Brownfields Insurance
for Public Sector-Led
Development Projects:
Experience and Methods
Northern Kentucky University
University of Louisville
-------
This publication was made possible by a grant from the U.S. Environmental Protection Agency. Its
findings, however, may not necessarily reflect the Agency's view, and no official endorsement should
be inferred. Reproduction of this report, with customary credit to the source, is permitted.
-------
Acknowledgments
The authors extend our deepest gratitude to the people who generously gave their time to make this
report possible. Themanyhours local government representatives, insurance brokers, environmental
and local government attorneys, and environmental consultants spent with us are greatly appreciated.
We acknowledge their candor in discussing their problems as well as successes and their willingness
to give us their time knowing that, for most of them, their service had to be anonymous, so that we
could preserve the anonymity of our sources and the projects on which they worked. Research
support from Susan Opp and Karen Cairns contributed substantially to this report, both in the form
of information to augment our own data collection efforts and in commentary on our descriptions and
analysis. We thank them for their assistance.
May, 2005
Peter B. Meyer
University of Louisville
426 West Bloom Street
Louisville, Kentucky 40292
Voice: 502-852-8032
Fax: 502-852-4558
Kristen R. Yount
Northern Kentucky University
3205 Huntersridge
Taylor Mill, KY 41015
Voice: 859-491-9298
Fax: 859-491-9252
Email: PBMeyer@louisville.edu
Email: YountK@nku.edu
l
-------
This page left blank.
11
-------
Contents
Executive Summary 1
1.1 Prior Findings Motivating This Study 7
1.2 Methods Employed 8
Chapter 2.0 Overview of Experiences 9
2.1 Case Study# 1: Parkville 10
2.11 Background: The Site 10
2.12 Negotiations with Remediation Contractor 11
2.13 Lessons Learned 14
2.2 Case Study #2: Utopia Park 15
2.21 Background: The Site 16
2.22 Negotiations with Responsible Parties: The Role of Site Assessment .... 17
2.23 Acquiring a Master Developer 20
2.24 Lessons Learned 23
2.3 Case Study # 3: Hapiton 25
2.31 Background: The Site 25
2.32 Negotiations with the Seller/Responsible Party 26
2.33 Lessons Learned 30
2.4 Vignettes 30
2.41 School 31
2.42 Agency Facility 32
2.43 Park and Community Center 33
2.44 Lessons Learned 34
2.5 Risk Management for Public Sector-Led Brownfield Projects 35
in
-------
Chapter 3.0 The Insurance Procurement Process 37
3.1 Determining Insurance Needs 37
3.11 Insurance in Conjunction with Other Risk Management Mechanisms. ... 37
3.12 Selecting Needed Coverages 39
3.2 Overview of the Insurance Acquisition Process 41
3.21 Project Conceptualization - Should Insurance Enter the Picture? 41
3.22 Environmental Site Assessments 42
3.23 Determine Needed Protections/Begin Allocation of Liability Risks 43
3.24 Present Underwriting Package to Insurers 44
3.25 Select Insurer 44
3.26 Submit Application 45
3.27 Negotiate Insurance 46
3.3 The Need for Expertise in Negotiating Policies 47
3.31 Pollution Liability Policies 48
3.311 Selected Definitions and Exclusions 48
3.312 Policy Triggers 50
3.313 Notice Provisions 50
3.314 Cancellation 51
3.315 Number and Status of People on the Policy 51
3.32 Cost Cap Policies 52
3.321 Scope of Work 52
3.322 Policy Period 53
3.323 Accompanying Pollution Liability Coverages 53
3.4 The Pros and Cons of Finite Risk Programs 53
3.5 Fixed-Price Contracts vs Time and Materials Cleanups Using Cost Cap Insurance 55
3.6 Drafting a Request For Qualifications for Brokerage Services 57
Appendix: A Sample Property Transfer and Remediation Agreement 61
References 65
iv
-------
Executive Summary
Local governments and their economic development and environmental protection agencies have
become ever more active in efforts to remediate and reuse the brownfield sites that are scattered
across their communities. As they have come to play a more central role in such regeneration efforts,
often acting as the real estate developer for brownfield projects, they have had to deal with other real
estate actors and with the broader issues of risk management on their projects. They thus have had
to confront a new purchasing decision - the acquisition of environmental insurance.
This report builds on the past work on brownfields insurance of Northern Kentucky University and
its partner, the University of Louisville. Those earlier efforts examined the supply of insurance
coverages, their utility as tools to smooth and facilitate brownfield transactions, state efforts to
facilitate private sector access to coverages and impediments to public sector use of the tool.
The findings reported here are based primarily on tracking the role of insurance in three public sector-
led development efforts over a period of more than two years. Those projects were monitored
through personal interviews, attendance at key negotiations and decision-making meetings, and
review of documents and agreements between parties to redevelopment deals. Additional data were
collected about other local government projects that utilized insurance.
While those projects were being monitored, the authors continued to track the environmental
insurance industry and collected additional data from brokers and insurance advisors on aspects of
the insurance acquisition process. These data, largely involving purely private sector transactions,
were analyzed for the guidance they offered to public sector organizations facing an insurance
purchase decision.
All data collection was conducted with the promise of anonymity to the parties involved. Individuals
who provided information are identified in the report only in terms of their roles in projects.
Pseudonyms are used to identify cities and organizations.
After a review of the rationale for and methods employed in this study, the report describes in depth
three case studies:
Parkville - A municipal acquisition of an abandoned factory site for conversion to a park. The
project involved demolition of the existing factory buildings as well as site mitigation. Due to
city requirements for minimal oversight effort and cost predictability, the remediation and
building demolition activity was funded through a pre-funded Fixed Cost Remediation Contract,
with insurance protections for both the manufacturer and the city built in.
The manufacturer initiated the project and remained actively involved and supportive of the
city's needs. The major problem encountered in the deal was that the remediation contractor
-1-
-------
initially selected by the company and city through a Request for Qualifications (RFQ) process
failed to deliver an acceptable insurance policy to back up its cleanup price quote. The
contractor appeared to be unwilling to accept any of the cost uncertainties involved. After a
delay of about a year, the city and the manufacturer found another remediation contractor with
whom they consummated an insured arrangement in under four months.
Utopia Park - Municipal Riverfront Authority utilization of a previously acquired manufactured
gas plant site for a mixed use redevelopment. The proj ect involves the re-use of prime river view
land adjacent to a booming downtown revitalization. With a recalcitrant utility company and
failed past redevelopment efforts on the publicly owned site, the Authority pursued
exceptionally detailed site assessment to both get the utility to admit to its responsibilities and
contribute to site mitigation and to manage the mitigation risks known to exist. The Authority
got the utility's financial contribution and state approval for its mitigation plans for which they
used a fixed-price remediation contractor, backed by insurance.
A RFQ process for a master developer for the 50-acre site resulted in selection of a developer
that, after winning rights to negotiate a pre-development agreement with the Authority, never
brought its principals to the table for additional meetings. After a delay of some six months, the
Authority turned to its second choice for master developer, the pre-development contract was
agreed to, and the final development plans are on the verge of approval, all in well under a year.
Although the second developer has not yet raised issues about insurance coverages for the
project, use of insurance to protect against unexpected cleanups and liability claims and to
provide assurances to future users of the site remains a possibility.
Hapiton - Offer by manufacturer with minimally remediated site to sell the site to a local
municipal Redevelopment Authority (RDA). In this case, the RDA did not initiate the process,
but was approached during a period of depressed industrial real estate activity in the area. The
site was already remediated to industrial use standards and had earned state approval for a
mitigation that consisted primarily of a cap over contaminated soil. The RDA wanted liability
protection from the company. The manufacturer offered one year's indemnity and a short term,
low limit insurance policy that the Authority found to be inadequate. Until it received guidance
from environmental counsel, the RDA did not recognize that, if any new development pierced
the approved cap, it might have to get another state approval for the site condition, and thus
might need an insurance policy to cap the cost of remediation as well.
The manufacturer was not willing to deal with the RDA concerns over liability, wanting simply
to dispose of the site. While negotiations dragged on, with the Authority not pressing matters
because the project was not an organizational priority, the local industrial real estate market
heated up. Private firms began negotiations with the site owner and the RDA stepped out of the
picture. After over a year of private sector negotiations, the manufacturer is on the verge of
finally selling the site to the fourth company to have attempted to strike a deal.
-2-
-------
The most obvious lesson for public sector-led brownfield redevelopment from these three cases is that
it is inappropriate to assume that project delays in such transactions are due to the public involvement.
In all three instances studied, major delays occurred. All those delays were caused by private sector
parties involved in some aspect of the intended transaction.
Three vignettes offer additional insights into environmental insurance decisions in public sector-led
regeneration efforts. They include non-insurance risk management activities and decisions to buy
certain coverages and not purchase other coverages, depending on the situation. The first example,
building a school on a brownfield, includes acquisition of separate insurance policies for different
parties involved. The second, using a brownfield for a new agency facility as part of a land swap,
demonstrates how creative reuse can affect the economics of both a remediation and a regeneration
with the risks managed by insurance. The third, building a community events facility and park on a
derelict brownfield, illustrates the importance of selectivity in the purchase of insurance and the value
of buying only the coverages really needed. All three involve a local government providing facilities
for its own use, situations in which private sector end-users are not likely to dictate conditions or
generate needs for coverage that might not otherwise make sense for public sector-led brownfield
projects.
Lessons Learned about the insurance purchase process from these cases and vignettes include:
The adversarial nature of any real estate transaction - buyers and sellers with different obj ectives
- sets the context for any brownfield redevelopment. Insurance can play a role in reconciling
conflicting objectives and arriving at mutually acceptable transaction terms.
Information is central to any decision. Specialist consultants and advisors, extremely thorough
site investigations and demands for full disclosure by sellers may all involve costs to a developer.
But investing in better data for decision-making can save money over the course of the project.
Overall, better information reduces uncertainty, and thus risk, and can reduce the need for the
risk transfer capacity provided by insurance.
Time is also both a cost and a resource. Investing the time needed to do in-depth site
assessments and to consult with state regulators about alternative approaches to site mitigation
will delay work on the ground at a redevelopment site. The political and other costs of such a
delay, however, are likely to be offset by reductions in the uncertainty over environmental
conditions and the regulatory requirements likely to be imposed and are essential to the purchase
of insurance policies crafted to fit the risks of a particular brownfield.
Time and information together, however, do not assure a good deal for a public sector-led
redevelopment project. In any adversarial process, the party with the greatest expertise will
generally "win." Local governments and their agencies rarely have the expertise in-house that
the sellers and/or redevelopers of remediated brownfields have available. While temporary
advisors cost less than specialists on retainer, they will not be able to connect all the dots on
-3-
-------
complex projects and thus will not be as competent to act on the behalf of the locality
throughout the development deal-making process.
Each project has its own dynamics, risks, and possible management processes. In some
instances, insurance may be the key to completing a deal. In others, it may contribute the extra
security that speeds a project along or generates needed political support even if it may not be
central to the economics of the project. In yet others, it may make no sense, given the risks
involved and the certainty generated by other means.
A good insurance acquisition can, however, be distinguished from a poor one:
Are the risks of concern adequately covered, both in monetary and policy term limits?
Have extraneous coverages not needed to permit the transaction to proceed been excluded?
Are the appropriate parties protected as needed?
Is the price, including the premium, deductible or self-insured retention, and co-pay
requirement, acceptable to the parties involved?
If the answers to these questions are "yes," then the purchase of insurance is a "good deal." If
not, then the transaction is questionable.
The report concludes with a chapter addressing the processes and issues that need to be addressed
in purchasing environmental insurance.
Determination of insurance needs begins with the identification of the other risk and
uncertainty management and reduction tools available, or already in use, for a project. If it is
determined that there are some issues that need the protection of insurance, it then becomes
important to be very specific about what coverages are required. A checklist for developers
(Table 3.1) is provided.
The insurance acquisition process should not be initiated by a public sector developer until all
the necessary expertise has been assembled to provide needed guidance. The process then
proceeds through a series of clearly definable steps:
Project Conceptualization - including end use and possible risk allocations among parties,
Environmental Site Assessment - accumulation of all available data on the property,
Determination of Needed Protection - from allocation of liability risks and exposures,
Presentation of Underwriting Package to Insurers - an overview of the site and project
provided in order to get their "indications" on coverage available and its costs,
Selection of an Insurer - on the basis of the indication and its fit to project needs,
Submission of Application - the details of the site condition, intended uses, and the coverage
desired, including copies of all known environmental conditions data,
Negotiation over actual coverage terms, following receipt of a response to the application.
