United States Office of Emergency and EPA 500-R-96-001
Environmental Protection Remedial Response OSWER 9230.0-74
Agency (5101) PB96-963244
June 1996
<&EPA Potential Insurance Products
for Brownfields Cleanup and
Redevelopment
Survey Results of Insurance Industry Products
Available for Transference of Risk at Potentially
Contaminated Property
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For more Brownfields information, visit our Internet World Wide Web Brownfields Home Page at:
http://www.epa.gov/brownfields/
Additional copies of this publication may be obtained from:
National Technical Information Service (NTIS)
U.S. Department of Commerce
5285 Fort Royal Road
Springfield, VA 22161
(703) 487-4650
Please reference document number: PB96-963244
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CONTENTS
Page
Executive Summary 1
A. Background of Survey 1
B. Summary of Key Findings 2
I. Environmental Risk and Potentially Contaminated
Properties 5
A. Risk Description 5
B. Common Controls for Risks 5
II. Insurance Risk Transfer Mechanisms 7
A. Overview of Insurance Industry and Products 7
B. Survey Findings 8
Table 1: Risks Covered by Respondents 10
Table 2: Summary of Coverage for Risks 13
C. Market Factors Influencing Insurance Policies 14
III. Conclusion 17
Attachment 1: Survey Contacts Al-1
Attachment 2: Complete Survey Responses A2-1
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Executive Summary
A. Background of Survey
EPA's Brownfields Economic Redevelopment Initiative is designed to empower
states, communities, and other stakeholders to work together in a timely manner to
prevent, assess, safely clean up, and sustainably reuse potentially contaminated
properties. Key players in economic redevelopment (prospective purchasers,
redevelopers, lenders, and investors) are sometimes reluctant to pursue redevelopment
activities at brownfields, however, for fear of incurring potential liability. These
liability risks leave many properties idle. Most liability risks can be grouped into three
broad categories:
• Remediation-based Risks — the potential that if site contamination exists,
the owner/operator will bear the costs of cleanup, including site
investigation and assessment, legal fees, and regulatory compliance
consulting fees
• Property Value Impairment Risks — the potential that if site
contamination exists, the owner/operator will bear the costs of lawsuits
stemming from reduced value of neighboring properties and/or nuisance
caused
• Personal Injury Risks — the potential that if site contamination exists, the
owner/operator will bear the costs of lawsuits stemming from bodily
injury caused by contamination existing on-site or migrating off-site.
Some parties assert that insurance products in existence or under development
successfully transfer these risks from the key players involved in brownfields
redevelopment to a third party. EPA conducted this survey to test this assumption by
addressing the following three questions:
• Are insurance policies in existence or under development that could serve
as risk transfer mechanisms for potentially contaminated properties?
• If policies exist or are under development, how many of the risks
encountered at potentially contaminated properties (i.e., remediation-
based risk, property value impairment risks, and personal injury risks) are
covered, and how available are these policies?
• If no policies exist or are under development for specific risks, what
factors are inhibiting their development and use?
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To answer these questions, EPA:
• Identified no more than nine representatives of the insurance industry,
noted by industry contacts to be the key players
• Developed a list of questions to be used in phone interviews with the
insurance representatives
• Developed a standard list of risks, to maintain consistency when
insurance representatives referred to risks covered or not covered
• Conducted interviews
• Compiled and analyzed responses to answer the three key questions.
B. Summary of Key Findings
Eight insurance industry representatives were interviewed for this survey. The
following key findings emerged:
• All respondents indicated that insurance is available and is being
purchased.
• All respondents indicated that the nine risks listed encompassed all
known risks encountered at potentially contaminated sites.
• Five respondents cover all of the risks under existing insurance products;
the remaining respondents cover all but property value impairment risks.
• Minimum coverage ranged from $1 million to $100,000 per policy.
• Maximum coverage generally ranged from $10 to $40 million per policy.
• Typical coverage ranged from $2 million to $10 million per policy.
• Typical premium costs were approximately $5,000 per $1 million in
coverage.
• Five respondents noted increased demand for environmental insurance
policies in those states that have active brownfields programs or state
voluntary cleanup programs.
• Common suggestions for EPA involvement included clarification of
liability issues, more consistent implementation of risk-based corrective
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action (RBCA) standards, and education about the availability of risk
transfer insurance products.
The following report discusses the findings of this survey in greater depth.
Section I provides an overview of the potential risks encountered by owners of
potentially contaminated property and discusses common ways key players control
these risks, including the use of insurance. Section II describes how the insurance
industry works and provides an overview of the main environmental insurance
products, a discussion of the survey findings, and market factors that influence
environmental insurance policies. Section III offers concluding remarks and
recommendations.
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I. Environmental Risk and Potentially Contaminated Properties
A. Risk Description
The commercial real estate industry has many uncertainties, or risks, that affect
the willingness or ability of potential players to participate in brownfields property
transactions. Many risks, such as changes in market conditions and interest rates, are
inherent in the industry and provide opportunities for economic gain with limited risk.
Risks such as environmental liability, however, are not viewed as inherent in the
industry and often present greater potential for economic loss than for economic gain.
Many of these environmental risks encountered at potentially contaminated properties
fall into three broad categories: remediation-based risks, value impairment risks, and
personal injury risks.
The first category of environmental liability risks is remediation-based risks,
related to Federal and state environmental laws and regulations that mandate cleanup
under certain circumstances. These risks include:
Risk 1: Cost of identification and determination of site contamination
Risk 2: Cost of site remediation
Risk 3: Cost of ensuring compliance with Federal and state regulations
during remediation (e.g., consulting and legal fees)
Risk 4: Cost of legal fees to defend against lawsuits brought by regulators
(Federal and state) and third parties.
The second category of environmental liability risks is property value
impairment risks attributable to site contamination, or to the perception that the site is
contaminated. These risks are pursued through tort liability and include:
Risk 5: Payment required due to a nuisance caused to a neighboring
property (e.g., remediation of the site causes substantial noise in the
neighborhood - a nuisance)
Risk 6: Payment required due to the erosion of equity of a neighboring
property (e.g., the perception that there is contamination on the site
causes the value of a neighboring property to decline)
Risk 7: Payment required due to the decreased security interest of the
lender of a neighboring property (e.g., on-site contamination causes
the value of a foreclosed neighboring property to decline).
