The Base Realignment and Closure Act (BRAC) of 1990 now covers over 300 Department of Defense (DOD) military facilities or installations. Eventually, these facilities will be transferred to the private sector. But as these properties are prepared for reuse in the private sector, one risk still remains unaddressed: Who will be responsible for the business interruption and potential liabilities resulting from additional cleanup activities that may emerge as a result of previously unknown conditions and the change of use of the property? A potential answer to these concerns may lie in the application of new risk financing products that have steadily become more available in the private sector over the last several years.

The Liabilities Of Property Transfer

Under section 120 of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the DOD is required to be responsible for all remedial action necessary to protect human health and the environment that its activities have caused in the past. The intent of the CERCLA section was to insure that the closed or closing military installations would be remediated to levels protective of human and ecological health before the property was transferred to the private sector.

But as properties are ready for transfer to the local authorities or the private sector, there is significant concern over the issue of liability associated with current and subsequent transfers. While it may be very clear between the DOD and the Local Redevelopment Authority (LRA) what the intended use of the property is at the time of the initial property transfer, there is a very real concern about subsequent uses of the property and the liability implications for the DOD and the LRA.

For example, military facilities can be comprised of motor vehicle maintenance facilities, fueling islands for a variety of vehicles, laundry and dry cleaning facilities, mechanical and electrical equipment maintenance facilities and municipal type waste dumps. Many of these contaminated sites are currently some of the most valuable property on the closed bases. The economic growth of the communities adjacent to these sites may eventually dictate a higher and better use of the BRAC property than what was initially planned. The operational and financial burdens on subsequent developers, property owners and business operatorsdue to unanticipated contamination could be catastrophic.

Environmental Insurance

Environmental insurance products can help to eliminate or reduce the uncertainty that exists for all parties involved in a property transaction, such as the subsequent sale of DOD military base property, get BRAC facilities back on the municipal tax rolls, and aid in local job creation.

Both the uncertainty surrounding the ability of the DOD to remediate a site prior to transfer to the private sector and the liability of the DOD with respect to changes of intended use of the property may adversely affect the willingness or ability of LRAs or other private sector entities to accept ownership of the property. Examples of this may include:

• Discovery of additional contamination that requires a business to halt operations on a former DOD site for an extended period of time while remediation takes place.
• The DOD may not be able to provide assistance in indemnifying and defending subsequent property owners if they are named as co-defendants in lawsuits brought by third parties because of an environmental incident.
• The discovery of new contamination.
• The subsequent failure of the initial remediation, due to changes in environmental standards or changes in site reuse plans.

Given one or more of these potential liabilities, many DOD installations that are slated for closure may be considered less than desirable even when compared to other nearby Brownfield sites.

The good news is that environmental insurance products can be used successfully to manage the risks inherent in these contaminated property transfers. These products include Pollution Cleanup, Pollution Legal Liability and Pollution And Remediation Legal Liability, among others. Owner controlled wrap-up programs provide additional benefits, including cash flow management and cost savings that can be reinvested in the project.

Ultimately, the attractiveness of the transfer of former DOD facilities to the private sector can be enhanced and improved through the reduction of uncertainty and the addition of risk management controls.