-4-
-------
Negotiating policies is a fine art in itself, and not an activity for the inexperienced. The more
detailed issues arise in Pollution Liability policies; the negotiable elements include:
Definitions and Exclusions - language that determines what is covered,
Policy Triggers - the terms and conditions governing coverage activation,
Notice Provisions - the information flows required between the parties involved,
Cancellation - the limits on the rights of the insurer to terminate coverage,
Number and Status of People on the Policy - the parties protected by insurance.
Mistakes made in the negotiations process can render an apparently valuable policy useless in
practice, so attention needs to be paid to these details. Similar issues in assuring appropriate
coverage arise for the Cost Caps policies, albeit the key issues are slightly different:
Scope of Work - the remedial activities and contaminants covered,
Policy Period - the length of time allowed for the covered remedial activities,
Accompanying Pollution Liability coverages - whether they are included and how they
interface with the Cost Cap policy.
Three topics of particular concern to the purchase of environmental insurance for public sector-led
projects are addressed at the end of the report:
Finite Risk Programs, a form of pre-paid insurance coverage that has been used extensively
for brownfields with extended cleanup processes, may prove useful, but could be costly for
public sector developers, notably in the capital requirements for pre-funding the project.
Insured Remediation Contracts come in two forms, with very different features that make it
difficult to chose between them for many projects. Fixed Price Remediation Contracts avoid the
oversight and management burdens on the developer that are associated with the alternative -
Time and Materials contracts covered by a negotiated Cost Cap policy. Other differences
between the two types of contracts enable developers to pick the approach that best fits their
needs and capacities. (Table 3.2 details the comparison.)
Drafting a RFQfor Brokerage Services is particularly problematic for public sector bodies that
may have least-cost, open-bid and other regulatory constraints on their purchasing processes.
A mistake in the RFQ specifications can lead to a contract with a broker not really qualified to
provide the guidance needed for environmental insurance negotiations. This section provides
guidelines about the needed elements of such a RFQ.
-------
This page left blank.
-6-
-------
Chapter 1.0
Introduction and Methods
Across the nation, there are hundreds of local government redevelopment programs working to
regenerate abandoned and underutilized brownfield sites. In order to stimulate more redevelopments,
many localities are attempting to improve their risk management practices. In order to do so, they
need specialized knowledge about utilization of insurance and guidance that may help them to acquire
the most useful and cost-effective insurance products. This study was intended to serve that need.
Three in-depth case studies were chronicled in which insurance was considered and/or used as a
brownfield redevelopment risk management tool. Insights also were garnered from less intensive
examinations of other local governments involved with insurance procurement.
1.1 Prior Findings Motivating This Study
Data from a 2001 study conducted by the authors, Factors Affecting Municipal Pursuit of
Environmental Insurance as a Brownfields Redevelopment Strategy, provided information that
shaped the data collection and analysis activities covered by this report:
Environmental insurance has been used predominately in large-scale private redevelopment
efforts in the past. Despite advances in the industry and its ability to serve diverse insurance
needs, local governments were not regularly considering or using insurance in their brownfield
regeneration programs.
Insurance underwriters and brokers reported frustrations in marketing to the public sector. In
particular, they commented on the slow pace of governmental decision-making processes, lack
of public officials' knowledge of insurance products, and decentralized risk management
decision-making. They noted in particular the high costs of educating personnel in multiple
departments and agencies in order to sell their products.
Local governments operate with requirements that purchases be put out to multiple bids,
typically with bid content and price open to public scrutiny. Environmental insurance
underwriters have a proprietary interest in the individualized insurance coverage programs they
design for specialized client needs. They thus are reluctant to bid on standard Requests for
Proposals for coverage for public sector projects.
An additional problem arises since local government purchasing procedures are more oriented
toward issuance of Requests for Proposals for specific insurance policies and coverages rather
than Requests for Qualifications from brokers that demonstrate their capacity to represent public
interests in negotiating policies.
-7-
-------
1.2 Methods Employed
The project entailed acquiring information from local government representatives from localities in
which insurance was being considered to foster a brownfield redevelopment. Their experiences were
monitored through a procedure that included the following:
Identifying EPA Pilot grant recipients and others working with them who were interested in
utilizing insurance. The researchers solicited recommendations from EPA sources and used their
own contacts, arriving at an initial set of over a dozen prospects for possible study.
Selecting three cases for detailed examination with EPA approval, based on the localities'
intention to pursue insurance during the study time frame, their willingness to provide
information, and the diversity of the situations they faced.
Conducting repeated interviews with local government personnel and their advisors for over a
two-year period to collect data on their perceptions and understandings of their project
insurance needs, and the methods employed to obtain insurance.
Attending local government meetings at which insurance was discussed and following up with
telephone and in-person interviews with different participants in order to monitor progress, log
barriers encountered, and, if they were overcome, to examine the means by which the problems
were resolved.
In addition to their liaison with the case study local government project participants, the researchers
maintained communications with other governments working on brownfields insurance to supplement
the case studies with shorter descriptions or vignettes of insurance acquisition.
Throughout the research effort, anonymity was promised to all interviewees and others providing data
for the study. This commitment offered individuals the freedom to talk about situations and problems
that may have been difficult to address, to admit to mistakes they would avoid the next time around,
and otherwise to share the negative as well as positive aspects of their efforts. Most telephone and
in-person interviews were taped and transcribed for detailed analysis, with the assurance to
participants that the identities of speakers would not be reported. The descriptions of experiences and
practices that follow here thus identify the sources only in terms of their roles in projects.
Pseudonyms are used for the different localities studied.
-8-
-------
Chapter 2.0
Overview of Experiences
In order to follow the case study descriptions below, the reader needs some understanding of the
types of environmental insurance products utilized. The policies are discussed in greater detail in
Chapter 3.0, which addresses the process of negotiating insurance coverages and the issues local
governments and their agencies need to consider. Three key types of policies have been developed
over time to serve the needs of the organizations accepting some liability for the risks associated with
the mitigation and redevelopment of brownfields:1
Pollution Liability (PL) Policies. PL policies provide protection for costs resulting from
preexisting pollution conditions and new releases of contamination. Coverages consist of
protections for the costs of third party claims such as government demands for remediation and
private lawsuits for property damage, bodily injury, and remediation. Legal defense costs to
defend against third party claims are provided. The insured also may be protected against the
costs of cleanup of newly discovered, preexisting contamination on the insured's property and
related costs such as business interruptions.
Cost Cap (CC) Policies. CC policies protect against cost overruns that arise in the performance
of a planned remediation, such as those due to discovery of additional contamination. The
insurer pays the excess costs above a "self-insured retention" paid by the insured that typically
is calculated as a percentage of the estimated cleanup cost. Some CC policies include a co-pay
element, with the insured paying a percentage of the excess costs.
Finite Risk (FR) Programs. FR programs, which involve pre-funding the remediation, include
CC coverages and are often written with a PL component. The insured deposits the "net present
value" of the expected cleanup costs, plus some additional premium, with the insurer and the
insurer pays for the remediation expenses as they are incurred by the remediation contractor.
If the cleanup costs exceed the expected costs, the insurer pays for the overruns. If there is
money left in the fund when the cleanup is complete, it is returned with interest to the insured
or, if desired, to the contractor. The PL coverages may continue beyond the time it takes for the
remediation work.
1 Insurance companies have developed a variety of other products for businesses exposed to liabilities
stemming from pollution conditions. Contractors' Pollution Liability policies protect contractors that handle
remediation, demolition, transportation and disposal of hazardous materials against property damage, bodily
injury, and remediation claims. Errors and Omissions policies provide protection against claims for mistakes and
negligent acts for engineers, lawyers, laboratories, and other professionals providing services and advice. To assure
that all contractors have coverages needed, insurers offer Owner-Controlled programs to protect all contractors and
consultants working on a project
-9-
-------
2.1 Case Study #1: Parkville
Parkville, a medium sized city of about 100,000 people, is in the Upper Midwest. It enjoys a lake
shoreline and is relatively homogenous with 83 percent of the population classified as Caucasian in
2000. Using 1999 Census Bureau area definitions, Parkville is the principal city of a small Primary
Metropolitan Statistical Area of under 200,000 people. For the period of 1990-2000, both the city
and its county enjoyed a population growth rate close to the national average of 13.1 percent, with
county growth slightly outstripping that of the city. There are few differences between the population
characteristics of the city and its county, and both have close to 75 percent of their populations in the
18-65 working age range.
The city is booming as a residential area. When adjusted for inflation, Parkville's housing values
increased a staggering 40 percent between 1990 and 2000 in both the core city and the county. This
is more than double the national average increase in value. This rapid growth, however, represents
a form of catch-up: Parkville's housing values as of 2000 had basically just reached the national
median values. Housing demand continued to be high with a vacancy rate of less than half of the
national average. Parkville exhibits low poverty rates and a low unemployment rate relative to the
nation, although its median household income is comparable to the national average.
2.11 Background: The Site
This is a case involving a roughly 30-acre site in Parkville that had previously housed a diverse
manufacturing complex used for decades by a major Company, XYZ Products, Inc. The company
approached the City, offering to partner with it for remediation and redevelopment of the plant. The
site was close to existing residential areas of the City and, if remediated, had potential to contribute
to economic development and property value increases. Residential reuse was possible, given housing
demand, but development of the site for a public park also was possible and posed lower remediation
costs. The decision was made to proceed with plans to remediate to the standard necessary to support
the use of the site as a city park.
XYZ Company is a privately owned firm and does not have to disclose contingent liabilities on its
books - such as those associated with possible claims on contaminated sites - in the manner required
of companies with publicly traded stock. This left executives somewhat more willing to accept
residual liabilities than would be the case with a firm required to explain its possible environmental
liabilities to investors. Under the agreements finally consummated, in return for some direct funding,
the City released the Company from all costs and liabilities associated with environmental remediation
obligations with the exception of third party damage claims and a limited set of defined liabilities.
At the beginning of negotiations between the City and the Company, the site contained both buildings
to be demolished and in-ground contamination. XYZ had spent over $2.5 million prior to the
involvement of the City to conduct site assessments and stabilize environmental conditions. Over 300
-10-
-------
borings had been conducted to determine issues. The tests identified two chemical hot spots, some
widespread volatile organic compounds on site, and a potentially problematic groundwater
contamination plume. An additional problem uncovered was an off-site plume from an adjacent
contaminated industrial site owned by another party that could potentially migrate onto the property
in question.
Remediation plans required some soil removals, with other soil treated and retained on site, some
capping and underground plume diversion, some natural attenuation elements, and probable pump
and treat approaches to the onsite plume. Building demolition required addressing lead and asbestos
risks and also posed the problem of disposal of minimally contaminated debris. Early involvement of
the State Regulator, and that agency's cooperation in investigating alternative remediation strategies
and approaches, helped the two parties to arrive at a cost-effective approach to the mitigation. The
Regulator agreed that a risk-based approach was appropriate, and that, for the purposes of park uses,
a cap of clean soil at least 18-24 inches deep above the permitted residual contaminated soils would
permit utilization of the site as a park. The re-use could begin long before the natural attenuation and
groundwater pump and treat processes that the remediation plan included would be completed.
The Company, wanting to dispose of the site, offered it to Parkville for SI, with the intent of
structuring a deal under which some public funds would be expended for site mitigation. Parkville
obtained EPA grant funds to assist in the remediation and used an additional source of financing: a
Tax Increment Financing (TIF) District, incorporating within it the land that would rise in value due
to the area property development effects of the new park.
Box 1. Parkville: Players Involved
The City, represented by its Mayor, City Manager, and City Attorney
Environmental Counsel to Parkville
Management of XYZ Products, Inc., previous owner of the site
The State Regulator, the agency operating the Voluntary Cleanup Program
Engineers, Inc., a national firm initially selected to remediate the site with which
negotiations for the project failed
Risk Acceptors, Inc., a risk assumption firm working with Engineers, Inc.