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The third category of environmental liability risks is personal injury risks. Also
pursued through tort liability, these risks include:
Risk 8: Payment required because of personal injury occurring off-site
caused by migrating contaminants
Risk 9: Payment required because of personal injury occurring on-site
caused by site contamination.
B. Common Controls for Risks
The above risks can be reduced or eliminated in several ways, thereby increasing
the willingness of transaction decision-makers to pursue redevelopment at potentially
contaminated properties. Parties can control environmental risks in several ways:
• Indemnification Agreements — The seller provides the purchaser with a
legally binding agreement stating that the seller will cover the purchaser's
costs stemming from specified environmental risks (e.g., the purchaser
will cover the cost of on-site remediation for contamination undiscovered
at the time of the property transaction).
• Sell Price Adjustment — The seller will reduce the price of the property
based on an agreed upon level of risk incurred by the purchaser (e.g., a $5
million property with known contamination faces remediation costs
between $1 million and $3 million; because of the risk that remediation
may cost as much as $3 million, the seller reduces the purchase price to $2
million).
• Self Insurance — A purchaser ensures that he/she can cover the costs of
potential environmental risks by setting aside a reserve fund, or by
pooling money in a reserve fund with other companies (e.g., a well-
capitalized company uses its reserve fund to remediate contamination at a
neighboring property caused by migrating contaminants from the self-
insured company's property).
• Third-party Insurance — The seller or purchaser buys insurance to cover
the environmental risks encountered at a potentially contaminated
property (e.g., the purchaser of a potentially contaminated property buys
an insurance policy that covers up to $10 million of remediation costs for
unknown site contamination).
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II. INSURANCE RISK TRANSFER MECHANISMS
A. Overview of Insurance Industry and Products
Insurance is one of the best available tools for transferring and managing certain
financial risks. Through a complex process of risk determination, insurance companies
determine what risks encountered by businesses or individuals can be covered, or
underwritten, and then collect premiums for the policies, under which they agree to
pay for some or all costs or losses to these insured parties. Insurance companies
perform this risk determination through the following generic, three-step process:
• Statistical or Actuarial Analysis — a process to develop a profile of
specific risks and the potential costs or losses associated with these risks.
This profile is developed using historical data accumulated on similar
clients.
• Underwriting Analysis — a process to establish a relationship between a
risk and its expected loss for a specific client. This analysis varies
depending on the type of risk to be covered, but for potentially
contaminated properties can include an analysis of site engineering data,
business/financial stability, the business' regulatory compliance history,
and surrounding site use.
• ludgment — a discretionary determination made by an insurance
company on coverage of risks, particularly when there is insufficient data.
In the case of risks at potentially contaminated property, this judgment is
affected by two major concerns:
— Uncertainty of Liability — Under CERCLA, this incorporates how
retroactive, strict, and joint and several liability can affect potential
costs to cover risks.
— Economic Conditions in the Insurance Industry — The conditions
include the number of paid claims incurred based on policies sold,
as well as the willingness or ability of the reinsurance market (such
as Lloyds of London) to absorb some of an insurance company's
risks of future claims in exchange for a percentage of the premiums.
Through experience, the insurance industry has collected sufficient data to
understand and underwrite the financial risks associated with potentially contaminated
properties. Thus, environmental insurance has developed as a distinct subset of
property and casualty insurance, which also includes homeowner and auto insurance.
The three most common policies available under environmental insurance that are
applicable to potentially contaminated properties are:
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• Property transfer insurance
• Cleanup cost cap or stop loss insurance
• Owner-controlled insurance.
Property transfer insurance protects an insured against on-site cleanup of
unknown, pre-existing, or new conditions, and against third-party claims for off-site
cleanup costs that result from on-site pollution. An insured can add to this coverage
claims from third parties arising on-site or off-site from bodily injury or property
damage due to on-site contamination. This policy can provide coverage of remediation-
based risks, value impairment risks, and personal injury risks.
Cleanup cost cap or stop loss insurance protects an insured against a cleanup
project that runs substantially over budget. Policies require the insured to accept the
risk of the project going over budget by a certain percentage of the estimated project
costs. The insurer pays only if the project costs exceed the estimated costs, plus the
agreed upon buffer. This policy can provide coverage of remediation costs.
Owner-controlled insurance allows an owner or prime contractor undertaking
cleanup to determine the desired scope of insurance protection against the acts or
omissions of other parties involved in the cleanup. This includes protection against the
failure to perform by consultants, contractors, and subcontractors; against these parties'
aggravation of site contamination conditions; and against claims of contractors'
employees or other third parties for bodily injury arising from site contamination. This
policy can provide coverage for remediation-based risks, value impairment risks, and
personal injury risks.
By clarifying how the insurance industry develops methodologies to cover risk,
and how this process has been applied to environmental insurance for property
transfer, the current market for these products can more clearly be understood.
B. Survey Findings
EPA developed a survey to answer three questions: 1) Are insurance policies in
existence or under development that could serve as risk transfer mechanisms for
potentially contaminated properties? 2) If policies exist or are under development, how
many of the risks encountered at potentially contaminated properties are covered, and
how available are these policies? 3) If no policies exist or are under development for
specific risks, what factors are inhibiting their development and use?
To answer these questions, EPA developed a list of potential risks and questions
related to the coverage of these risks. Using this list, EPA interviewed eight
representatives from three segments of the insurance industry: underwriters,
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insurance providers, and brokers (see Attachment 1 for a list of the insurance
representatives and the segment of the insurance market they represent).1
QUESTION 1: DO POLICIES EXIST?
The unanimous answer to Question 1 was "yes." Environmental insurance
policies that manage the financial risks encountered at potentially contaminated
properties have existed for several years.
QUESTION 2: WHAT RISKS ARE COVERED/HOW AVAILABLE ARE THE
POLICIES?
The answer to Question 2 is summarized in four major categories: risks covered,
scope of coverage, cost of coverage, and demand for coverage. (Tables 1 and 2 are
attached to provide a quick reference for determining each representative's responses in
these four major categories.)
Risks Covered: Respondents were asked about the availability of coverage for
environmental risks related to remediation, value impairment, and bodily injury.
The following summarizes the respondents' comments (Table 1 provides
individual responses):
• The market covers environmental risks associated with remediation, value
impairment, and bodily injury, although not all companies represented
provide coverage for each of these areas.
• Remediation-based risks and personal injury risks are the easiest
environmental risks to cover.
• Property value impairment risks are the most difficult to cover, although
some coverage for these risks is currently available.
