Environmental Insurance Helps
Ensure Redevelopment
o
Environmental Insurance
bstacles that include unanticipated cleanup costs and fears of
unforeseen liability often dissuade otherwise interested developers from
investing in brownfields. Environmental insurance is one of the few tools
capable of limiting both of these barriers. "It makes a brownfields deal
seem less risky, provides comfort to the decision makers, and lets people
sleep well at night," explains Lynn Tracy Nerland, Assistant City Attorney
for Emeryville, California. Increasingly, communities like Emeryville and
other EPA Brownfields Pilots/Grantees are including environmental insurance
as a tool in their multifaceted approaches to brownfields reuse.
The protection afforded by environmental insurance is available in a number
of different policy terms and types of coverage. Professor Peter Meyer of
the University of Louisville and Director of the EPA Region IV Environmental
Finance Center, and Professor Kristen Yount of Northern Kentucky
University, have collaborated to complete extensive research on the industry.
Through their research, Meyer and Yount distilled various environmental
insurance policy types into three categories of coverage: Cleanup Cost Cap,
Pollution Liability, and Secured Creditor. Cleanup Cost Cap provides the
developer with protection against the possibility that actual cleanup costs
exceed original estimates. Through Pollution Liability Protection, developers
and long-term owners of redeveloped brownfields are provided with coverage,
up to specified amounts, for users of those properties who make claims
based on continuing pollution conditions. Lenders are guaranteed loan
repayments through Secured Creditor policies in the event that a borrower
were to default on loan payments or if collateral value is lost, due in some
way, to the pollution condition.
Across the landscape of abandoned sites and the Brownfields Pilots/Grantees
that address them, these types of insurance policies are protecting those
with a stake in brownfields redevelopment. The Somerville, Massachusetts
Brownfields Pilot, for example, created its own form of Cleanup Cost Cap
coverage to facilitate redevelopment of an abandoned mattress factory.
continued ^
An abandoned mattress factory in
Somerville, MA.
JUST THE FACTS:
The protection afforded by environmental
insurance is available in a number of
different policy terms and types of
coverage:
• Cleanup Cost Cap coverage provides
the developer with protection against
the possibility that actual cleanup costs
exceed original estimates.
• Pollution Liability Protection covers
developers and long-term owners of
redeveloped brownfields, up to
specified amounts, in the event that
users of those properties make claims
based on continuing pollution conditions.
• Through Secured Creditor policies,
lenders are guaranteed loan
repayments in the event that a borrower
defaults on loan payments, or if
collateral value is lost, due in some way,
to the pollution condition.
"[Environmental
insurance] makes a
brownfields deal seem
less risky, provides
comfort to the decision
makers, and lets people
sleep well at night."
—Lynn Tracy Nerland
Assistant City Attorney,
Emeryville, California
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Though interested in converting the mattress facility into a full-service assisted living
facility, the Visiting Nurses Association (VNA) was discouraged by fears that cleanup
costs might exceed estimated estimates. Soil and groundwater assessments revealed
lead, petroleum, and barium contamination that would cost at least $225,000 to
remediate. Recognizing the multiple benefits of this redevelopment project, the
City of Somerville used a portion of its U.S. Department of Housing and Urban
Development (HUD) Community Development Block Grant funds to finance
$100,000 in Cleanup Cost Cap coverage. With confidence that cleanup costs
to the VNA would not escalate beyond the original estimate, the Visiting Nurses
Association proceeded with redevelopment plans. No claims were made against
the cost overrun protection, and the VNA's new 97-unit, assisted-living facility
opened in June 2000. Every unit was occupied by the end of that summer.
This $14 million redevelopment project brought more than 45 new jobs to the
city.
