Before the very recent introduction of innovative insurance programs and policies, the development of contaminated property or “brownfields” for commercial use has been a virtual impossibility. Potential purchasers and developers had previously shunned the inflexibility of the regulatory community and its policies, including: strict, joint and several liability, burdensome cleanup standards, and lender liability that made financing unreasonable. These disincentives resulted in a blight of abandoned factories with rusting smokestacks and vacant weed-strewn lots instead of an urban (and occasionally suburban) renaissance.

The term “brownfields” refers to contaminated property or buildings in need of cleanup before they may be recycled into industrial parks, office complexes or other potential beneficial uses. Cleanups of brownfields offer economic advantages to the owners or potential purchasers of the contaminated property and are important to the reduction of economic, environmental and health problems that the sites present to the community. Although unfortunate, the development of “greenfields” — pristine and uncontaminated land — have in the past, been a much safer and more viable path for purchasers and developers to follow. This development, from a public policy point of view, does not make sense because: development of greenfields reduces the finite inventory of available natural resources; and abandoning contaminated property reduces employment opportunities, erodes the tax base, and allows pollution to remain unabated.

However, most recently, through the efforts of federal, state and local governmental legislation and regulatory action, voluntary cleanup and industrial site reuse programs have been initiated. Programs such as these encourage the redevelopment of brownfields and result in properties being put back on active tax roles. Also, significant strides have been made by an increasingly sophisticated insurance market in addressing the insurability of contaminated property.

Today, environmental insurance underwriters are carving out a niche market. They have begun offering a variety of insurance products that address brownfield exposure. The balance of this article discusses the role of insurance in connection with the redevelopment of brownfields.

Insurance Availability

Currently, insurance which addresses the most problematic environmental exposures, known and unknown, is available to all participants to a brownfields transaction. These coverages include:

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 spread of contamination from the insured’s site to a neighboring property. The pathway for this 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 citizen groups has led to hundreds of class action suits alleging bodily injury and related health problems, to which pollution legal liability insurance responds.

Remediation Legal Liability: This coverage protects the insured for the cost of remediating any additional contamination that is discovered on-site. Remediation Legal Liability 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 regulatory agencies’ realization that a site should only be remediated based on its anticipated use; for example, the standards for the levels of remediation will be much more stringent for a residential use than for an industrial or commercial application.

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 possible contingent exposures from the actions of the environmental contractor who 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. The contingent contractors coverage protects the buyer’s interest and contingent pollution liability exposure.

An All-Inclusive Brownfields Solution

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 the coverages discussed previously can be combined into one policy form.

Given the increased interest in Brownfields, XL Environmental is seeing a growing number of applications for coverage from parties involved in redevelopment projects, especially property owners and developers. To stay ahead of the insurance needs of entities involved in Brownfields, XL Environmental released in October its Commercial Property Redevelopment Pollution Program (CPR). CPR is a comprehensive pollution insurance program that offers all the coverages that the parties to a brownfields redevelopment may need — i.e., the coverages discussed previously.

Since this is a new era of coverage, most underwriters will offer their assistance and expertise to each scenario to ensure that the product and program options are tailored to the specific needs of each transaction.

Government Incentives

Government, on both the federal and state level, is quickly assuming an important role in the initiative to reclaim toxic real estate. Government goals generally are to conserve available greenfields, create new employment opportunities, increase the tax base and bring new life into the inner cities. At the same time, it seeks to reduce environmental and health problems. Voluntary cleanup and industrial site reuse incentive programs represent the two approaches that are being implemented.

Conclusion

The brownfields problem plagues communities nationwide. However, many of these sites will eventually be recycled and put to productive use, as developers are finding that state and federal governments and environmental insurers are offering more than just a sympathetic ear. The time is ripe for meaningful solutions.