Scope of Coverage: Respondents were asked to provide specific information on
limits of coverage for these risks (Table 2 provides individual responses):
• The minimum amount of coverage ranges from $100,000 to $1 million per
policy, with several respondents indicating that they could offer lower
coverage if needed.
• The maximum amount of coverage offered ranges from $10 to $40 million
per policy.
Underwriters collect and analyze potential client data to determine what risk coverage can be offered and
at what premium. Insurers provide the actual risk assumption for the policies sold, through the pool of
invested premiums, or through reinsurers who accept some of the risks for a percentage of the premiums.
Brokers are the marketing/sales arm of insurance policies, providing direct sales and service to potential
clients.
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• The coverage is currently offered only for commercial and multi-family properties, not for
residential properties.
Cost of Coverage: Respondents were asked about the typical costs to cover these risks (Table 2
provides individual responses):
• The average cost was $5,000 per $1 million in coverage.
• Costs per unit of coverage increased as the amount covered decreased.
• There was no average deductible, since the deductible varied widely based on the soundness of
the business deal and the insured's desire for variations in coverage.
Demand for Coverage: Respondents were asked the number of policies sold covering these risks, the
demand trend for coverage of these risks, and differences in demand among states (Table 2 provides
individual responses):
• Demand for these policies has increased significantly since mid-1995, with two respondents
noting several hundred percent increase in inquiries and policies sold since that time.
• Although not all respondents could provide actual numbers of policies sold, three indicated that
they had sold between several hundred to over a thousand.
• Five of the respondents indicated that demand varied regionally, noting that states with active
brownfields programs, active voluntary cleanup programs, and states using RBCA standards,
had higher demand for these policies.
QUESTION 3: IF THERE ARE NO POLICIES, WHAT IS INHIBITING THEIR DEVELOPMENT?
According to respondents, policies exist that cover all known risks.
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C. Market Factors Influencing Insurance Policies
Survey results indicate that a growing array of products transfer risks associated
with potentially contaminated property from the players in economic development to a
willing third party. Two groups of factors, however, influence the availability and
marketability of useful policies. Both groups of factors may impact the application of
this survey's results.
Availability Factors
Availability of environmental insurance products, or its absence, is influenced by
factors inherent in both the insurance and the commercial real estate industries. These
factors include:
• Underwriting Factors: Cost of Cleanup — In order to accurately price the
coverage of risks, environmental insurers must create tools or underwriting
methodologies (as discussed in Section II.A.). Respondents have developed
underwriting methodologies which they deemed to be sufficient for this
purpose. A key component of underwriting is the environmental consulting
industry, which supplies much of the underwriting information to insurance
underwriters (some insurance providers have their own environmental
consulting staff). In its long history, the environmental consulting industry has
been fairly predictable and consistent in its services, and is therefore an effective
primary data source for insurance risk underwriting.
• Underwriting Factors: Property Value Impairment — Underwriting of property
value impairment risks is directly related to appraisal industry practices. The
appraisal industry's position is that value impairment attributable to
environmental conditions is outside the purview of a routine appraisal, making it
more difficult for insurance providers to underwrite property value impairment
risks. Predictably, respondents indicated that property value impairment risk
coverage is less often available, although some respondents do provide this
coverage.
• Market Factors: Product Awareness — Many respondents were concerned that
sufficient information is not available to the commercial real estate industry
regarding the availability of environmental insurance products. If decision-
makers in the marketplace are not aware of the availability of risk transfer tools,
their usage in property transactions is greatly reduced. While this information
dissemination is clearly the responsibility of the insurance industry, it was
frequently suggested that EPA could provide useful support to the insurance
industry's efforts to increase product awareness in the marketplace.
14
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• Legal Factors: Uncertainty — A factor that impacts the extent of coverage is the
uncertainties created by liability. Many respondents indicated a preference for
jurisdictions where risk-based corrective actions standards have been
implemented. It was further suggested that states with voluntary clean-up
programs, as well active brownfields redevelopment programs provide a more
favorable climate for environmental insurance. In addition, some respondents
anticipate that as liability is further clarified, lender confidence will increase and
coverage costs will decline.
Marketability Factors
Insurance products, even at reasonable costs, may not provide adequate incentive
for players in economic redevelopment to purchase, redevelop, and reuse brownfields
because the current products lack many factors necessary to make them "marketable."
Three key issues, among many, affect insurance marketability:
• Policies offered focus on the "high" end of the market — The insurance
industry tends to insure larger, well-financed transactions involving financially
sound enterprises. Survey responses indicated the importance of financial
soundness of the transaction and its parties in underwriting. While policy limits
can be small, the relative cost of insurance increases as the policy limits decline.
This limits the market appeal of insurance. Many brownfields' prospective
purchasers may not qualify for insurance coverage because they are not as
financially sound or well-financed as large corporations.
• Owners of properties still concerned with CERCLA liability — Many larger,
financially strong companies are not interested in returning their properties to
the real estate market until Federal and state hazardous waste laws further limit
or clarify their liability following a cleanup and transfer of property. Even if a
successive owner purchases insurance to cover its risk, the insurance company
could seek payment from former owners for costs based on CERCLA's
retroactive, strict, and joint and several liability. Some claim that a high
percentage of brownfields are not placed on the market because of this uncertain
future liability.
• Lenders reluctant to finance properties — Major sources of credit, like large,
financially strong companies, fear being viewed as "deep pockets." They are not
interested in financing the return of contaminated properties to the real estate
market if contingent liability risks are unacceptable, based on the uncertainties of
future liability.
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III. CONCLUSION
This report explores the risks encountered by prospective purchasers, lenders,
investors, and redevelopers at potentially contaminated property, and common ways
these risks are controlled or eliminated. Desire to control these risks has recently
spurred a great increase in the risk transfer mechanisms of environmental insurance
and the availability of products, breadth of coverage, and number of risks covered.
Survey results indicate that many policies are available to cover remediation, value
impairment, and bodily injury at insured properties. There is a wide range of coverage
and costs for coverage are continually declining. The survey suggests, however, that
although insurance can facilitate the return of brownfields to productive reuse,
limitations on its usefulness and applicability for all brownfields exist.
Finally, all survey respondents suggested several issues that could be addressed by
EPA to encourage redevelopment and reuse of brownfields through the use of risk
transfer insurance products. Most respondents identified two particularly relevant
issues: lack of knowledge of available risk transfer insurance products; and lack of clear
risks and CERCLA liability encountered at potentially contaminated properties.