In Emeryville, California, a bustling community situated to the east of San Francisco,
demands for housing are high. Additionally, the Emeryville community desired a
mixed-use downtown center. The City's South Bayfront area, once the location of
a paint factory, pesticide production facility, and drum reconditioning factory in the
1920s, became the planned site of a 350-unit residential, 250-room hotel, and 400,000-
square-foot retail development in 1999. With a history of chemical production and a future of
overnight accommodations and long-term residences, developers and the Emeryville Redevelopment
Agency needed to feel comfortable and protected if they were going to invest in the South Bayfront
area. The redevelopment agency and developers decided that a $10 million Pollution Liability
policy would help everyone sleep well at night.
This policy protected the redevelopment agency during remediation from certain additional cleanup
costs and bodily harm to workers. When cleanup was completed, the developers became the
primary insured. As such, the developers have up to $ 10 million in liability protection for a 10-year
period, which includes physical harm to residents or occupants should they be affected by the
project. According to Ms. Nerland, the redevelopment agency, the site's developers, and the
insurance underwriter conducted an extensive due diligence review of past uses, contaminants,
and cleanup results. The Emeryville Department of Economic Development reports that $85
million in private investment has been leveraged and more than 700 jobs have been created as a
result of the project. These numbers are expected to increase as construction of more than 300
housing units is planned to begin in the Fall of 2003. In Emeryville, thanks in part to environmental
insurance, stakeholders and investors feel protected, the South Bayfront site is being redeveloped,
and housing, jobs, and a town center are being created.
The South Bayfront industrial site
in Emeryville, CA.
Brownfields Success Story
Environmental Insurance
Solid Waste
and Emergency
Response (5105T)
EPA500-F-03-232
July 2003
www. epa. gov/brownfields/
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Brownfields deals have also been sealed with Secured Creditor Policies. Under
these policies, insurers provide reimbursement if a borrower defaults and
compensation to the lender for collateral value loss caused by a pollution
condition. While Brownfields Pilot/Grantee communities are just
beginning to explore the use of secured creditor coverage, this coverage
is already prevalent in many redevelopment financing packages. Kevin
Matthews of AIG Environmental, a national provider of Secured
Creditor Policies, explains that, "we will often be asked to provide
coverage on a pool of loans for multiple redevelopment projects."
The assisted living facility built on the former
mattress factory site in Somerville.
Insurance carriers such as AIG Environmental, XL Environmental, Inc.,
Kemper Environmental, and Zurich-American, which provided input for a
1999 EPA study of the industry, are among the small group of carriers currently providing
environmental insurance. These companies recognize the value in adapting and innovating their
insurance products, since particular projects most often necessitate highly tailored insurance policies.
This spirit of adaptability and innovation is characteristic of local and state brownfields programs
as well. When developers and lenders express interest in redeveloping an abandoned site in
Phoenix, Arizona, the city provides them with a Brownfields Information Resource Package that
includes information about environmental insurance policy types and brokers serving the Phoenix
area. At the state level, Massachusetts provides a subsidy of 25 percent of the environmental
insurance premium cost to developers who redevelop brownfields. The policy is pre-negotiated,
not only lowering pre-development costs, but also reducing the amount of up-front work needed
to obtain coverage.
The environmental insurance field continues to grow. According to Professors Meyer and Yount,
the industry has evolved rapidly—and with the allowance of environmental insurance as an eligible
use for funds under the new federal brownfields law, environmental insurance is
likely to proliferate. Brownfields initiatives at the national, state, and local levels
are fitting environmental insurance into their revitalization strategies. As
Ignacio Dayrit, Emeryville Pilot Director, commented, "It's one piece of
the redevelopment puzzle. It is not the silver bullet, but it is protection
from uncertainty."
More information on environmental insurance can be obtained at
http://www.epa. gov/swerosps/bf/insurebf.htm or by contacting EPA's
Office of Brownfields Cleanup and Redevelopment at (202) 566-2777'.
CONTACTS
For more information contact
US EPA-Region 1(617) 918-1424
U.S. EPA-Region 9 (415) 972-3188
Or visit EPA's Brownfields Web site at:
http://www.epa.gov/brownfields/
Brownfields Success Story
Environmental Insurance
Solid Waste
and Emergency
Response (5105T)
EPA 500-F-03-232
July 2003
www. epa. gov/brownfields/
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