A military base in Colorado is converted to a model residential community.

A bank sells a portfolio of repossessed environmentally impaired properties.

A city turns development of city owned land over to a private developer.

A chemical company sells an abandoned, closed plant to a developer for conversion to a research center.

What do the above transactions have in common? They represent one of the newest areas for agents and brokers to enhance their firm's revenues through the use of environmental insurance to help foster the redevelopment of abandoned, contaminated industrial sites, also called "Brownfields."

The redevelopment of Brownfields is complicated by real or perceived environmental contamination. In the past months, much has been written about the federal and state governments' incentives to convert environmentally impaired property to its full capacity. In fact, President Clinton in his State of the Union address in January, 1996 committed over $2 billion in tax incentives for the redevelopment of contaminated properties. Carol Browner, Environmental Protection Agency administrator, echoed these comments, "We must help communities rebuild with the help of the Superfund, not in spite of it."

The advantages to the local, state and federal government are clear - they stand to benefit from enhanced tax revenue, the redevelopment of urban (often blighted) properties and the resurgence of jobs in industrial cities. Additionally, the redevelopment of urban areas promises to slow the migration of business to suburban areas, thereby protecting pristine land, or "Greenfields," from further development.

Clearly, Brownfields redevelopment is a burgeoning market that offers agents and brokers an opportunity to enhance their revenues. Since the application of Environmental Impairment Liability products is becoming more commonplace, most agents and brokers will find numerous opportunities in their own book of business. Additionally, knowledge of the Brownfields Initiative may open doors to many new prospects as the topic is increasingly relevant to every town and city.

Though much has been written about the Brownfields initiative, there is an undercurrent that it may be more "smoke than fire." Some of the misunderstood issues include:

• A lack of understanding of the available mechanisms for the transfer of risk inherent in purchasing contaminated property.
• The reluctance of banks to fund developers of contaminated property. Due to various environmental legislation such as CERCLA and RCRA, banks are often hesitant to foreclose on a contaminated property since they may then be called upon to fund the remediation. In most cases, when a client is significantly delinquent on a loan for a contaminated site, the bank writes the loan down rather than foreclosing on the property. Therefore, a bank or financial institution will apply significantly stricter loan covenants on an impaired site since from the outset they know foreclosure is not a viable option.
• A lack of knowledge about the availability of environmental insurance among real estate attorneys who in the past have advised their clients against purchasing a contaminated site and relying on a corporate indemnification from the Seller. Typically, a Seller offers the Buyer a form of indemnification for future liabilities from the pre-existing contamination. Potential problems arise because the Indemnification is not "liquid." That is, an indemnification agreement may require legal action and the risk of long delays in the event it's triggered.

What's The Solution?

As happens frequently in the marketplace, the insurance industry has responded to this opportunity by developing new insurance programs to fill the vacuum that has stymied growth in the Brownfields arena.

Perhaps not since the advent of title insurance in the 1950s and the federally supported National Flood Insurance Plan has there been an insurance product that will encourage the development of commercial and industrial real estate. In fact, the insurance industry's response represents an answer to the urban and economic evolutionary process sweeping the country. Basic manufacturing and process industries of the United States are shifting strategically. Instead of large fixed plants in a few locations, it is now common for steel mini-mills to be located close to their customers and for $10 billion chip making "foundries" to be located near an available pool of skilled workers. Also, just-in-time manufacturing is causing a basic re-ordering of the auto industry. In short, today's contaminated site can be tomorrow's industrial hub. The wake of this transition has left over 500,000 contaminated, abandoned sites. Many of these sites represent a real economic value aside from the fact that they are contaminated.

What Is The Brownfield Challenge?

The challenge is to protect the parties involved in the redevelopment of a contaminated site(s) to ensure that the known exposures are retained and limited, and the risk of unknown or future exposures are transferred, thus allowing the deal to close!

Brownfields redevelopment is a unique business opportunity with significant potential concerns, including:

• Regulatory Liability
• Pollution and Remediation Liability
• Legal Liability
• Financing

The primary role of insurance is to eliminate or reduce the uncertainty that exists for all parties involved in a brownfields property transaction. Insurance can help municipalities, city governments, property owners, potential purchasers, developers and financial institutions reduce present and future liability. Insurance can protect contractors and consultants from inherent risks involved in remediation. Environmental insurance providers offer flexible, responsive insurance products and solutions to facilitate the planning and completion of Brownfields redevelopment projects.

Who Seeks Insurance Protection?