Insurers suggested that EPA pursue the following activities to address these concerns:
• Educate — EPA should help educate stakeholders (lenders, developers,
investors, prospective purchaser, states, and localities) about the availability and
use of insurance risk transfer mechanisms.
• Clarify — EPA should continue to clarify the liability encountered at these sites,
including definitive closure of site liability.
• Implement — EPA should encourage broader and more consistent
implementation of risk-based corrective action (RBCA) standards.
17
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18
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Attachment 1:
Survey Contacts
COMPANY
INDUSTRY
American
International Group
ECI Incorporated
ECS
Environmental
Warrantee
The Eric Group
United Coastal
Insurance
Willis Corroon
Environmental Risk
Management Services
Zurich American
Insurance Group
Insurer
Underwriter/Broker
Underwriter/Broker
Underwriter/ Broker
(for AIG)
Underwriter/Broker
(for Zurich)
Insurer
Broker
Insurer
Al - 1
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Al - 2
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Attachment 2:
Complete Survey Responses
Company Page
American International Group A2-2
ECI Incorporated A2-5
ECS A2-8
Environmental Warrantee A2-11
The Eric Group A2-15
United Coastal Insurance A2-19
Willis Corroon Environmental Risk Management Services A2-22
Zurich American Insurance Group A2-25
A2 - 1
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American International Group
COMPANY: American International Group
INDUSTRY: Insurer
I. Do you have policies in existence or in development?
Yes.
II. What is the coverage of these policies?
A. Do these policies cover commercial or single-family properties?
We cover only commercial properties.
B. What risks are you covering?
All of the risks listed are covered in some form. Potentially contaminated
properties are usually covered under our "Select" policy, which is a menu driven
policy covering these risks. However, they usually include an exclusion for a re-
opener.
i. What is the scope of coverage for these risks? Maximum coverage,
deductible, etc.?
Maximum coverage is around $35 million and minimum coverage is $1
million. Deductibles can run as low as $10,000 and are variable depending
on coverage.
ii. What are the underwriting criteria for covering these risks?
The criteria are based on engineering data, site history, condition of
surrounding sites (releases, as well as former operations), and financial
condition of the company.
Hi. What is the demand trend for insuring these risks?
The demand for covering these risks is greatly increasing because we as
insurers have more flexibility on coverage and the price of these policies
has come down. There has been an increase in demand over the past
several years, but I cannot give any specifics on the trend.
A2 - 2
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American International Group
iv. How many policies have you sold?
I really have no estimate, but we have been writing these policies since
1980.
v. Are the trends different in certain states (i.e., have state laws affected the
demand for these policies) ?
There are demand differences in certain states where insurance can pass
for financial responsibility requirements, but I have not seen a difference
in demand for redeveloping properties.
vi. What are the costs (i.e., premiums) for covering these risks?
Premiums usually run around $5,000 per million of coverage.
vii. Do the relative costs of covering these risks increase as the value of the
insured property decreases? If so, what needs to change for the relative
costs to remain constant?
Property value really has no consideration in rating the property. "Is it
good business" is the main question.
B. Why aren't [those risks not mentioned] covered under these policies?
All of the risks are covered in some manner.
i. What are the significant inhibitors to covering these risks?
No answer.
ii. Do you know of any companies covering these risks?
No answer.
Hi. What needs to be changed, by EPA or other parties, to enable the coverage
of these risks?
No answer.
iv. What needs to be changed, by EPA or other parties, to lower the cost of
covering these risks?
No answer.
A2 - 3
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American International Group
C. What would be the estimated amount of time needed to develop and market
coverage of these risks, inception-to-market time?
The development can take a long time. For example, value diminution is very
difficult to calculate.
D. Do you know of any other companies developing or selling these policies?
No answer.
III. How can EPA encourage or develop incentives for the use of these types of
risk transfer mechanisms?
• Make it easier for the underwriter by encouraging such common sense
approaches as the RBCA standards.
• Make it known that insurance is out there and can make investors more
comfortable.
• Legislate requirements for the use of these types of financial assurance
mechanisms for some transactions.
A2 - 4
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ECI Inc.
COMPANY: ECI Inc.
IDUSTRY: Underwriter/Broker
I. Do you have policies in existence or in development?
Yes.
II. What is the coverage of these policies?
A. Do these policies cover commercial or single-family properties?
We cover only commercial properties at this time, but have plans to develop
similar policies for single-family properties.
B. What risks are you covering?
All of the risks can be covered in some way. For the risks of value impairment
and taking, however, there must be very clear evidence proving the impairment
and/or taking was caused by the insured property. Nuisance would be covered
if it was connected to the release of contaminants.
L What is the scope of coverage for these risks? Maximum coverage,
deductible, etc.?
The scope of coverage is commonly $1 million to $5 million. The
maximum has been around $15 million, but I have seen coverage for as
low as $100,000 (however, at this level, the cost per dollar of coverage is
more expensive). The amount of coverage varies greatly with the type of
property covered. For example, an office building would require a
smaller amount of coverage.
ii. What are the underwriting criteria for covering these risks?
Once again, this depends significantly on the historical use of the
property. We usually require a regulatory records check, a baseline
environmental survey, a Phase I, a compliance audit, a review of use of
neighboring properties, and a review of whether the site must comply
with RCRA, TRI, etc.
A2 - 5
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ECI Inc.
Hi. What is the demand trend for insuring these risks?
I have seen the demand greatly increase, but I have only been writing
these policies for three to four months so I cannot give a longer trend
description. We have seen an increase in demand for coverage of small to
mid-size industrial properties, and on the low end coverage such as office
buildings.
iv. How many policies have you sold?
I have no specifics, but less than 100.
v. Are the trends different in certain states (i.e., have state laws affected the
demand for these policies) ?
In general, I believe that voluntary clean-up programs and the RBCA
standards in states have increased the demand for insurance policies.
However, I have seen a decrease in the potential demand in states where
there are more stringent administrative requirements for voluntary clean-
up of sites. Many people do not want to go through this administrative
"red tape." (He did not give any specific states where this has happened.)
vi. What are the costs (i.e., premiums) for covering these risks?