Contract Remediators Ltd., the firm currently remediating the site
2.12 Negotiations with Remediation Contractor
Both parties wanted a fixed price for the cleanup for planning and budgeting purposes and neither
party was in aposition to offer an indemnification for prospective liabilities. A mutual determination
was made to seek a Fixed Price Remediation Contract (FPRC) under a FR program that protected
against overruns and included 30 years of PL coverages that extended beyond the anticipated
completed cleanup with full attenuation within a 10-year period.
-11-
-------
A guaranteed fixed price for the environmental response was important to the City. Although XYZ
had conducted exceptionally extensive site assessments, the possibility of cost overruns was not
acceptable. The issue revolved around financial management practices and obligations. Most state
and local governments have to balance their budgets every year and cannot afford to run deficits.
They also tend to fund major projects through borrowing or floating bonds to pay for capital
expenditures. Bonds, however, can only be floated if there is solid evidence of the borrower's
capacity to service the debt - to pay the interest and return the capital when the bond is due. That
evidence requires certainty with respect to both revenues and expenditures relating to the capital
project; a locality needs to be able to predict annual costs and project timing.
In principle, the Company, with the City, could have contracted with an engineering firm to conduct
the demolition and mitigation on a time and materials basis and then directly acquired CC coverages.
However, the City would lose the cost certainty it wanted for its TIF district if it had to file its own
claims and attempt to collect from an insurer. The Company no longer had business in the area and
did not want to have to monitor the engineering work. Similarly, the City did not want to spend its
scarce specialist personnel resources on proj ect monitoring. The strategy of reliance on a FR program
that included management of the remediation, allowed the municipality to concern itself with other
aspects of the redevelopment, notably consulting and planning with neighboring landowners and
residents for street closures and openings associated with the conversion of the site to a park.
Although pre-funding the entire cost of an environmental response in a single fiscal year would be
difficult for a local government using current revenues, the City was going to borrow for its cost of
site preparation and park construction. Thus, the capacity to pre-fund cleanup costs did not pose a
problem. In addition, from the perspective of the City, the fact that the issue had to come up only
once for municipal budgetary review was a positive argument for the FR approach.
Preparatory to the sale, Parkville helped the Company develop a Request for Proposals (RFP) for the
services of an engineering firm with the following specifications:
A Fixed Price Remediation Contract, backed by an insurance policy;
No self-insured retention on the CC coverage;
A 30-year PL policy;
Total costs for remediation and demolition work to permit development of a park estimated at
around $5 million, with an additional $200,000-$400,000 acceptable as the insurance premium.
Competitive bids from remediation contractors were jointly reviewed and Engineers, Inc., a major
national company with an extensive portfolio of brownfield mitigation, was selected. However,
negotiations with the firm broke down over the insurance component of the proposed work plan and
the remediation firm's unwillingness to accept the cost-overrun risks involved. This experience is
worth noting since it offers lessons about the differential experience of regional offices of major
engineering firms and about the variety of parties that may be involved in the risk transfer and
management process for brownfield redevelopments. It also illustrates the extent to which municipal
priorities and action plans may be delayed by the private sector, over which local governments may
have little or no control.
-12-
-------
Initially after selection, Engineers, Inc. indicated it had a preliminary commitment from an insurer for
a $250,000 premium as part of the FR structure of the FPRC. At the meeting to negotiate final
contract terms and price, the City and Company found, to their surprise, that no insurance policy for
the project had been negotiated by Engineers, Inc. Further, Engineers, Inc. brought in another party,
Risk Acceptors, Inc., to accept the liabilities associated with the project.
Engineers, Inc. did have extensive experience with excavation, building construction, andbrownfields
remediation, but the nature of the contracts it had held was not clear. The firm's insistence on
inclusion of Risk Acceptors, Inc. led the City to wonder if the geographic division of the company
with which it was dealing had prior experience with FPRC work, or if they had simply performed
brownfields remediations on a time and materials basis and had not been involved in risk management
or price assurance.
Risk Acceptors, Inc. was a small firm, unknown to Parkville and XYZ personnel, that claimed to have
an unspecified unique capacity to accept risks, and the experience and ability to negotiate less
expensive insurance policies. It claimed that it would accept all legal liability, relieving Engineers, Inc.
completely, a claim the City Attorney perceived to be of little value if not adequately supported by
insurance. At the meeting, the City and Company indicated that Engineers, Inc. could involve Risk
Acceptors, Inc. as it wanted but that Engineers, Inc. would need to be the signatory to the agreement.
The City and Company anticipated that it would take Engineers, Inc. two to three months after this
first meeting to get a final proposal consonant with the RFP specifications. This proposal, however,
never arrived. Eight months after negotiation began, all details were in place except for the requisite
insurance coverage. That is, the City and Company had received a remediation response plan from
the Engineers, Inc. that was fully acceptable to them and the State Regulator, but there was no
provision in place for managing financial risks. While some insurance documents had been delivered,
they were merely template policies that did not include specific insurance elements required in the
RFP.
After waiting another month, the Company and City terminated negotiations with Engineers, Inc. for
failure to perform. Subsequently, they selected an alternative provider, Contract Remediators, Ltd.
A mere two months later, a full proposal for remediation accepted by the State Regulator and
insurance to transfer risk was in hand. The following month it was presented to the Finance
Committee and City Council and was approved.
While the City had to yield on its original request for a 30-year PL policy term, since that coverage
is not available in the current market, the seller and buyer otherwise got the FPRC they originally had
pursued. Insurance costs and coverages in the program ultimately initiated included:
~ PL coverage for cleanup of preexisting, newly discovered conditions and for third party
claims for bodily injury and property damage. This coverage carries a $25,000 deductible
and has a $4 million aggregate. Both the City and the Company are named insureds.
-13-
-------
~ CC coverage for both known contaminants and unknown contaminants carrying a $7
million aggregate, no self-insured retention and a 10% co-pay provision, with Contract
Remediators, Ltd. as the named insured unless the City has to become responsible for the
cleanup.
~ A policy term of 10 years, with a 60 day extended reporting period for the PL coverages
beyond the termination of the policy.
~ Commutation provisions, permitting return of funds committed if the project is declared
complete by the state after five years, with remaining funds provided to Contract
Remediators, Ltd. as the named insured.2
The total FR program cost $5.4 million, the maximum originally acceptable to the City and Company,
with $4.5 million for the demolition and remediation and $900,000 for the PL and CC coverages.
Key elements of the full final agreement, described in detail in the Appendix to this Report, provide
a useful illustration of how a local government can play a key role in regenerating a brownfield site.
The property transfer involved the site in as is condition with an acknowledged and defined set of
existing conditions for which the Company retains ultimate legal liability. The Company did not
request indemnifications from the City. Its risk management concerns were addressed through the
insurance coverage that assured that sufficient funds would be available to address cost overruns in
the demolition and remediation process and that provided liability protection.
Work by Contract Remediators, Ltd. is currently underway. The demolition of the structures on site
has been completed. Parkville is proceeding with neighborhood meetings to refine plans for the site
redevelopment.
2.13 Lessons Learned
Although a FR insurance program structure may not save money for a remediation project, such
a program has advantages if a local government can raise funds for the cleanup and premium
up front. In the Parkville case, a major benefit included minimizing the need for municipal
involvement in assuring successful site preparation, thus freeing personnel for other important
tasks such as community involvement in project decision making. Additional benefits of FR
programs are discussed in Section 3.4.
Not all remediation contractors, regardless of their experience in conducting site environmental
responses, are prepared to accept all of the proj ect risks and may not know how to offer FPRC.
2 A negotiable feature of a FR program is the disposition of any funds remaining after a
regulator approves a remediation. Receipt of all or a large share of that balance may provide a
remediator with an incentive for speedy and cost-efficient performance.
-14-
-------
The RFP for remediation services under such a contract thus should specifically ask about the
responding office or division's experience in working under such arrangements.
The insurance marketplace is constantly changing, so what past experience may suggest are
reasonable insurance terms, such as the City expectation of a 30-year PL policy, may not be
available.
The greater the extent of cooperation of the Buyer and the Seller, the more they can determine
the terms of any agreement to mitigate and reuse a site, and can influence the terms and
conditions of insurance coverages.
Cooperative State Regulators who can assist Buyers and Sellers in determining the extent of
environmental response required before they advertise for remediation services can have a maj or
impact on the cost, speed, and likelihood of a successful brownfield redevelopment.
The fact that a public sector body is party to an agreement does not necessarily impede proj ect
planning and implementation, despite fears on the part of developers documented by Meyer and
Lyons (2000).
Neighborhood acceptance is important to any land redevelopment effort, and political and/or
financial capital is always going to be needed to assure such support.
2.2 Case Study # 2: Utopia Park
Utopia Park is a mid-western city at the center of a Metropolitan Statistical Area (MSA) with a 1999
population of over 1.5 million people. This city and county have experienced a much smaller than
national average population growth over the decade ending in 2000, with the county growing at twice
the rate of the city. Neither the city nor the county enjoyed growth in median house values at even
so much as three-quarters of the 18 percent national average for the 1990s. However, as a reflection
perhaps of a shift in luxury demand for urban residential opportunities, median house value growth
in the city exceeded that in the county by over 30 percent, despite the city's slower population
growth. Median home value over the decade of the 90s, while growing, remained in the mid-$80,000s
across the central county of the MSA, with little change in population density.
Both the central city and county seem to be economically stagnant, unable to generate significant job
growth as population andjobs shift to other counties in the MSA. They remain the regional job center
statistically due only to their historic dominance of employment locations. The central county has the
highest unemployment rate and one of the lowest economic growth rates in the metropolitan area,
and its central city exhibits an individual poverty rate approaching 15 percent. 1999 median household
incomes are in the $35,000 - $40,000 range, well below national averages.
-15-
-------
2.21 Background: The Site
Like many older cities, Utopia Park was home to a manufactured gas plant (MGP) from the late 19th
century until after World War I. Typical of such plants, the local facility simply dumped the tarry
sludges that were a maj or byproduct of the early coal gasification process. While there were millions
of gallons of contaminated liquid waste generated as well, those environmental problems had long
since washed away. The MGP, as was common in the period, was located near a barge-navigable
river to permit easy provision of the coal that was its feedstock. The site was neglected for most of
the post-World War II period as Utopia Park, along with cities like it throughout the rust belt, turned
its back on its industrial waterfront.
The MGP site, originally owned by the local utility company, MyGas, Inc. was taken over by the City
in the 1950s, long before concerns about environmental problems affected public willingness to accept
surplus private lands for possible redevelopment. The City, over time, had acquired title to virtually
all its waterfront land since it was separated from the economically active downtown by a busy
railroad line, and the waterway, while navigable, had become economically irrelevant as far as most
of the local businesses were concerned. Those acquisitions included the site of an ammonia plant
operated by Colamia that used waste products from the MGP facility.
Those parcels and adjacent properties were used for a period as a municipal landfill. Subsequent
public sector activity included surface deposition of debris from structural demolition on public
projects - mostly cement, rebar, and related materials - contaminated by friable asbestos. Such
activity took place from the early 1960s into the 1980s.
Eventually, as the potential economic value of the waterfront property became apparent, the City
formed a special arms-length economic development organization, the Utopia Park Riverfront Agency
(RA), to take title to an array of properties and pursue regeneration. Formed in the 1970s, the RA
is a City instrumentality with a municipally appointed Board and independent authority to condemn
property, enter into contracts, and issue bonds. Its legal mission is the promotion of the local
economy through its land development efforts.
Nurturing its assets and leasing rather than selling its more valuable locations, that agency gradually
developed a portfolio of income-generating property. Funds from those resources were re-invested
in further riverfront property development and provision of amenities near the old MGP site. The
gradual improvement in the real estate market in the Central Business District, on the other side of
the tracks, along with continued movement toward the river and the national tendency of cities to
return to their riverfronts, led the City and its Agency to try to attract development to the area.
The RA initiated some efforts in the 1990s to attract developers to the 50-acre site that included the
old MGP and municipal disposal sites. Those early efforts attracted only local firms as prospective
developers, and the responses and proposals seemed to be more linked to the types of development
experience the firms had than to any serious conception of what the market might bear at the location.
-16-
-------
The RA attributed the failure to interest any non-local companies and lack of serious interest in a
large tract of riverfront land to uncertainty on two fronts: (1) the costs for infrastructure needs
(water/sewer services, road access), and (2) the problems posed by the site' s environmental condition,
about which very little was known at the time. These two concerns led to the fear that an
economically viable private development on the 50 acres was not possible.
