Breakthrough in Brownfield Remediation

Stringent environmental regulations requiring costly cleanup usually cause developers, investors and lenders to steer clear of environmentally impaired properties. However, innovative environmental liability insurance products are replacing or supplementing traditional risk-shifting mechanisms such as contractual indemnities and escrow provisions.

Environmental liability policies can protect developers, sellers, investors and lenders from contamination claims that can include lawsuits, costs of addressing contamination discovered during development, and cleanup costs that exceed a guaranteed cost estimate.

Indeed, some consulting firms are providing creative solutions to expedite brownfield remediation and transactions. For example, Environmental Waste Management Associates LLC (EWMA) has created a fixed-price cleanup program known as Secur-It, which is backed by an environmental liability insurance policy.

The Secur-It program covers “uninsurable” cleanups that insurers have rejected due to past claim and loss history, such as dry-cleaner contamination in a strip mall or the renovation of an abandoned gas station. Cleanups currently in the program range from $600,000 to $3 million. Other consulting firms such as TRC Companies Inc., Arcadis Geraghty & Miller and Weston Solutions provide similar programs for much larger-scale cleanups, such as Superfund sites.

Genesis of the Program

Since the mid-1990s, clean properties have become more difficult to locate in desirable urban and suburban areas. As a result, redevelopment of brownfields has emerged as environmentalists pressure developers and government officials to target urban centers for redevelopment. Abandoned or obsolete manufacturing facilities are continually being converted to mixed-use residential/retail or commercial office complexes.

Parties involved in these types of transactions and their lenders are now hesitant to rely solely on the traditional contractual protections such as defense and indemnification provisions. Governmental covenants and agreements of liability protection are not foolproof. They also are not available in all states.

Environmental-liability insurance policies — also known as Pollution Legal Liability policies — provide coverage for onsite and offsite property damage and bodily injury, and legal defense costs. Onsite coverage also may include natural resource damages, loss of rental or property value, or business interruption costs caused by contamination. There was a need for this product because traditional general liability policies have contained pollution exclusion clauses since the late 1980s.

Known costs covered by a remedial action plan are typically excluded from Pollution Legal Liability policy coverage. As a result, insurers created the cleanup cost cap policy to cover cost overruns. Insurers typically require a government-approved remedial plan prior to issuing a cleanup cost cap policy and will not insure cleanups less than $1 million. Environmental Waste Management Associates' Secur-It program allows for coverage prior to governmental approval of a remedial plan and for remediation under $1 million. This allows for insurance coverage in the early stage of the transaction and expedites redevelopment.

Typical insurance coverage periods for these policies are three- to 10-year terms. Limits of liability range from $2 to $10 million with deductibles of $25,000 to $100,000. Premiums generally range from $50,000 to $250,000, depending upon the use of the property and the type and extent of contamination, as well as the projected cleanup costs. Cleanup cost premiums are typically 8% to 15% of the cleanup costs.

Advantages of Fixed-Price Cleanups

Innovative insurance policies alone do not always allow a litigation settlement to proceed. Environmental remediation firms should quantify cleanup costs long before a remedial action plan is approved and insurance is commercially available. Fixed-priced guaranteed cleanups provide an exact figure on the developer's environmental costs.

Fixed-price cleanups, together with innovative insurance products, provide savvy developers a competitive edge over those following traditional indemnity mechanisms. Environmental Waste Management Associates conducts the due diligence for the developers, provides them with a fixed-price proposal and secures underwriting approval from the carriers. The developer can then spend time on true development issues and transfer the environmental liabilities to the consultant and the carrier.

Daniele Cervino, Esq. is vice president and general counsel of Environmental Waste Management Associates LLC and runs the company's Secur-It fixed-price program.

TAGS: News
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.