I have seen costs as high as $100,000 per million in coverage and as low as
$400 per million in coverage (this was for such properties as office
buildings). A premium of $15,000 to $20,000 per million in coverage is the
high average, with $5,000 per million in coverage being the most common.
vii. Do the relative costs of covering these risks increase as the value of the
insured property decreases? If so, what needs to change for the relative
costs to remain constant?
I really do not think the cost of insurance policies is a concern. I have not
seen any relative cost problems.
B. Why aren't [those risks not mentioned] covered under these policies?
No answer.
A2 - 6
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ECI Inc.
i. What are the significant inhibitors to covering these risks?
No answer.
ii. Do you know of any companies covering these risks?
No answer.
Hi. What needs to be changed, by EPA or other parties, to enable the coverage
of these risks?
No answer.
iv. What needs to be changed, by EPA or other parties, to lower the cost of
covering these risks?
• Do not require too many legal hoops to jump through for property
cleanup and liability issues.
• Ensure a continuity of land use type (any changes in land use can
throw kinks into the process).
• Allow insurance market competition only; this will bring the costs
down.
C. What would be the estimated amount of time needed to develop and market
coverage of these risks, inception-to-market time?
No answer.
D. Do you know of any other companies developing or selling these policies?
No answer.
III. How can EPA encourage or develop incentives for the use of these types of
risk transfer mechanisms?
There are a number of things to pursue:
• Use financial responsibility requirements to ensure use of these policies.
• Take on an educational function. There is substantial misunderstanding of what
products are available.
A2 - 7
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ECS
COMPANY: ECS
INDUSTRY: Underwriter/Broker
I. Do you have policies in existence or in development?
Yes.
II. What is the coverage of these policies?
A. Do these policies cover commercial or single-family properties?
Our policies cover only commercial properties.
B. What risks are you covering?
All risks on the list (the risks as described in Section LA.) can be covered. Value
impairment, although potentially covered, may not be covered if there is a known
stigma attached to the property, such as being listed on CERCLIS.
i. What is the scope of coverage for these risks? Maximum coverage,
deductible, etc.?
The maximum limit is about $60 million, but the market has seen up to
$100 million. Coverage below $200,000 is not practical at this time, at least
by larger insurance companies, because the premiums do not
comparatively decrease below this amount. The deductibles range from
$25,000 to $500,000.
ii. What are the underwriting criteria for covering these risks?
We look at financial information for the past 2-3 years as well as an
engineering report (sometimes the insurance company will complete this
report for free).
Hi. What is the demand trend for insuring these risks?
With increasing focus on brownfields, we are just now seeing an increase
in activities and voluntary cleanups, which is increasing demand for
insurance. After the inception of the Brownfields program in January of
1995, there was a slight lag-time, and then there was about a 15 to 20
percent increase in demand. The Brownfields program sparked this
increase because these properties were now in the public eye and had a
A2 -
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ECS
name attached to them. In addition, local governments were getting
anxious to get these properties back on the tax roll.
iv. How many policies have you sold?
Last year we sold about $200,000 in premiums covering these risks.
Overall, we have about 25,000 clients covered for parts of these risks.
v. Are the trends different in certain states (i.e., have state laws affected the
demand for these policies) ?
States that have very active voluntary cleanup programs have greater
demand, such as Pennsylvania, Illinois, Indiana, Michigan, Ohio,
California, Louisiana, and Texas. For example, Pennsylvania has made
clear its desire to do business on these properties. They have a fast track
for preparation and help design cleanup plans.
vi. What are the costs (i.e., premiums) for covering these risks?
Premiums range from $10,000 up to $200,000 to $300,000 per million of
coverage. An example is a policy that covers first and third party liability
at $1 million in coverage for 3 years. This policy would cost between
$12,000 and $15,000 (if the deductible was between $30,000 to $40,000).
vii. Do the relative costs of covering these risks increase as the value of the
insured property decreases? If so, what needs to be changed for the
relative costs to remain constant?
I have not viewed this question quite the way you have it phrased. What
prevents the purchase and redevelopment of properties are other costs
such as deductibles and fixed costs. Depending on the condition of the
property (and thus the amount of these costs), purchasing the property
may be worth the costs.
B. Why aren't [those risks not mentioned] covered under these policies?
We have not been asked to cover the costs of Risk #5, payment due to nuisance
caused, under value impairment. First-party diminution is not widely available,
but third-party diminution has been covered, and is currently being improved.
There really aren't any other risks missed or not covered. However, high-level
radiation is one type of contaminant that is not covered.
i. What are the significant inhibitors to covering these risks?
A2 - 9
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ECS
There aren't really any inhibitors for value impairment, or diminution, but
high-level radioactivity is too costly to cover.
ii. Do you know of any companies covering these risks?
No answer.
Hi. What needs to be changed, by EPA or other parties, to enable the coverage
of these risks?
No answer.
iv. What needs to be changed, by EPA or other parties, to lower the cost of
covering these risks?
No answer.
C. What would be the estimated amount of time needed to develop and market
coverage of these risks, inception-to-market time?
It takes a few weeks to a few months, depending on state legal requirements and
paperwork, such as the forms approval process. The average time for
development is probably about six months.
D. Do you know of any other companies developing or selling these policies?
No answer.
III. How can EPA encourage or develop incentives for the use of these types of
risk transfer mechanisms?
Education, education, education!! Many of the key players are not aware of the
availability and coverage of these policies. Many of your non-traditional sources of
funding are part of this unknowledgeable group. Beyond just education, EPA needs
to recommend the mechanisms to all players involved.
A2 - 10
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Environmental Warrantee
COMPANY: Environmental Warrantee
INDUSTRY: Underwriter/Broker (for AIG)
I. Do you have policies in existence or in development?
Yes.
II. What is the coverage of these policies?
A. Do these policies cover commercial or single-family properties?
Our company covers only commercial properties, but we are putting together
similar single-family policies.
B. What risks are you covering?
Policies cover unknown contamination. Known contamination can be factored
into properties through adjusted purchase price, adjusted financing, and reserve
funds.
Policies started with an exclusion of known contamination and covered only
first-party (because no one knew what third-party suits might include). In
addition the policies covered only the said property, not surrounding properties.
Policies now include third-party and off-site lawsuits for most of the risks
remediation, value impairment, and personal injury (those not included will be
mentioned later).
L What is the scope of coverage for these risks? Maximum coverage,
deductible, etc.?