Relying on its own revenue-generating real estate interests and the City's willingness to take some
responsibility for the wastes it had disposed on the site, the RA decided it could address some of the
on-site environmental conditions. The residuals from the MGP, however, posed a relatively unique
set of uncertain mitigation problems it could not address on its own. While the US Environmental
Protection Agency had determined in the 1970s that deep seated coal tars and slurry remains did not
pose any real environmental threats, deposits from the MGP operations much closer to the surface,
especially the residues from liquid hazardous waste holding tanks, were of some concern. The RA
thus approached MyGas, Inc. and Colamia with a request that they step forward and acknowledge
their responsibility.
Box 2. Utopia Park: Players Involved
The Utopia Park Riverfront Agency (RA) and its Manager
Environmental Counsel to the RA, a local firm with a specialist environmental practice
MyGas, Inc, the local public utility that operated the MGP through the 1920s
Colamia, Inc., the operator of the ammonia plant next to the MGP facility
The City of Utopia Park, its City Manager, Mayor and members of Council
The State Regulator and Voluntary Cleanup Program (VCP)
The Brown Coalition, the initially selected Master Developer for the project
The Cityworks Company, the second choice for Master Developer, now doing the project
The River Grove neighborhood association
The Utopia Park Brownfields Coordinator, who has supported the project indirectly
2.22 Negotiations with Responsible Parties: The Role of Site Assessment
MyGas, Inc., the utility that ran the MGP, remains a major power company serving Utopia Park and
is a maj or landowner in the area, holding title to property adj acent to redevelopment site. As has often
been the case with similar efforts to induce parties to accept responsibility for contamination, the
utility refused to admit it had anything to do with the pollution. MyGas argued that it was not
responsible for any of the residues on-site, claiming that it had never deposited anything to begin with
and that, given the number of years since it had turned the property over to the City and the use of
the site for waste disposal, what was present resulted from subsequent uses. (MyGas representatives
-17-
-------
substantiated their denial with claims that they had interviewed ex-employees of the MGP - a facility
that had closed its doors in the 1920s.)
Given this resistence, the RA had to decide how to proceed with respect to potential reuse of the site.
It could (1) abandon its efforts to turn around the property, (2) proceed to sue MyGas and Colamia
as PRPs under CERCLA's strict joint and several liability provisions, or (3) take a different approach
to convincing the utility to help with the remediation. Given that the MGP site, only about five acres
overall including ancillary operations, adversely affected surrounding property, rendering the entire
50 acres intended for development virtually unusable, the RA was not prepared to abandon its efforts.
The second option, legal proceedings, could have tied up the site for a decade or more, and the RA
did not want to expend its financial resources on litigation. Yet something needed to be done about
the MGP site.
The RA thus decided late in 1999 to begin extremely intensive site investigation efforts and to pursue
regulatory decisions regarding the MGP waste sludges and the risks they posed if left in place. The
Agency recognized that its efforts could facilitate the redevelopment they wanted:
Having the evidence to offer the PRPs might enable the RA to come to financial terms with the
MyGas and Colamia without having to resort to litigation;
The detailed data would make the whole site more attractive to prospective developers, at a
minimum attracting more attention by reducing the due diligence costs associated with
considering the site as an investment prospect.
With ten percent funding from the state environmental agency, raising the rest from its own revenue
stream, the RA initiated the intensive site investigation for all 50 acres, focusing the majority of its
efforts on the MGP site, and spending roughly SI million in the process. After taking over 400 test
borings, hiring a specialist on MGP wastes and fully characterizing the problems on its property, the
RA had the evidence it needed to return to MyGas and reopen discussions. The data suggested that
a full mitigation, removing all the waste coal tars in order to permit single family residential use,
would cost over $50 million, but that a risk-based approach leaving the tars and sludges 15 feet
underground would cost a maximum of $10-$ 12 million, including funds needed to bring in "fill,"
raise the ground level another 15 to 20 feet, and grade the site to maximize the real estate value of
the river views, thus increasing the soil barrier between users and the remaining pollutants to 30 or
more feet.
In order to reinforce its findings on remediation requirements and their adequacy and cost, the RA
entered the entire 50 acre site into the state Voluntary Cleanup Program (VCP) and won approval
from the State Regulator for a risk-based remediation, with the V CP noting the reasonableness of the
cost estimates. The state VCP was prepared to offer a "No Further Action" (NFA) letter for a
-18-
-------
successful site mitigation that addressed all surface deposits from the municipal landfill and building
demolition debris, but did not address or remove the subsurface tars.3
The RA thus used the VCP itself as an additional authority to validate the analysis and remediation
approach it presented to MyGas and Colamia in order to get participation. The RA did not pursue
the full $10 million plus that was its maximum cost estimate for site preparation, since it wanted to
give the companies an incentive for settling and contributing to the remediation without resorting to
litigation. The strategy pursued involved arriving at an agreed mitigation approach with the state
VCP, obtaining a firm bid from a fixed price remediation contractor, and showing the remediation
plans and costs to MyGas and Colamia, asking them to contribute as PRPs. The acceptable bid for
mitigation of the strands of waste coal tars within 15 feet of the surface came in at $1 million.
Additional cost coverage was requested for:
provision of water and waste-water services to the new development, which might have to be
located within contaminated subsurface areas;
reimbursement for the higher due diligence costs incurred by the RA due to the historic
contamination; and,
insurance to cover additional risks and uncertainties the development might have to address.
All told, the bill presented was for under $5 million, less than half the plausible worst-case scenario.
The PRPs settled for that sum since the figure avoided litigation costs, including possibly paying for
the litigants' costs in suing them.
The remediation contractor selected was the same firm that had conducted the in-depth site
assessment originally funded by the RA. It thus was very well acquainted with the site, the mitigation
problems and the risks. It offered a Fixed Price Remediation Contract (FPRC), which the RA was
pleased to accept.
The RA did not have experience buying environmental insurance, nor did the Brownfields or City
Risk Management offices. It also had no capacity to oversee the work of the contractor to assure that
the efforts were timely and cost-effective. In the interest of time efficiency as much as anything else,
it chose the FPRC, backed by the insurance the remediator carried. Work began in 2002 and the
mitigation and contamination removal activities required for state VCP approval were completed in
2004. The VCP approval was granted, contingent on the site not being used for single family
detached homes but imposing no other form of land use limitation.
2
The coal tars are not water soluble and pose no threat to the river and are not likely to migrate off site.
While globules of tars have been spread vertically in subsoil surfaces by the river, rising with the water table and
remaining when dry, the highest recorded subsurface water table levels have reached only to 15 feet below grade
level at the lowest points on the 50-acre plot.
-19-
-------
2.23 Acquiring a Master Developer
While work was progressing on funding and completing the mitigation of the problems left by the
MGP, the RA re-initiated efforts to attract a master developer for the site. A Request for
Qualifications (RFQ) was developed after consultations with the River Grove Neighborhood
Association that helped shape conceptions about development alternatives and contributed to the
broad specifications for a proposed mixed use project.
The RFQ solicitation initiated in 2003 differed from those pursued earlier on two maj or levels: First,
the RA was offering a fully assessed, characterized, and remediated site. Second, the RA itself
contracted with a national real estate marketing specialist for an analysis of the possible market
demands and appeal of the site and provided results of that analysis on a CD accompanying the RFQ.
Both these activities served to reduce risks for prospective RFQ respondents. The remediation and
attainment of NFA status in the VCP reduced the anticipated due diligence and compliance costs for
respondents. The market analysis enabled prospective respondents to decide whether the site fit into
their business plans and provided data to the selected party that would reduce its actual pre-
development costs.
The decision to issue a RFQ, rather than a RFP, reflected the RA's interest in partnering in the
redevelopment project, rather than just turning the site over to another party. As a partner, the
Agency could retain more influence over the nature of the redevelopment project and the mix of land
uses on the site without dictating the parameters of a preferred project to developers. Such rigid
requirements are characteristic of many municipal development RFPs. Brownfield developers report
that such restrictions make it difficult for them to use many publicly owned sites (Meyer and Lyons
2000).
From a risk management perspective, the RFQ process that was followed avoided placing the issuer
in the position of offering indemnifications or other forms of assurance that might have required
insurance underwriting. Provisions associated with the approval and certification of agreements of
all parties to the VCP, which would be extended to the selected developer, offered protections from
damage claims from others, further reducing the need for insurance coverage. (These protections even
extended to eliminating the possibility of natural resource damage claims from the state itself.)
RA representatives anticipated, however, that insurance might play a role in the project because of
the extent to which the redevelopment relied on a Risk-Based Correction Action (RBCA) mitigation
that left contamination in place. The state VCP includes a provision that permits a state-approved
mitigation plan to be augmented by a negotiation process for problem resolution to address any
contamination issues that may arise in the course of the redevelopment activities. If a new problem
such as a stray strand of coal tars close to the surface were discovered, the basic requirements for the
NFA letter would remain in place for the site as a whole. Only the new condition could be the subject
of a negotiation on a supplemental mitigation process. This provision, available in a number of
different states' VCPs, significantly reduces the perceived risks of cost increases for regulatory
-20-
-------
compliance associated with undiscovered contamination: the scope of work originally approved
cannot be reopened due to discovery of a limited new environmental problem on the site.
Despite this provision, there remains the risk that the development will experience cost overruns due
to unanticipated environmental problems. These possibilities, combined with the toxic tort liability
risks associated with the reliance on a RBCA approach, constitute uncertainties that insurance might
address. Moreover, the master developer could utilize insurance protections to increase the
marketability of parcels of the site. It did not make sense to pursue insurance coverages at the time
the RFQ was issued, however, given the need to determine specific site usages. Thus the RFQ
solicitation itself did not reference insurance. It is notable that, while the Agency received questions
from over a dozen different firms with an interest in its site and proposed redevelopment, no
questions about plans to manage risks with insurance were raised by any party.
The market analysis was completed in time for the RA to publicize the RFQ at a major developers'
conference before issuing it late in 2003. In addition to magazine advertisements and a conference
display, the RA sent the RFQ specifications, with the market analysis data CD to some 80 national
firms known to have undertaken projects of comparable scale. The Agency also held a prospective
bidders' meeting and provided interested parties with the opportunity to ask for additional
information.
When the RFQ process closed, the RA had received three responses, slightly below the number they
had gotten on other RFQs not involving previously contaminated sites. All responses were from
nationally prominent groups with large-scale redevelopment experience. The responding firms also
understood the characteristics of the Utopia Park real estate market: they all were actively engaged
in one or more local redevelopment or infill project when they responded.
The Brown Coalition was selected in March 2004. It was given 180 days' exclusive right to negotiate
a pre-development agreement with the RA that covered both the proj ect conception and design work
to be done and the financing arrangement for pre-development planning. These pre-development
agreement elements were necessary before a contract for any redevelopment designs to be
implemented could be signed. The Agency had committed the resources at its disposal to making the
site attractive to developers and was not prepared to commit more funds to project design and
planning. As noted above, the RA had avoided specifying any details about the type of development
it expected in order to encourage innovative and negotiable ideas. However, it was not prepared to
give any developer a completely free hand.
The broad, mixed use planned for the site fit the demand patterns for the riverfront. The design
question involved how best to build on complementary investments evident in the area, and the RA
expected to collaborate with its master developer on the issue. The Agency Board initiated trips to
waterfront proj ects in other cities in order to learn more about possibilities now that their preparations
appeared to be bearing fruit.
-21-
-------
The Brown Coalition, however, seemed unwilling to meet with the RA and work collaboratively
toward an approach tailored to the local market conditions. Instead they repeatedly offered fixed
designs based on past projects and never brought in the design and marketing expertise they had
offered in the RFQ response and on which the Agency had expected to rely. The Brown principals
also failed to come to the table with proposals for how to bring in the financial and planning resources
needed to complete the pre-development activities. No progress was made toward apre-development
agreement, and the Brown Coalition was informed in mid-summer 2004 that the Agency was
terminating the exclusive negotiation agreement due to their failure to deliver any of the specialist
resources that they had promised in their RFQ response.
The Cityworks Company, the RA's original second choice, was then awarded negotiation rights.
