transaction-by-transaction basis, and in so doing manage its lifetime cumulative risk.

The two negotiating points that will most frequently come up in insurance related negotiations between a land trust and a landowner will be whether one party requires the other party to regularly provide proof of insurance, often at a pre-agreed level of coverage, and whether one party requires the other party to include it as a named insured on the other party’s coverage (again, with written proof required).  In some cases such requirements will be reciprocal; although, not in all cases.  The most often encountered negotiating obstacle with regard to these issues is the asymmetry in the control of the parties over the property and the types of insurance coverage they have.  In all cases it will be the landowner that has the most control over the property and that is thus likely to be able to purchase the most comprehensive insurance.  The land trust will always have the least control over the property and will also have much less access to insurance coverage as there are only a few insurance carriers that insure a land trust’s risks from holding conservation easements.  While it is the norm for each party to require the other party to have insurance coverage, it is not the norm for both parties to name the other as an insured.  Because of this asymmetry in control and insurance purchasing power, and because land trusts are non-profit organizations subject to IRS prohibitions on private benefit, land trusts typically do not name landowners on their insurance policies.  On the other hand, landowners frequently agree to name land trusts on their policies.

Indemnification, the second risk management tool in a belt-and-suspenders approach, is often discussed but poorly understood.  In simplest terms, indemnification means that the indemnifying party will pay for certain financial liabilities incurred by the indemnified parties.  Typical liabilities include money damages in a lawsuit and certain types of taxes.  However, when considering indemnification provisions in a document, keep in mind that indemnification provisions almost always include an additional obligation to defend the indemnified party as well as an agreement to hold the indemnified party “harmless.”  While indemnification can be costly, defense can be even more costly as this term refers to paying for the legal defense of the indemnified party.  As legal fees and costs are typically very high, and can easily run into the millions and tens of millions of dollars, taking on an obligation to defend another party is a serious matter.  Even agreeing to hold another party harmless, which means that the party held harmless won’t be sued or asked to contribute to the costs of liability, can be an expensive proposition if the held harmless party would otherwise be legally obligated to contribute to the loss of the indemnifying party.

As in the case of risk allocation by insurance, risk allocation through indemnification in a conservation easement is asymmetrical.  Again, this is because it is the landowner that has the greatest control over events on the eased land and the easement holder has the least.  Accordingly, the typical conservation easement indemnification provision will obligate the landowner to indemnify, defend and hold harmless the easement holder for “all claims, costs, liabilities, penalties, damages, or expenses” arising out of violations of the conservation easement or, frequently, any activities of the landowner on the eased property.  It is also standard practice for landowners to agree to indemnify easement holders for such things as real property taxes, utility assessments, liens and, importantly, hazardous waste liability.  Indeed, so important is hazardous waste liability that conservation easements often have a separate provision in which the landowner agrees to indemnify the easement holder.  In such situations, the easement holder may likewise agree to indemnify the landowner if the easement holder violates hazardous waste laws on the eased land.

Indemnification provisions in which the easement holder agrees to indemnify the landowner, if used at all, are much narrower in scope and are limited to liabilities arising from the easement holder’s activities on the land, for instance while engaging in monitoring or stewardship activities.

As with insurance allocation provisions, indemnification provisions can often become sticking points in conservation easement transaction negotiations.  For example, problems often arise when landowners unrealistically expect easement holders to provide non-standard, broad, indemnification protections.  Because land trust easement holders are typically non-profit organizations without substantial cash resources, not only would it put the land trust at risk to agree to a broad indemnification provision, it would likely confer little benefit on the landowner as indemnification provisions are only as good as the indemnitor’s pockets are deep.

Another, highly technical, indemnification issue is the standard of care that triggers either party’s indemnification obligations.  The standard of care is usually expressed as “strict liability,” “negligence,” “gross negligence” or “willful misconduct,” or some combination of the three.  Limiting the obligation to gross negligence or willful misconduct contracts the indemnification obligation.  Requiring indemnification based on strict liability, or negligence, on the other hand, expands the indemnification obligation.

Obviously, risk allocation is an important, arguably indispensible, part of any conservation easement transaction.  Allocating risk and managing it by insurance, indemnification, or other methods, can be highly technical and can require much research, and even creativity.  For these reasons, parties to a conservation easement transaction should always strive to begin an open, honest and realistic risk allocation dialog early in the discussion and negotiation processes.  To wait until the last minute can easily result in one or both parties walking away from what otherwise could have been a valuable conservation endeavor.

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