The scope of coverage varies greatly with the underwriting criteria. There
is no maximum coverage or standard deductible. However, the low side
of coverage is usually around $1 million, and the high side of coverage is
around $40 million, with an average of $2 million to $5 million. Although
the minimum coverage is currently $1 million, Environmental Warranty is
developing two new policies with coverage from $250,000 to $500,000, and
$500,000 to $1 million.
The deductibles range from $10,000 to $100,000, with 8 out of 10 policies
written with a deductible in the $25,000 to $50,000 range.
ii. What are the underwriting criteria for covering these risks?
A2 - 11
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Environmental Warrantee
Underwriting criteria were very stringent in the past, requiring extensive
due diligence. As insurance companies have become more comfortable
with the risks, these criteria have begun to relax.
Hi. What is the demand trend for insuring these risks?
Demand has increased greatly for these policies. Since last July and
August, we have seen a 300 to 400 percent increase in demand for these
policies. The reason for this dramatic increase is based on three things:
• Environmental Warrantee moved away from their original carrier
(SafeCo) to two other carriers (Zurich American and AIG) which
caused the submission acceptance to go way up (the two new
carriers are more willing to cover risks).
• The underwriting of policies in general has broadened coverage.
• The market is finally waking up with more refinancing, more
securitization work, and lenders requiring insurance on collateral
properties.
iv. How many policies have you sold?
During the period from January 1990 to January of 1995, we sold about 50
policies, while we have sold 20 policies during the last 2 months. Over the
next year we expect to sell between 200 to 225 policies.
v. Are the trends different in certain states (i.e., have state laws affected the
demand for these policies) ?
The demands for these policies are more lender driven. We have not seen
any states where the demand is significantly different than other states.
vi. What are the costs (i.e., premiums) for covering these risks?
The costs of covering these risks has gone through the floor. Three years
ago, the cost for simple coverage of a $1 million policy was $10,000.
Today, the cost for the same policy is $5,000.
vii. Do the relative costs of covering these risks increase as the value of the
insured property decreases? If so, what needs to change for the relative
costs to remain constant?
A2 - 12
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Environmental Warrantee
Using the minimum value of property as an excuse that it is too expensive
to buy coverage is not a good excuse. Cost is only an easy excuse. We
know of many lenders that incorporate the cost of the policies into the
loans.
B. Why aren't [those risks not mentioned] covered under these policies?
Risk # 5, payment required because of nuisance caused, is a question. I guess
that third-party lawsuits based on nuisance would not be covered.
Risk # 6, payment required because of decrease of property equity, can't really be
covered. The erosion of equity problem is based on "says who" criteria. There
are just too many opinions on how much, and why equity has eroded.
All value impairment risks are nearly impossible to insure. The ability to define
perception has too many variables. For example, the Federal or state
governments may change their minds on liability. Even with a letter of closure,
there is always that "but we reserve the right" clause.
L What are the significant inhibitors to covering these risks?
Covered above.
ii. Do you know of any companies covering these risks?
I don't know of any companies covering these risks.
Hi. What needs to be changed, by EPA or other parties, to enable the coverage
of these risks?
I cannot think of anything.
iv. What needs to be changed, by EPA or other parties, to lower the cost of
covering these risks?
Some covered below.
A2 - 13
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Environmental Warrantee
C. What would be the estimated amount of time needed to develop and market
coverage of these risks, inception-to-market time?
No answer.
D. Do you know of any other companies developing or selling these policies?
No answer.
III. How can EPA encourage or develop incentives for the use of these types of
risk transfer mechanisms?
There are several things EPA can do:
• Develop a pilot program to encourage use of policies
• Decide what lending authorities need to be involved
• Develop a private sector task force with Financial Accounting Standards Board
(EASE) for example
• Mandate these insurance policies
• Make these policies as universal as title insurance - simple
• Keep a property closed when you close a property
• Endorse the usage of these policies.
A2 - 14
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The Eric Group
COMPANY: The Eric Group
INDUSTRY: Underwriter/Broker (for Zurich)
I. Do you have policies in existence or in development?
Yes.
II. What is the coverage of these policies?
A. Do these policies cover commercial or single-family properties?
The policies cover only commercial properties at this time.
B. What risks are you covering?
We cover most risks as listed on the predeveloped risk list (the risks as described
in Section I.A.). Risks such as pre-existing, undetected/undiscovered, and on-
going. Some common types include property transfer insurance, bodily injury
from contamination, post-remediation insurance, and remediation stop-loss to
cover remediation cost overruns.
i. What is the scope of coverage for these risks? Maximum coverage,
deductible, etc.?
Maximum coverage is typically around $10 million, with the minimum
usually around $1 million. Coverage can potentially go as low as the
insured wants, but there is a minimum on cost or premiums regardless of
how low the coverage is. For example, if someone wanted insurance
coverage for $500,000 in cost overrun of known contamination, the
premium would only be slightly less than coverage for $1 million. On the
other hand, if someone wanted coverage for $500,000 for unknown
contamination, the premium would be significantly less than policy
coverage for $1 million. The deductible varies with the type of coverage,
but usually has a minimum of approximately $10,000 with a typical
amount of $50,000.
ii. What are the underwriting criteria for covering these risks?
We require a Phase I audit for most cases, remediation papers, and other
checks and measures
A2 - 15
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The Eric Group
Hi. What is the demand trend for insuring these risks?
Demand has been a flat curve until about July 1995. Since then, the
demand has increased 200 percent. Most of this increase has been due to
Eric Group's expansion of coverage last May. We are also looking for a
great increase in 1996 as many property portfolios are coming in.
iv. How many policies have you sold?
We have sold over 1,000 policies covering environmental risks. The
policies provide coverage to over $2 billion worth of securitized mortgage
transactions. The total value of real estate covered is probably over $5
billion.
v. Are the trends different in certain states (i.e., have state laws affected the
demand for these policies) ?
We have not seen a big difference among states, but Illinois, Ohio,
Minnesota, New Jersey, Massachusetts, and Pennsylvania have all done a
great job of encouraging redevelopment by relaxing risk-based cleanup.
vi. What are the costs (i.e., premiums) for covering these risks?
The premiums vary by risk and not size or value of the property. Cost for
a 5-year policy in coverage is commonly around $10,000, and can go up to
$100,000. For $2 million in coverage, the premiums range from $10,000 to
$25,000 for most policies. For $5 million in coverage, the premiums range
from $15,000 to $50,000.
vii. Do the relative costs of covering these risks increase as the value of the
insured property decreases? If so, what needs to change for the relative
costs to remain constant?