Although the firm had responded to the RFQ, it had been only minimally interested in the Utopia Park
project and had to be encouraged to step into the lead role after the Brown Coalition failed to
perform. Once convinced of the opportunity, however, Cityworks moved quickly to a pre-
development agreement with the Agency, committing to provide its own internal expertise to support
planning and design efforts. The pre-development agreement was consummated late in 2004.
Designs for a pedestrian-friendly, mixed-use urban village have been drawn up that satisfy all parties.
City Council support, generated in part by Council member participation in the Agency's planning
efforts, helped to put into place zoning changes and other facilitative arrangements. Financing plans
explicitly include pursuit of possible co-venture components, involving a continuation of the
collaboration the Agency has pursued all along. This objective is consistent with the RA's past efforts
to build their operations on revenue-generating real estate holdings, using their access to publicly
owned land not as a simple subsidy to developers, but as a means of gaining access to ownership
shares and direct financial returns on the dollar value of their public sector contributions.
Recent pressure for rapid decisions and project progress has been mounting as new opportunities
have emerged. The adj acent real estate market has heated up at a rate not anticipated earlier in 2005.
A spate of projects elsewhere in the downtown have made massive amounts of excavation fill and
clean demolition debris available at little cost for the required additional grading and shaping of the
land contours on the site. Moreover, Cityworks and the RA want to have plans in place to be able
to site underground utilities before additional fill gets placed above them, and to direct the flow of
the fill material so it does not need to be moved again in the future.
As a result of explosive development nearby in the area originally not expected to boom, the River
Grove neighborhood, Cityworks and the Agency have been collaborating on accelerating the
removals of city demolition debris that were originally deemed to be a low priority issue. State
economic development funding for strategic brownfield cleanups will cover 100 percent of the
estimated $4.5 million cost. They also are joining in efforts to pursue improved access to the site from
the nearby hot real estate zone, a linkage not considered important in the specifications and data
offered as part of the 2003 RFQ invitation. After planners hired by Cityworks developed outline site
plans and consulted with River Grove residents on their plans, a proposal for a road extension was
-22-
-------
developed and submitted to the City for approval and appropriation of needed funds. Approval is
expected without formal resolutions from the City Council. The involvement of the City Manager,
Mayor, and senior Council members in the selection of the master developer and their participation
in site visits to Cityworks' projects in other cities that were undertaken to help form a local vision has
given them a personal stake in the development.
Until the final development agreement is completed, the precise role, if any, that insurance will play
in this project remains to be determined. The co-venturing component of the arrangement with
Cityworks Company explicitly references the need to address the "financial risks ofj oint ownership."
As of May, 2005, neither party to the pre-development agreement has fully addressed the
management of the financial risks associated with unexpected costs in final site preparation. Both also
know that toxic tort risks have yet to be addressed. Roles for liability coverage may emerge as the
plans for ownership and management of the site are further articulated.
2.24 Lessons Learned
Detailed site assessments and in-depth investigations of remedial options, while expensive, may
be cost-effective, since they both reduce uncertainties and may be useful in inducing PRPs to
settle and contribute to revitalization efforts.
State VCPs can help reduce uncertainty in brownfield site preparation costs and efforts if the
enforcement agency is willing and legally able to provide assistance to prospective mitigators
in examining alternative standards and strategies for cleanups.
The national experiences and past successes of development firms working with brownfields do
not always translate to local effort and capacity - developers need to have some commitment
to the specific proj ect in order for a revitalization effort to move forward efficiently. Otherwise,
a developer's limited interest could contribute substantially to project delays, despite public
sector efforts.
Many local redevelopment agencies have very limited in-house planning and design capacity.
Such organizations need to invest heavily in building collaborative partnerships on brownfield
projects with private development firms, both to assure needed certainty and commitments and
to derive economically viable plans that can then be subjected to public discussion and
modification without generating adversarial relationships.
The necessity of obtaining environmental liability protection cannot be determined prior to
derivation of project development options. Site development plans, since they must take
financing and sale or lease options for the facilities developed into consideration, not just the
mix and spatial arrangement of land uses, may shape the extent and duration of liability risks and
thus define the insurance coverages needed.
-23-
-------
This page left blank.
-24-
-------
2.3 Case Study #3: Hapiton
Hapiton is a city of some 250,000 in the Southern United States. This population closely resembles
that of the nation overall, with over three quarters of residents between the ages of 18 and 65 and a
median age of 36. Hapiton is the principal city of a medium-to-large sized MSA - one with a
population of approximately one million. Both the city and county experienced below average
population growth for the decade ending in 2000. Moreover, the city is becoming less dense while
the county gains in population density. Sprawl is thus a serious concern in Hapiton.
Economically, Hapiton is poor and underperforming. While median housing costs rose at more than
double the national rate between 1990 and 2000, the area still has below average housing costs, with
the city showing a median value of only 70 percent of the national average, and the county, despite
the out-migration and new construction, still only at 86 percent. Incomes have not kept pace with
housing costs, so affordability has dropped: both the city and county experienced below average job
and economic activity growth rates in the 1990s. In 2000, Hapiton's individual poverty rate exceeded
20 percent, far above the roughly 12 percent rate exhibited by its county and the nation as a whole.
Median household income, similarly, was well below the national average for the city, but closer to
the national figure for the county. Overall, Hapiton may be described as economically distressed,
suffering competitively in a county (and metropolitan area) that outperforms its city.
2.31 Background: The Site
This case involves the Baker Corporation, a maj or diversified manufacturer, with a roughly 100-acre
factory site in Hapiton that it no longer wanted and on which it had mitigated environmental risks.
The company approached the local redevelopment agency in late 2002 with an offer to sell. Two
characteristics of the case underscore its value as an example:
Local government was not pursuing the site for a specific brownfield revitalization effort. It was
concerned with the economic revitalization of a depressed area, and the site, mitigated with an
approval from the state VCP, was seen as a possible catalyst for redevelopment.
Baker had conducted a RBCA mitigation that relied on an impervious cap over extensive
remaining contaminants to reach an industrial reuse standard. The company wanted to constrain
any on-site redevelopment activities to assure that it would not bear any costs for modification
of its already-approved environmental response efforts.
The Baker Corporation had maintained manufacturing operations in the area through most of the
post-war period. It closed the facility in the 1980s and completed stabilization of known contaminants
- metals and some petroleum distillates and solvents - in 1992. Since that time, the site has remained
idle, except for one remaining building occupied by another manufacturer that is renting the premises.
That renter expressed an interest in purchasing the site it occupies, but Baker would not further
subdivide, insisting on selling the entire site intact. It appears that the basis for this insistence is that
-25-
-------
the environmental response that won state approval was for the site as a whole, and the company
feared any reconsideration in the event of a real estate transaction involving subdivision.
The property is only a portion of the original factory site, having been separated from an adj acent site
that once held a long-since dismantled foundry to segregate the greater environmental problems posed
by the foundry. It lies in an industrial zone that had become obsolete over time and that had a number
of abandoned or underutilized sites, few of which were being offered for sale during a period of
depressed local demand for industrial facilities. The rail yard serving the area is also largely
abandoned, with few reutilization prospects although an active trunk line runs through the area and
the site is serviced by a rail spur.
In terms of contamination, metals problems lie primarily under the portion of the site now occupied
by the tenant manufacturer, as do the majority of the "hot spots" that were not to be disturbed under
the original approved mitigation. The remainder of the site, all unoccupied, is capped to avoid water
penetration that could create runoff and groundwater problems with remaining solvents and
petroleum distillates found in the soils at levels below those requiring mitigation actions. Groundwater
monitoring wells, checked regularly by Baker, have not shown signs of emerging problems.
Box 3. Hapiton: Players Involved
The Executive Director of the Hapiton Redevelopment Authority (RDA)
The Hapiton Brownfields Coordinator
The Hapiton Chief Officer for Economic Development (to whom both of the above
report)
Real Estate Counsel to the RDA
Environmental Counsel to the RDA
Risk Manager for the Baker Corporation
Environmental Counsel for the Baker Corporation
2.32 Negotiations with the Seller/Responsible Party
The Baker Corporation's initial sale offer was S3.5 million and was for the entire site, as is, with no
contingencies, indemnifications, or other protections to the buyer. The company had successfully sold
the foundry site to a self-financing real estate operator that accepted the full legal liability for any
remaining environmental problems as a condition of sale. Baker hoped for a similar outcome for the
less contaminated, but larger site it offered to Hapiton.
The RDA responded, stating it would pay $2 million for the site. Baker, however, did not look at the
purchase offer contingencies until the dollar amount rose past the first bump of $2.5 million, to the
$3 million offer that launched the negotiations. The negotiations that ensued proved to be very
-26-
-------
difficult, colored by factors that suggested that Baker was more interested in divesting itself of
liabilities than of the property:
Baker insisted on complete confidentiality in the transaction, requiring the RDA to pledge not
to share any data on environmental conditions with any parties, including prospective purchasers
that might be identified in the course of planning for redevelopment of the site. This condition
rendered the site unattractive to the redevelopment authority, so Baker agreed to disclosure to
private third parties interested in the site - but only under very rigid confidentiality agreements.
Baker demanded that the cap never be breached. This left the RDA responsible for costs
associated with piercing the cap. This was likely, since the cap would have to be pierced to build
a structure with anything other than a slab foundation. The RDA agreed that, as of the date the
cap was breached, it would accept responsibility for conforming to required standards for
further mitigation of known contaminants, but wanted protection for unknown contaminants,
arguing that Baker remained liable for the actual pollution remaining on the site as of the
property transfer date.
RDA management never took Baker Corporation's demands for non-disclosure of information on
known site conditions as a serious stumbling block. Although the Executive Director noted that the
property had zero value to an economic development unit if it could not be re-sold for private use and
that any such sale would require full disclosure of site conditions, he assumed the requirement would
eventually be waived if the parties could settle on other terms. The RDA was more concerned with
the apparent insistence by Baker that it be able to dispose of all its liabilities and responsibility for
prior site conditions in the course of the sale by limiting the buyer's recourse rights. The City and
RDA would not move forward without protections provided by Baker as part of the deal and
expressed concerns about two issues to be addressed:
Costs for remediating pre-existing, newly discovered types and quantities of contamination not
mentioned in the environmental reports; and
Liability protections for damage due to known contamination.
Subsequently, Baker offered to indemnify the RDA for a period of one year after the sale - for a total
of SI million, after a $100,000 "deductible." RDA noted that the indemnification was too low and
the term proposed was shorter than the time it might take them to find a prospective buyer for the
capped portion of the site, and thus had virtually no value. In response, in addition to the
indemnification, Baker offered to procure and pay the full costs of an insurance policy with a policy
period of not more than 5 years and a dollar limit of not more than $5 million, with the RDA
assuming all liability after that, for any known or unknown contaminants.
The "insurance policy" that Baker sent was, in fact, an insurer's "specimen policy," available on the
Web. It outlined the major elements of the most common coverages, with no detail beyond the
aggregate and term provided. Along with that specimen, Baker attached three endorsements or
coverage modifications that severely reduced the policy's potential value to the RDA:
Coverage was provided only for "third party claims," which meant the RDA was not covered
for additional cleanup it felt it needed to make the site safe.
-27-
-------
Coverage excluded any claims for releases associated with work conducted on site prior to the
initiation date of the policy. This limitation meant that the RDA could not initiate any work
during the one year period it was covered by the indemnification from Baker and before the
insurance coverage began, thus delaying any work to make the site more attractive to new users.
The limit also excluded any unknown contaminants or pollutants not declared when the policy
was negotiated, but discovered before it went into effect, thus making it economically
unreasonable for the RDA to even conduct site investigations in its first year of site ownership.
The policy excluded coverage for off-site groundwater contamination, leaving the RDA
responsible for any possible migration of substances below the cap that might migrate off site.
The documents thus generated more questions than answers and the Executive Director and Real
Estate Counsel concluded that they needed the expertise of Environmental Counsel to negotiate with
Baker. In consultation with their new Counsel, who consulted with a national specialist environmental
broker, the RDA developed a more sophisticated understanding of the uses and timing of insurance
coverages. For example, CC coverages likely would be needed. The initial review of the project by
the RDA Director and Real Estate Counsel did not consider risks such as the possibility that piercing
the cap in one location could cause damage to the rest of the cap elsewhere on the site and could
affect the tests at the well sites installed by Baker, to which the company insisted on having access
in perpetuity. In fact, re-stabilization of the site after the existing cap was breached constituted a new
remediation response, with the risks inherent in such actions. RDA's Director also came to
understand the risks posed by the time elapsed since the original approval by the state VCP. Due both
to the possibility of changed standards, and, perhaps even more importantly, improvement in
detection technologies, a new site mitigation might have to comply with requirements for additional
assessments and remediation and have to address previously unknown contamination.