There can be many participants to a Brownfields property transaction - property owners/sellers, legal firms, consultants, contractors, economic development agencies, financial institutions and property buyers. All entities involved in the transaction can benefit from a properly implemented risk management plan. Inherent environmental risks of a brownfields project can include:

• For a financial company or developer, the discovery of environmental issues on the site may make redevelopment out of reach financially. Contamination discovered during redevelopment or aggravation of existing contamination by a consultant or contractor may result in additional cleanup costs and increased regulatory oversight.
• For a purchaser, the discovery of residual contamination due to improper cleanup or possible future environmental problems may result in additional cleanup costs. Contamination could affect an adjacent property or business leading to third-party bodily injury and property damage.
• For the property owner/seller, the spread of existing contamination during remediation, adjacent property value diminution or, in some cases, business interruption due to inadvertent spread of contamination and third-party bodily injury and property damage.
• For a municipality or city government, an environmental incident which may occur following redevelopment could trigger an investigation of the property. Contamination could be linked to improper cleanup during the municipality or city's ownership. The municipality or city could then incur additional costs. The specter of contamination can make marketing the property difficult.
• For a contractor, consultant or project manager, contracting or consulting activities may aggravate or result in additional contamination, cleanup expenses or third-party bodily injury and property damage. Failure of the remedial design during the actual remediation or during a period of performance affects the timing of the entire project.

Insurance Products Applied In Brownfields Redevelopment

Pollution Legal Liability Coverage

Pollution Legal Liability coverage protects the insured against suits brought for damages for bodily injury or property damage caused by the migration of contamination from the insured's site to a neighboring property. The pathway for the migration can be either through the air - such as air or odor emissions from a plant - the groundwater or the soil. The increasing activism among many concerned citizens groups has led to hundreds of class action suits alleging bodily injury and related health problems. Pollution Legal Liability Coverage may also cover more veiled exposures - e.g., suits from neighboring sites for diminution of property value from the alleged or real contamination associated with an insured's operation.

Remediation Legal Liability

Remediation Legal Liability protects the insured for the cost of remediating any additional contamination that is discovered on-site. This coverage provides additional security to the insured for any unknown, pre-existing contamination at the time the site was acquired. Typically, the discovery of any additional contamination would require remediation to a "use based standard." The use based standard reflects the EPA's realization that a site should only be remediated based on its anticipated use. The standards for the levels of remediation will be much more stringent for a residential use than for an industrial or commercial application.

Defense Coverage

In many actions brought under environmental liability coverages, the defense cost will exceed the actual damages paid out. This coverage responds to defense cost as well as the cost of investigating the claim.

Remediation Stop Loss Coverage

One of the newest and most critical coverages offered by environmental insurers is Remediation Stop Loss. This coverage allows the project owner to cap the remediation costs for a project. With many projects, additional costs are incurred due to the discovery of higher than anticipated concentrations of contamination or a wider spread of contamination. In any development project, a pro forma is prepared to arrange financing and determine the financial viability of a project. With the ability to cap one of the most significant cost drivers in the redevelopment of a contaminated site, the developer can predict with greater certainty their break-even point for a profitable development. In addition, this coverage enhances the developer's ability to negotiate favorable credit terms since the financial viability of the project is more certain.

Contingent Contractors Coverage

The buyer of the site also faces a contingent exposure from the actions of the environmental contractor that designs and performs the actual remediation. Clearly, the buyer needs protection in the event the contractor's environmental coverage lapses or the contractor's actions lead to an environmental claim in excess of the contractor's limits. Much like an Owners & Contractors Protective (OCP) policy, the contingent contractors coverage protects the buyer's interest and contingent pollution liability exposure.

Conclusion

Historically, the marketplace reaction to environmental insurance was unfavorable - coverage was too expensive vis-à-vis the exposure, the form was too restrictive and the Self-Insured Retentions were too high. In today's market, however, many of these coverages can be combined into one policy form. The Insurance providers have packaged programs that offer all the coverages clients may need - a definite advantage to the agent or broker. The result is a simpler, more efficient quotation and policy production process. In addition, a common form designed exclusively for Brownfields transactions facilitates the agent's presentation of environmental insurance options. Lastly, since this is a new area of coverage, most underwriters will offer their assistance and expertise to each scenario to ensure that the product and program options presented by the agent are tailored to the specific needs of each particular transaction.

As mentioned previously, there are over 500,000 sites across the country that have been identified as contaminated in some form. Each of these sites represents an opportunity for an agent or broker to work with their clients to maximize the utilization of the site while enhancing service to their clients. By doing so, insurance professionals can integrate themselves into the insured's operations while helping to enhance their bottom line.