Yes, small properties have a higher relative premium. Premiums usually
bring the value of the property back into the playing field, level with
"greenfields." When the deal makes sense, premiums are not a concern.
B. Why aren't [those risks not mentioned] covered under these policies?
Risks on properties that have not been remediated, and where there is
unresolved remediation are not covered. The property owner needs to either
remediate or complete closure of a site.
A2 - 16
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United Coastal Insurance
Risk #4, legal fees under remediation-based risk, is not covered at this time, but
could easily be covered.
Risk #5, payment required because of a nuisance, could be covered if a judgment
was lawfully claimed.
Risk # 6, payment required because of decreased equity, is not currently covered,
but I am sure models could be developed.
Value Impairment is not covered at this time but is probably calculable. We
would need to know (1) how often something happens, and (2) how much it
costs to get it done. I would be very interested in developing this type of policy.
L What are the significant inhibitors to covering these risks?
The major inhibitor is undefined risks of EPA liability.
ii. Do you know of any companies covering these risks?
I don't know of any companies covering these risks.
Hi. What needs to be changed, by EPA or other parties, to enable the coverage
of these risks?
Regulations need to be reasonable regarding remediation policies, and
EPA needs to be firm on going further with liability, such as re-openers,
even though we can deal with re-opener clauses to a certain extent.
iv. What needs to be changed, by EPA or other parties, to lower the cost of
covering these risks?
There is nothing EPA can do to lower these costs, but they do need to be
at the table to clarify things.
C. What would be the estimated amount of time needed to develop and market
coverage of these risks, inception-to-market time?
The usual amount of time needed is about 1-2 years for development.
D. Do you know of any other companies developing or selling these policies?
No answer.
A2 - 17
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The Eric Group
III. How can EPA encourage or develop incentives for the use of these types of
risk transfer mechanisms?
• The Federal government should not be in the insurance business. However,
HUD and DOC may have an interest in encouraging the use of these policies.
• EPA needs to provide a mechanism to require and allow the use of public
funding for insurance premiums.
• EPA should make sure all parties involved in property transactions are aware of
the availability of insurance.
• EPA should use incentives to encourage the use of insurance. For example, if
insurance is in place on a property, EPA should relax certain procedures.
A2 - 18
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United Coastal Insurance
COMPANY: United Coastal Insurance
INDUSTRY: Insurer
I. Do you have policies in existence or in development?
Yes.
II. What is the coverage of these policies?
A. Do these policies cover commercial or single-family properties?
The policies cover only commercial properties at this time.
B. What risks are you covering?
Our company covers unknown contamination. In situations where the
contamination is known, there is a purchaser/seller indemnification agreement
where the purchaser sits behind this agreement and the seller may purchase a
policy.
i. What is the scope of coverage for these risks? Maximum coverage,
deductible, etc.?
We can cover liability above certain levels of known contamination, up to
$10 million. The coverage can go as low as $250,000. The scope of
coverage really depends on the underwriting criteria.
ii. What are the underwriting criteria for covering these risks?
The criteria includes: assessment of on-site management and
environmental practices, such as controls and safety measures;
assessment of all hazards on-site and on surrounding sites such as number
of USTs, the site's listing on CERCLIS, the site's requirements under
RCRA, and whether the site is considered a large quantity generator. In
addition, we look for ground water and surface water problems.
Hi. What is the demand trend for insuring these risks?
The demand is high, but it has not been purchased a lot because costs are
still too high. However, we have seen about a 15-20 percent increase in
demand for these policies over that past year (no specific month of upturn
was identified). This increase was attributed to the fact that lenders,
A2 - 19
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United Coastal Insurance
buyers/sellers, and municipalities are requiring use of insurance policies
for real estate transactions.
iv. How many policies have you sold?
This information is proprietary.
v. Are the trends different in certain states (i.e., have state laws affected the
demand for these policies) ?
The Transfer Act in New Jersey emphasizes site assessment and sheds
more light on liability.
vi. What are the costs (i.e., premiums) for covering these risks?
The costs are relatively expensive, but I cannot give specifics.
vii. (Question was not included on this interview.)
B. Why aren't [those risks not mentioned] covered under these policies?
They are not covered due to the risks of third-party liability.
i. What are the significant inhibitors to covering these risks?
It is difficult to define the potential liability.
ii. Do you know of any companies covering these risks?
No answer.
Hi. What needs to be changed, by EPA or other parties, to enable the coverage
of these risks?
EPA needs to do more to clarify the liabilities of property purchasers.
iv. What needs to be changed, by EPA or other parties, to lower the cost of
covering these risks?
EPA needs to seek out more PRP's, use joint and several liability, and
relax and/or revamp many of the cleanup laws. It is too big an issue to
define clean when it is very dependent on the desired use of the property.
A2 - 20
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United Coastal Insurance
C. What would be the estimated amount of time needed to develop and market
coverage of these risks, inception-to-market time?
No answer.
D. Do you know of any other companies developing or selling these policies?
No answer.
III. How can EPA encourage or develop incentives for the use of these types of
risk transfer mechanisms?
• (Could) Require policies.
• Distribute materials on the risks, and the policies that are available to cover the
risks.
• Develop indemnification/protection on Brownfields for third-party lawsuits.
A2 - 21
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Willis Corroon
COMPANY: Willis Corroon Environmental Risk Management Services
INDUSTRY: Broker
I. Do you have policies in existence or in development?
Yes.
II. What is the coverage of these policies?
A. Do these policies cover commercial or single-family properties?
Our policies cover only commercial properties.
B. What risks are you covering?
If you can get a permit to do it, you can insure it. All of the risks, such as fines,
penalties, punitive damages, non-compliance lawsuits, value impairment, can be
covered in some way.
i. What is the scope of coverage for these risks? Maximum coverage,
deductible, etc.?
There is a minimum premium which does not really decrease with
anything below $1 million in coverage. There have been very few policies
written for $500,000 in coverage, but most brokers do not want to deal
with anything less than $1 million.
ii. What are the underwriting criteria for covering these risks?
No answer.
Hi. What is the demand trend for insuring these risks?
I do not have a specific percentage of increase, or date when the increase
started, but there have been more inquiries on these insurance policies
over the past month than there has been over the past five years. The
reason for this has been EPA encouragement of brownfields
redevelopment and the Brownfields Program. RBCA standards are
making real cleanup feasible for the first time.
iv. How many policies have you sold?