A further concern raised by the Counsel was the minimal disclosure of site characterization by Baker.
The firm was only willing to provide the environmental data on the site that had already been
submitted to the state to obtain approval for its site mitigation plan. The Counsel noted that this most
likely represented only a small subset of the data that Baker actually had. His argument was that any
competent consultants and attorneys would have helped the company to submit to the state absolutely
no more than what the state required. However, it was reasonable to assume that the company had
obtained other site characterization data in order to select one approach to mitigation and not
another. Those additional data would help a successor owner/operator do a better job of managing
the pollutants remaining on site. In addition, and importantly, if other reports did exist and were not
provided to the insurer prior to underwriting, that failure to disclose could invalidate claims made
under the coverages.
Despite the efforts of the RDA and its Counsel, direct communication after the transmittal of the
specimen policy was limited to a single conference call with company representatives. Information
was requested during that phone call about several facets of the proposed coverages, none of which
were evident in the specimen policy offered:
-28-
-------
The relationship between the indemnification and the subsequent insurance policy, for two
reasons: (1) the inadequacy of the indemnification limit, and (2) the likelihood that any problem
that arose in the first year would not be resolved before the indemnification was over and the
insurance was to take effect.
The identity and status of the insured party, to make sure that it (or any designated successor
owner) was entitled to file claims for insurance coverage.
The levels of the deductibles and who would be responsible for paying for them, since extremely
high deductibles could be imposed in order to lower the insurance premium to be paid by Baker.
The policy triggers or conditions/events initiating eligibility to file a claim for reimbursement,
since the ways in which they are defined can severely limit the value of a policy.
The sub-limits imposed per occurrence that trigger coverage which could mean that, for low
sub-limits, a very large number of small claims would have to be filed for the insured to come
close to collecting the full policy aggregate.
The extended policy period under which the RDA could file a claim.
The transferability of the policy, since the site's appeal to any subsequent owner or occupant
would be higher if the policy also covered them.
The Risk Manager for the Baker Corporation, to whom RDA's Counsel submitted further e-mail
requests, proved to be uncooperative: responses to the requests were never provided. Negotiations
stalled in late 2003 as a result of this lack of cooperation and because the RDA needed to turn its
attention to obligations to other redevelopment projects.
In addition, new market conditions resulted in a decline in the need for public sector action to get the
property back into productive use. The local climate for industrial activity when Baker approached
the City with an offer to sell was poor, with plants closing creating a growing supply of vacant sites.
By late 2003, however, the market had shifted and demand for industrial land expanded unexpectedly.
Two firms entered into independent private negotiations with Baker for the property in early 2004.
In response, the City and the RDA stepped back, not wanting to expend public resources to promote
economic regeneration that the new market conditions appeared to drive without further support.
Neither of the two prospective buyers were able to arrive at acceptable terms with Baker. By mid-
2004, a third interested private party entered into negotiations and retained the same environmental
Counsel that the RDA had brought into Baker purchasing efforts. That buyer pulled out in October,
2004, also unable to come to acceptable terms on prospective liability relief with the seller.
As that buyer ended negotiations, a fourth party stepped forward. As of Spring 2005, this party had
signed an option to purchase the site with Baker. The firm is currently conducting due diligence and
pursuing re-zoning to non-industrial. Notably, their reuse plans involve slab construction that will not
pierce the cap at the site.
2.33 Lessons Learned
-29-
-------
Some sellers are unwilling to take full responsibility for their pollution and will only agree to
exploitative deals. Not all offers, even at low costs, are good deals for public agencies.
The inability of the RDA to consummate a private-public deal with Baker does not reflect on
the Authority's real estate market operations efficiency, but rather on the seller's unwillingness
to accept responsibility for pollution it created and to disturb a previous mitigation using RBC A
standards.
A real estate purchase is essentially an adversarial process, and that condition is even more
central when there are contamination issues. Independent specialists, including environmental
counsel and brokers, need to be retained by public sector entities that do not have the needed
expertise on staff to place them on an equal footing with large private firms. The need for such
support, and the recognition that the costs of such services may have to be incurred even if a
deal is not consummated, should be recognized prior to entering negotiations on brownfield site
acquisitions.
Full seller disclosure of environmental conditions is essential for costing out projects,
determining remedial response needed, and selling the site to a new owner.
The documents provided to a regulatory body rarely constitute the full body of information
about a site that is known to the applicant. Full disclosure by the seller is essential to negotiating
for and managing insurance coverages.
Knowing the aggregate limits and terms of insurance policies does not suffice for determining
the adequacy of coverages. A number of other key elements - discussed in Chapter 3 - need to
be understood as well.
2.4 Vignettes
The three projects described below offer some additional insights into environmental insurance
decisions in public sector-led regeneration efforts. They include non-insurance risk management
activities and decisions to buy and not to purchase coverages, depending on the situation. The first
example includes acquisition of separate policies for different parties involved. The second
demonstrates how creative reuse can affect the economics of a remediation and a regeneration with
the risks managed by insurance. The third illustrates the importance of selectivity in the purchase of
insurance and the value of buying only the coverages really needed. All three involve a local
government providing facilities for its own use, a situation in which private sector end-users do not
dictate conditions or generate needs for coverage.
2.41 School
-30-
-------
This project involves a sixteen-acre site in the center of a mid-western city with a population of
roughly 100,000.4 The site was selected by a school district board to build anew school; given high
demand for property in the city in the last decade, no other acceptable locations were available. The
site had been used primarily by an automobile manufacturer and, since the early 1990s, had been
capped with asphalt and used to store semi trailers. Phase II assessments conducted by the school
district in the fall of 2000 found petroleum products, lead, and other heavy metals in the soil and
discovered that a corner of the property was contaminated with TCE.
To assist with the proj ect, the school district brought in an environmental attorney and consulted with
the state environmental agency. Environmental response planning was conducted in the spring of
2001. An agreement was reached with the owner to divide the property into a twelve-acre parcel,
which the school district would purchase to build the school, and a four-acre parcel that contained
the TCE contamination, which would not be purchased.
The biggest hurdle the school district faced in the property transaction was reaching a legal agreement
with respect to the potential of future third party liability suits from students and staff at the school.
The manufacturer wanted indemnification from the school district for these liabilities, but the district
was not willing to accept that contingent liability. Negotiations began in June 2001 and continued for
the next year. At a stalemate, both parties agreed to utilize environmental insurance to resolve the
situation. The negotiations continued for another seven months before the agreement with the
manufacturer was finalized and the policies were issued.
Ultimately, the manufacturer agreed to pay for most of the $250,000 cleanup on the school site. In
turn, the school district contributed $50,000 for a portion of the premium for a ten-year PL policy
for the manufacturer. The school district also purchased a separate PL policy for itself designed to
protect the district from third party claims and from expenses related to unexpected pollutants that
might be discovered during construction. The policy has a ten year term, a dollar limit of $ 10 million,
and $25,000 deductible. The cost of the premium was $150,000.
The cleanup in the spring of2003 involved soil removal and took just a month to complete. Because
foundry sand had been found during the site assessment, the state environmental agency classified the
site as an landfill. Consequently, the school district was required to construct a vapor barrier under
the school to protect against possible intrusion of methane and other vapors and to monitor the
venting system for a ten-year period. Currently, no hazardous vapors are present and the school board
expects to receive a Certificate of Completion from the state agency in the early summer of 2005.
Employees of the school district who participated in the negotiations credit the success of the project
to (a) the assistance of the state environmental agency, which was involved early in the process, and
(b) the use of the insurance to settle the issue of liability relief with the manufacturer.
4 From 1990 to 2000, the city's population grew by 13% and housing values rose by over 35%.
-31-
-------
2.42 Agency Facility
This project involves a site encompassing a block in the downtown area of a southern city of about
500,000.5 The city, which had a heavy industrial history, experienced severe economic decline in the
1970s. The downtown area was largely abandoned until revitalization efforts were initiated in the
mid-1980s.
Previous uses of the property included a railroad yard starting in the 1800s; a dry cleaner from the
1930s through the 1950s; and a garage, office building, and parking lot into the 1960s. The buildings
were demolished in the late 1960s and the city acquired the site through a tax foreclosure. The site
remained vacant until 2003 despite the surrounding regeneration activity. Although there were
petroleum products on site, the primary contaminants of concern were dry cleaning solvents.
The redevelopment entails a property exchange between the city and a one of its arms-length
non-profit agencies. The land swap provided the means both to keep the agency in the downtown
area and to facilitate municipal waterfront revitalization efforts. The agency will use the dry cleaner
site for a new office building containing first floor retail space and a parking garage. The city will
acquire the agency's old site and seek a contractor to develop new downtown condominiums, which
are currently in demand.
Other key components of the redevelopment include the state dry cleaner program, funded by
business registration fees and surcharges on dry cleaning solvents, and a CC insurance policy. The
state dry cleaner program was set up to pay for the cleanups of such sites. However, the maximum
per-site expenditure permitted under the program is SI million. This amount roughly equaled the
estimated cleanup costs and the city was concerned that the remediation would exceed it.
This concern was exacerbated by the overall environmental response and redevelopment plan. Two
years were scheduled for the remediation firm to conduct soil cleanup and construct a pump-and-treat
system for contaminated groundwater. This would be followed by a two year period in which the
agency would construct its building and erect the parking lot structure over the wells. Well
monitoring would continue after the construction for another five years, with the wells accessible
from the ground floor of the garage. However, if the remediation did not proceed as planned, the
costs to rectify the problem could be exceptionally high due to the need to conduct further response
work beneath the parking structure.
To address these concerns, the city chose to purchase a CC insurance policy with a relatively long
term that extends through the monitoring period. The policy dollar limit is $ 1.8 million. The premium
cost $145,000 with a $500,000 self-insured retention.
5 The city experienced only a minimal (2%) increase in population from 1990 to 2000 but a housing value
increase almost equal to that of the US as a whole. However, the 2000 median housing values remained well below
the national average.
-32-
-------
A local broker worked with a consulting firm specializing in brownfields risk management to procure
the policy for the city. The process took about six months from the time the broker submitted
information for policy indications to the point at which the city had the policy in hand. Because the
remediation effort was at the minimum cleanup cost level that an insurer will consider for a CC policy
(SI million), there was little room for negotiating the conditions of the insurance contract.
2.43 Park and Community Center
This proj ect is in a small northeastern city with a population of about 3 0,000.6 For a number of years,
the town had been seeking acquisition of riverfront property for a park as well as a site on which to
construct a community and events facility. Both of these objectives were served in the late 1990s
when the town decided to foreclose on a tax-delinquent, 23 acre property on the river. However, the
site had been used as a bulk petroleum storage facility: it contained fifteen large above-ground storage
tanks and the soil and groundwater were polluted with petroleum products and PCBs.
Shortly after the site was acquired, the town received $250,000 in state funds to assess alternate
designs for site use, a process that helped them to develop their cleanup strategy. In 2000, the town
received an $85,000 targeted brownfield site assessment grant from EPA. In 2001, their consultants
developed a remedial action plan and the town removed the petroleum tanks at a cost of $320,000.
The remaining cleanup, which took place between September 2003 and March 2004, involved
removal and disposal of some of the contaminated soil, on-site relocation and management of other
contaminated soil using a four-foot cover of clean earth, and the installation of an interceptor trench
dug between the site and the river to prevent oil from leaching into the water. The $1.32 million cost
of this work to the city was partially offset by an additional $500,000 state cleanup grant.
At present, the property has been remediated to state standards. The community/events center is
nearing completion and will open in the summer of 2005. Construction of the facility was a $6.5
million effort supported in part by a $750,000 state grant and some $100,000 in donations from
private sources. The center will provide new premises for community gatherings and is expected to
generate tax and fee revenues that will help offset its costs as well as increase other commercial
activity in the town.
Master planning for the riverfront park is underway; the city has some $800,000 in state and federal
grants pending and $400,000 in donations pledged to help with its development. Even before
completion of the entire project, the redevelopment has delivered several important community
benefits including removal of an ecological threat to the river, elimination of an eyesore, and creation
6 From 1990 to 2000, the town's population grew at a rate slightly higher than the US as a whole. While
housing values in 2000 (over $200,000) were higher than national average, they actually had declined by over 25%
from 1990.