No answer.
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Willis Corroon
v. Are the trends different in certain states (i.e., have state laws affected the
demand for these policies) ?
No answer.
vi. What are the costs (i.e., premiums) for covering these risks?
A standard premium is not easily identified, but remediation stop-loss is
being pushed to under 10 percent of the coverage. Minimum premiums
are around $10,000 for a million in coverage.
vii. Do the relative costs of covering these risks increase as the value of the
insured property decreases? If so, what needs to change for the relative
costs to remain constant?
I do not think $10,000 is a deal-breaker for properties with little value. If
the cost of cleanup is upside down, in other words the costs are more than
the value of property at its highest use, the deal will not go through
anyway.
B. Why aren't [those risks not mentioned] covered under these policies?
No answer.
i. What are the significant inhibitors to covering these risks?
No answer.
ii. Do you know of any companies covering these risks?
No answer.
Hi. What needs to be changed, by EPA or other parties, to enable the coverage
of these risks?
No answer.
iv. What needs to be changed, by EPA or other parties, to lower the cost of
covering these risks?
No answer.
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Willis Corroon
C. What would be the estimated amount of time needed to develop and market
coverage of these risks, inception-to-market time?
No answer.
D. Do you know of any other companies developing or selling these policies?
The big companies offering these policies are Environmental Warrantee, ECS,
Zurich American, and American International Group. These are the leaders in
this type of insurance. The others are followers.
III. How can EPA encourage or develop incentives for the use of these types of
risk transfer mechanisms?
Policies are not being used because, for many sites, there is no or little information.
Second, there is a lack of knowledge about these types of policies in the
marketplace. EPA needs to make more information available through literature on
these policies and how they work.
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Zurich American
COMPANY: Zurich American Insurance Group
INDUSTRY: Insurer
I. Do you have policies in existence or in development?
Yes.
II. What is the coverage of these policies?
A. Do these policies cover commercial or single-family properties?
Our policies cover commercial properties, but they can be geared for single-
family properties if requested. However, the answers in this interview are based
on commercial property.
B. What risks are you covering?
All of the risks on the list are covered, at least to a certain extent. For example,
the coverage of consultant and lawyer fees to meet government regulations is
covered to the extent that it is included in legal defense. If one wanted to go
beyond compliance, it would not be covered.
L What is the scope of coverage for these risks? Maximum coverage,
deductible, etc.?
The scope of coverage varies widely, up to about $10 million in risk
transfer capacity. I can not give a definite range for the coverage, but I
have seen it as low as $500,000, with the most commonly requested
coverage at $1 million. However, there really is no set minimum except
for the fact that as the coverage amount decreases, the cost per dollar
covered increases. The deductible is really only a tool that makes sure the
insured is taking part of the risk, which will then vary on the soundness of
the business deal.
ii. What are the underwriting criteria for covering these risks?
We look first for a detailed engineering report of the site. The key
underwriting criteria, however, is to look at the soundness and business
sense of the property transaction. What are the fundamentals of the
project, and is its proposed use going to cover the costs of remediation,
enough to be profitable.
Hi. What is the demand trend for insuring these risks?
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Zurich American
The demand is greatly increasing. The talk and focus by EPA, states, and
localities has been a big help in driving up this demand, as well as the
time and energy spent by Zurich American promoting our policies.
Specifically, the increase in demand has only been in the form of inquiries,
and not in actual policies sold.
iv. How many policies have you sold?
We have been involved in several hundred commercial real estate deals
over the past 3 years.
v. Are the trends different in certain states (i.e., have state laws affected the
demand for these policies) ?
We have not sold enough policies across all states to make an informed
answer to this question. I do think that there are a number of states in the
Midwest that have put a substantial effort into their brownfields
programs.
vi. What are the costs (i.e., premiums) for covering these risks?
The costs vary widely. I cannot give a definite range, but I have seen
some policies go for $10,000 or less per million of coverage, while some
other policies have gone for a few million. There are too many variable to
give a range or average.
vii. Do the relative costs of covering these risks increase as the value of the
insured property decreases? If so, what needs to change for the relative
costs to remain constant?
There are properties where the cost of remediation, or the risks of these
costs, can far exceed the potential value of the property. However,
insurance is not going to help redevelop these properties. These
properties can only be redeveloped if the redevelopment makes sound
business sense. If it does not, insurance will not be provided. These
properties will only be redeveloped if subsidies are provided by the
government, or if they are redeveloped directly by the government. For
most properties that do make good business sense, the cost of insurance
has not been an issue.
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Zurich American
B. Why aren't [those risks not mentioned] covered under these policies?
There really are no risks that cannot be covered. There are only limits to most of
these risks, such as some types of contamination that will not be covered, as well
as some properties that have certain manufacturing histories.
L What are the significant inhibitors to covering these risks?
No answer.
ii. Do you know of any companies covering these risks?
No answer.
Hi. What needs to be changed, by EPA or other parties, to enable the coverage
of these risks?
No answer.
iv. What needs to be changed, by EPA or other parties, to lower the cost of
covering these risks?
No answer.
C. What would be the estimated amount of time needed to develop and market
coverage of these risks, inception-to-market time?
Development can be about as fast as we want it to be. If the deal is right, and the
demand for coverage is there, the time-frame can be quite short.
D. Do you know of any other companies developing or selling these policies?
No answer.
III. How can EPA encourage or develop incentives for the use of these types of
risk transfer mechanisms?
• There is talk and movement currently on secured creditor exemptions for
liability. There needs to be this same type of exemption for insurance companies
who could potentially be considered owner/operators of properties, and thus
could be held liable for costs
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Zurich American
they were not responsible for initially. There are several cases out there right
now which deal with these issues (i.e., Tiger vs. Tiger).
EPA needs to educate the public, developers, lenders, and purchasers on why
and how this redevelopment process happens. By shedding light on problems,
frivolous litigation can be averted. These groups need to have a clear picture
from EPA on the evaluation of property, and the liability that exists, both state
and Federal, even if a property has been closed. From this understanding, EPA
needs to make it clear why redeveloping potentially contaminated properties is a
priority, ways this is being done now, and how other mechanisms can be used in
the future to facilitate redevelopment (such as insurance).
Clarify the goals of Federal programs, such as Brownfields, and build a legal
framework into these goals. For example, when EPA is required to "re-open" a
closed property, loan funds should be provided for the additional costs.
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