-33-
-------
of new open space. Offsite property value impacts should contribute even more to tax revenues when
the park is completed.
For this proj ect, PL insurance was purchased with the town as the insured. The primary concerns that
led to insurance use included the possibility of costs for unexpected remediation of newly discovered
contamination onsite, third party claims from individuals who would be involved in the park
construction, and claims stemming from offsite migration of remaining contamination.
In addition to PL, the town initially had considered and received indications for a CC policy. City
officials decided against purchasing CC, however, because (a) they were confident in their site
assessments, and (b) the policy did not seem to make economic sense for them in light of their
thorough assessment. The estimated remediation cost was approximately $ 1 million and coverage was
only available with a self-insured retention of $350,000. The premium would have cost over
$100,000. Thus they would have had to spend over $450,000 above the estimated cost before the
policy began to pay. As it turned out, the determination not to buy CC paid off as the ultimate
cleanup costs were $1.3 million, so the city saved the cost of the premium for a policy on which they
could not have filed a claim.
To arrange for the PL coverage, the town used its insurance broker of record who worked closely
with an environmental attorney. The town manager also was closely involved in the negotiations.
After receiving indications from insurers, they debated different dollar limits ($5 or $ 10 million) and
term limits (three, five, or ten years) in light of the differential costs of the premium. Ultimately, they
decided on a ten year policy with a $5 million limit. The premium price was $ 120,000 with a $50,000
per-claim deductible. The purchase negotiations took approximately four months and a policy was
put in place in late 2003. The insurance for this case was not considered to be indispensable. Rather,
it was part of a "belt and suspenders" approach that brought comfort and certainty to the town.
2.44 Lessons Learned
These vignettes offer a starker perspective on the environmental insurance purchase decision
compared to the detailed cases simply because the decision stands out with little information about
the complexity of the context in which it is undertaken. The lessons learned reinforce those from the
cases:
Environmental counsel and insurance specialists are essential to insurance decisions.
State regulators can make maj or contributions to proj ect risk management, especially for local
public sector entities that may be able to get more guidance and collaborative assistance from
state personnel than might be available to a private sector developer.
Sometimes the economics of the deal - the cost of coverage or limits on protection - renders
insurance a poor choice, even when the developer wants to avoid uncertainty and limit risks.
-34-
-------
The insurance acquisition decision is always subjective - based on risk perception and risk
tolerance. The decision not to purchase CC for the for the Park/Community Center project may
have been conditioned in part on the volume of grants received, meaning that the city already
saw its total cash outlay risk cushioned by external support. The decision to buy CC for the
Agency Facility project, by contrast, reflected a concern over the magnitude of a possible cost
overrun, given that a structure would be built on the site.
2.5 Risk Management for Public Sector-Led Brownfield Projects
The adversarial nature of any real estate transaction - buyers and sellers with different objectives -
sets the context for any brownfield redevelopment. In any adversarial process, the party with the
greatest expertise will generally "win." Since local governments and their agencies rarely have the
expertise in-house that the sellers of brownfield sites have available, public sector bodies need to
assure that they have specialists in contaminated land transactions as part of their proj ect teams from
beginning to end of the transactions.
Information is central to any decision. It costs money to hire specialist consultants, as it does to
conduct extremely thorough site investigations. Consulting with state regulators about alternative
approaches to site mitigation and with the community about plans for the site will delay the onset of
visible initiation of work. But information has economic value, and the funds invested in better data
for decision making can, and usually will, save money over the course of the project. Most
significantly, better information reduces uncertainty, and thus risk, and can reduce the need for the
risk transfer capacity provided by insurance.
The purchase of insurance, or the decision not to, does not reflect the "success" or "failure" of other
risk management efforts. Each project has its own dynamics, risks, and possible management
processes. In some instances, insurance may be the key to completing a deal. In others, it may
contribute the extra security that speeds a project along or generates needed political support even
if it may not be central to the economics of the proj ect. In yet others, it may make no sense, given the
risks involved and the certainty generated by other means.
A good insurance acquisition can, however, be distinguished from a poor one:
Are the risks of concern adequately covered, both in monetary and policy term limits?
Have extraneous coverages not needed to permit the transaction to proceed been excluded?
Are the appropriate parties protected as needed?
Does the policy respond properly to unexpected changes in the deal, in ownership or project
objectives?
Is the price, including the premium, deductible or self-insured retention, and co-pay
requirements, acceptable to the parties involved?
If the answers to these questions are "yes," then the purchase of insurance is a "good deal." If not,
then the transaction is questionable.
-35-
-------
-36-
-------
Chapter 3.0
The Insurance Procurement Process
This chapter is written from the perspective of a brownfield site developer in general, since most of
the risk management issues that lead to consideration of insurance are the same for public and private
entities. We make specific reference, where appropriate, to the unique issues that can arise for a
public or quasi-public agency playing the role of redeveloper. The chapter opens with an examination
of insurance needs, including a checklist of risks that might be addressed by insurance. This first
section leaves open the possibility that no insurance will need to be acquired. The rest of the chapter,
however, assumes that the developer will be procuring coverages. The second section addresses the
purchasing process itself and the parties likely to be involved, while the third addresses negotiating
for coverages needed and notes some of the pitfalls that can arise in the course of designing
manuscripted policies. The fourth and fifth sections discuss the specifics of two different choices that
a party seeking insurance might have to make about how to acquire coverage. The chapter concludes
with a section offering guidance for public sector agencies on crafting a RFQ for brokerage services
to support insurance purchase decision making.
3.1 Determining Insurance Needs
Insurance is not the only way for a developer to manage risk. This simple fact is clearly evident in the
cases discussed in Chapter 2.0. It is true, however, that even if other risk management mechanisms
can be brought to bear, some risks may remain. Whether or not it is appropriate and efficient for them
to be addressed by insurance depends on a number of site, project and developer characteristics. A
cost-effective insurance purchase requires that the buyer understands which risks do - and do not -
need to be addressed.
3.11 Insurance in Conjunction with Other Risk Management Mechanisms
There are two major sources of uncertainty in a brownfield project the environmental response
required and the environmental liability that may arise from damage done by pollution. Overall, risks
and uncertainties at different brownfield sites tend to vary with:
the toxicity of the contaminants;
the media in which they are found to be present (soil, groundwater, surface water);
the likelihood of migration off site (which depends in part on the contaminants and media);
proximity of the site to sensitive human uses such as homes and schools and to vulnerable
natural resources such as lakes, rivers, and wetlands;
proximity to other sites from which contaminants may migrate (industrial facilities, dry cleaners,
service stations, landfills); and,
the intended future use(s) of the site (e.g., industrial verus residential).
-37-
-------
There are many ways to address uncertainties, so any assessment of insurance coverage needs must
be undertaken with reference to the other risk management approaches that may complement - or
substitute for - insurance.
Thorough environmental site assessments are central to determining the cost of site mitigation and
the likelihood of third party suits. The Utopia Park and Parkville cases both underscore this point.
In the first instance, the assessments helped define the coverage needed and helped hold down
remediation and liability coverage costs. In the second, the assessment not only helped bring a PRP
to the table to address financial issues, but also provided enough certainty to attract a master
developer to undertake a project on a site.
State-issued assurances such as No Further Action (NFA) letters and Certificates of Completion
(COCs) that designate approval of aremedial response clearly provide protection against further state
claims for action. They also contribute to uncertainty reduction by showing other parties that the state
has ruled that a site is safe for reuse. Thus the award of an assurance may deter third party suits if
potential litigants know they have to prove the state, not just a PRP, is in the wrong. It is unlikely that
Utopia Park could have attracted a master developer to a site that had not passed state standards
without offering some liability coverage in the form of insurance, given the extensive contamination
remaining on the project site.
The need of a public sector body for insurance for third party liability coverage may depend on
another aspect of state policy and law. In those states in which municipalities and other local
government enjoy "sovereign immunity," or protections from private lawsuits, cities would have little
reason to purchase such coverage for themselves. (This may even be true in those states in which
there is a low cap on the amount for which private parties can sue, even when they retain the right
to do so.) Though it may make sense to have such protection for owners who buy the property from
a public developer, the insurance cost might be avoided if the locality simply holds title to the land,
thus retaining the immunity privilege, and leases the land to a new occupant, perhaps for a 99-year
term, in order to encourage development.
Such a lease arrangement is one way a seller, developer/remediator, and a longer term user of a site
may arrange to control liability uncertainty. Other forms of contractual agreements between or among
buyers, sellers, previous owners responsible for pollution, and eventual site occupants are commonly
employed to allocate risks. The seller and original PRP, for example, may have sufficient financial
capacity to permit them to self-insure for any liabilities associated with the pre-existing, on-site
pollution determined to be present on a property, provided they are protected from the risks
associated with any future uses. If they accept that risk, then the new owners or occupants would
need coverage only for what they, themselves, would do on the remediated site. In such a situation,
the new occupants might see no need for special environmental liability insurance, especially if they
are engaged in a non-polluting use of the land. (The Appendix enumerates the representations,
warranties, and covenants allocating risks and responsibilities associated with the Parkville
remediation and redevelopment project.)
-38-
-------
One common tool for allocation of responsibility is indemnification of one party for the costs of
another. This approach was proposed in Hapiton by the seller: the Baker Corporation (the
indemnitor) offered to commit to assume the cleanup and related costs and third party claims
associated with unknown contamination incurred by the Redevelopment Authority (the indemnitee).
The proposal was rejected in that case, since the indemnification was for too short a period of time
(one year) and carried too many conditions.
Indemnifications may have disadvantages for both parties. For example, it will negatively impact the
indemnitor's financial statements since it needs to be carried as a contingent liability. In a worst case
scenario, it may expose the indemnitor's organization to a catastrophic loss. The indemnitee, on the
other hand, would have to incur the costs of investigating the indemnitor's financial capacities prior
to accepting such an offer. The indemnitee also risks finding out, after filing a claim, that the
indemnitor no longer has the resources to fulfill the commitments made. Even if the indemnitor is
financially able to cover the claim, the indemnitee may have to undergo costly litigation to obtain the
promised financial support (and a court may find in favor of the indemnitor if an agreement is not
carefully crafted). Moreover, neither party is fully protected from liability risk by an allocation
agreement: third parties are not bound by buyer-seller agreements, so an injured party may decide to
sue both a property seller and buyer regardless of their agreement on division of liability. At a
minimum, such a suit would expose both buyer and seller to legal defense costs.
Relative to indemnification, the purchase of an insurance policy has several advantages:
Because insurance carriers are more likely to provide payment on claims than are many
indemnitors, the guarantee is worth more to the indemnitee.
Insurance coverage includes legal defense fees, while indemnifications often do not.
Insurance brokers and underwriters generally have more knowledge about relevant risk
exposures than lawyers who draft indemnifications, so more protection may be available.
Purchase of insurance eliminates contingent liability so that an indemnitor' s financial statements
and credit ratings are not jeopardized.
There are, however, limits to insurance relative to its alternatives. For example, a risk may be judged
by a carrier to be too great to insure or the price of the premium may be too great for the purchase
of coverage to be economically viable. Sometimes, therefore, insurance is unobtainable. In other
instances, some combination of protections may be desirable (e.g., indemnification backed by an
insurance policy). A carefully developed risk management strategy takes into account the options of
risk retention, governmental protections, contractual agreements, and insurance.
3.12 Selecting Needed Coverages
Ideally, insurance policies and indemnifications should be worked out in conjunction with one
another, so that risks not covered by the insurance can be negotiated into the indemnification. Table
3.1 below offers a checklist of risks that can be insured by Pollution Liability (PL) and Cost Cap (CC)
policies.
-39-
-------
Table 3.1 - Brownfields Insurable Risks Checklist
Pollution Liability Policy
Probability that pollution on (and originating from) your site will cause you to pay for:
Cleanup required by a regulator of previously unknown, pre-existing pollution
Property damage caused by cleanup of previously unknown, pre-existing pollution
Business interruptions caused by cleanup of previously unknown, pre-existing
pollution
Cleanup required by a regulator of known pollution conditions previously granted
regulatory assurance, i.e., re-opener coverage
Bodily injury to tenants/new owners/occupants
Probability that pollution from your site will move offsite causing you to pay for:
Bodily injury to neighbors
Property damage to neighboring site(s), including diminution of value
Losses due to interruption of neighboring business(es)
Damages to natural resources on lands controlled by government entities
Probability that pollution from neighboring site(s) will move to your site causing you to pay for:
Cleanup required by a regulator
Property damage caused by cleanup
Business interruption caused by cleanup
Bodily injury to tenants/new owners/occupants
Probability that releases during transportation of your contaminants will cause you to pay for:
Cleanup
Bodily injury
Property damage
Probability that disposal of your contaminants at a disposal site will cause you to pay for:
Cleanup
Bodily injury
Property damage
Probability that you will need to pay for:
Legal costs to defend against third party bodily injury and property damage claims
Cost Cap Policies
Probability that, during the execution of a planned remediation, you will need to pay for:
Costs due to discovery of a greater volume or higher concentrations of contaminants
than were noted in the remediation plan
Costs due to discovery of contaminants that were not noted in the plan
Costs due to regulatory changes during the performance of the remediation plan
Remedy failure during the execution of the remediation plan
'Soft' costs, such as loan interest, due to unanticipated delays caused pollution
-40-
-------
3.2 Overview of the Insurance Acquisition Process
The first step - examination of the potential of insurance to facilitate redevelopment - is the largest
in many ways. Public sector agencies may not recognize the centrality of this decision point and thus
fail to involve all the parties that should be involved in risk management early enough in the
assessment of project feasibility and importance. The result may be inappropriate risk-taking or, on
the other hand, excessive spending on insurance.
Key project team members and their potential contributions to insurance - and possibly project
feasibility - decisions include the following:
Local brownfield or economic redevelopment officials - often the parties that first conceive of
the project and bring it to public attention.
Private or nonprofit developers or investors - who may have brought a site to public officials'
attention or who may be the intended purchasers and redevelopers of a remediated site.
Real estate and environmental counsel to the developers - those who have a grasp of the risks
and risk management tools that are available to a brownfield redeveloper.
Environmental consultants- the engineers with the capacity to assess site conditions (or who
have already done so for a target site), and who may direct or conduct a site mitigation.
State environmental regulators - the people who will determine the cleanup standard to be met
and who provide Voluntary Cleanup Program and other assurances of completed mitigations.
Lending institution risk managers - those who would finance any private sector construction
following site preparation and who have concerns about post-remediation site condition risks.
Public sector risk managers - those who acquire other insurance services or manage self-
insurance programs for the local government, and who, whether or not they are qualified to
advise on environmental insurance issues, may legally have to be involved in the process.
Insurance brokers - either multiple brokers responding to a RFQ for brokerage services, or the
local government's general purpose broker, who may be able to assist in the design of the
needed RFQ for such services.
A n insurance carrier's underwriter and legal counsel -the individuals who will decide on what
coverage options will be offered for a project, and at what costs.
Obviously, not all these types of individuals will be present at all steps along the path to a decision
on the use of insurance. However, as the cases in Chapter 2.0 illustrated - even those in which a
decision was made not to acquire coverage - they can play important roles in project decision
making.
3.21 Project Conceptualization - Should Insurance Enter the Picture?
The possible ways that insurance might facilitate a brownfields regeneration project should be
considered from the inception of the project. Anything that helps to reduce uncertainty, determine
costs or enable developers simply to calculate risk may promote the redevelopment of sites that are
-41-
-------
currently overlooked. Insurance is only one of the many tools available to accomplish those ends.
Some proj ects, such as the Parkville and School redevelopments, may not be feasible without the risk
transfers insurance provides. Others, such as the Utopia Park project, may not require the tool since
alternative risk management options are available.
While the costs of insurance cannot be determined in advance, knowledge of the types of coverages
available can make or break a project through their potential contribution toward:
encouraging sellers to bring vacant, underutilized, and/or contaminated properties to market;
helping sellers, other responsible parties, and buyers to arrive at an acceptable allocation of
responsibilities for cleanup and liabilities;
supporting indemnities offered by sellers and PRPs to buyers; and,
making the lenders on which private developers depend comfortable with site risks.7
If it appears that a brownfield development prospect may proceed or not go forward depending on
the availability of some risk transfer to third parties, an environmental insurance broker should be
brought on board to suggest how insurance may help the project. Selecting a broker who has the
needed experience in brownfield transactions may make the difference between obtaining and not
obtaining coverage and always will be key to acquiring the most cost-effective insurance policies.
Basic advice on preparing a RFQ to find such a broker is provided in Section 3.6 of this chapter.
3.22 Environmental Site Assessments
As we have emphasized, there is no substitute for a thorough site assessment. While a seller may fear
discovery of more contamination as the result of an assessment, it is possible that a thorough
investigation might reveal that there is less of a problem than expected. Buyers or future redevelopers
of a remediated site may be difficult to attract without information about the real extent of the
environmental problems and the ways in which they may be addressed. The detailed site assessment
was central to the negotiated agreements in the Parkville case, enabling the seller and the city to agree
on how to split environmental response and site preparation costs. An estimate of expected costs is
a prerequisite to any financial feasibility analysis.
The cases discussed in Chapter 2.0 involved projects that were made possible by virtue of early
consultation with state environmental regulatory agencies. That early discussion has to be grounded
in the site assessment. It may inform cost options for alternative remedial responses and thus shape
the rest of the project feasibility analysis. The consultation, moreover, maybe essential if there are
tight project completion deadlines that need to be met if a project is to attain the developer's
objective, as was evident in the School vignette case.
7 A lender can be protected by (a) an endorsement to the borrower's PL policy that assigns the policy to
the lender on foreclosure, or (b) a separate Secured Lender policy that, on foreclosure, provides reimbursement for
the lesser of the cleanup costs or the principal loan balance. Both approaches give the lender protection for the
costs of third party liability claims and legal defense.
-42-
-------
Without an assessment that they trust as thorough and complete, an insurance company may exclude
certain coverages or set a higher deductible or premium price to provide either CC or PL protection
for a project. But the assessment also may reduce the need for coverage in the first place - as both
the Utopia Park and Park/Community Center projects illustrated.
Both these considerations underscore the need for care in the selection of the environmental
consultants employed as site assessors. Insurers may not be willing to offer coverage without co-pays
or may ask for higher deductibles if they lack confidence in the engineering work.
3.23 Determine Needed Protections/Begin Allocation of Liability Risks
Any of the parties to a real estate and redevelopment transaction on a brownfield may share some
portion of the liability for past site environmental conditions. The principle of "joint and several
liability" that the courts have determined applies under CERCLA means that all parties in the title
chain and those occupying and using a site even though they are not owners, could be held liable for
the costs to remediate and damage done by past pollutants. This means that the future owners and
occupants of a site that received a VCP approval potentially could be held liable for on-site conditions
that existed prior to their involvement with the property. Section 128 of the 2002 Small Business
Liability Relief and Brownfields Revitalization Act bars EPA from enforcement if a site retains state
approval. However, the state remains capable of reopening a previously approved mitigation. The
need to allocate the responsibility for any future consequences of past contamination is obvious.
For a publicly led development, staff from the locality or its development arm first need to discuss
the risks with legal counsel and the environmental consultants that did the site assessment. Then the
insurance advisor or broker should be consulted about available coverages. The developer, as the
party that will propose an agreement to permit the project to move forward, needs to rely on these
experts and their recommendations in enumerating the relevant risks, their allocation across the
parties involved in the deal, and what protection should be provided to which party. For large sites
with complex problems, the consultations with experts may involve an extended period of time for
review of technical reports and relevant government regulations.
As Section 3.3 on negotiating policies highlights, utilizing legal counsel for the insured(s) to review
and negotiate the policies is especially critical for complex remediation transactions. The counsel
employed for these discussions should have an environmental law background and, ideally, should
have represented insureds on previous brownfield insurance policy negotiations.
Lending institution risk managers, when available, can be an asset to the team, both in defining risks
and in specifying desirable protections. The risk managers, unlike local bank loan officers, understand
how insurance can mitigate risk and uncertainty. Loan officers, even commercial lending specialists,
often are apprehensive about loans on environmentally risky properties The risk managers are the
officials charged with helping their institutions to manage the uncertainties involved in order to make
-43-
-------
it possible for them to make those risky, but profitable loans. In doing their jobs for the lenders, they
thus may fill in as additional insurance experts and advisors to prospective loan clients.
Another important possible team member that may be overlooked is the public sector risk manager,
where the locality has an official charged with such duties. Where such officers exist, they may have
to be involved in and approve insurance purchases. They may not understand the special insurance
needs of a brownfield project if they are not involved early in the process.
3.24 Present Underwriting Package to Insurers
Once the developer has identified the risks of concern, has dealt with other parties involved in the
development to arrange shares of liability and responsibility, and determined the coverages needed
to get all the parties to agree on allocation of liability, it is time to present a coverage package to
prospective underwriters. The broker approaches several insurers and provides information about the
site, the transaction, and the intent of the policy. Each interested insurer will respond with a
preliminary "indication," quoting the insurance available for the project. The indication document will
generally cover six elements: (1) the coverages the insurer can offer, (2) the policy terms offered, (3)
the deductibles, (4) the exclusions from coverage, (5) a list of the additional information about the
site and transaction needed for underwriting , and (6) an anticipated pricing range.
As Taylor (2002) notes, at the point of soliciting indications, an experienced broker will not simply
send each insurer contacted a box full of technical reports and agreements. Because the insurer is
providing only preliminary, non-binding estimates at this point, the carrier is not likely to conduct a
thorough review of the information. The detail could confuse the issues and result in insurers
returning indications that are full of qualifications and caveats based on a quick review of site
conditions. Such indications do not provide a realistic idea of how the insurance policies can move
the proj ects forward, since they would tend to be based on uniform worst case scenario assumptions.
Rather than provide all the detailed information available, the submissions to insurers at this stage
should include descriptions of:
previous operations at the site;
hazardous materials that were used at the site;
all investigations of the site, previous remediations, and the current remediation plan;
the regulatory status of the site, including issues that have not been resolved with regulators;
future development plans for the site;
the proposed transaction and identification of the parties involved including the buyer, seller,
other responsible parties, lender, developer, and environmental remediator.
3.25 Select Insurer
On the basis of the indications returned from underwriters, consultations should be held with advisors
to determine which insurer's proposal best fits the project needs. The selection process is not simply
-44-
-------
a matter of comparing prices, since the indications will differ with respect to coverages and terms
each insurer offers. Different carriers will be concerned about different risks based on their
experience.
In addition to the insurance provisions offered and their cost, the characteristics of the insurer should
be considered at this stage. Factors to examine include the firm's stability/years in the market and
financial strength. There are several major rating agencies that track carrier financial strength data,
including Standard & Poors, A.M. Best, Fitch, Moody's, and Weiss. Assessing an insurer by using
these sources can be complicated. Different agencies use different procedures to rate carriers and use
different terminology and symbols to present their results. The extent to which data on a parent
insurance company are relevant to its specialist environmental subsidiary also may vary from company
to company, and from one rating agency to another. An environmental broker will be able to collect
the relevant information from more than one agency and present it to the insureds.
3.26 Submit Application
Once a prospective underwriter is chosen, a complete package of information about the property and
transaction should be submitted; omitting any available documents or information will simply delay
the process. The request for coverage should be reviewed with a broker and counsel prior to
submission, since the data provided as part of the application becomes part of the policy. Errors,
omissions, or misleading information on the application could void coverages or the policy itself.
Because of this, it is advisable to change the certification at the end of most application forms
indicating that the signer attests to the fact that the statements in the application are "true" to a
certification that the statements have been made according to the applicant's best "knowledge,
information, and beliefs." It also is advisable to include a list of all documents disclosed with the
application to establish the record of what information was provided. The XYZ Company list
submitted in the Parkville project ran to four single-spaced pages and distinguished which of the
materials had and had not been submitted to the state regulators for their review.
Materials required by the insurer before underwriting policies at a site at which a cleanup will be
conducted can be substantial. The following list of documents, adapted from Avena (2001), notes
materials that may be requested, depending on the particular site, the remediation plans, and the
insureds on the policy:
remediation plan and schedule including estimated cost with backup data for cost calculations;
any and all environmental site investigation reports;
description of past uses of the site including products produced and methods of manufacture,
environmental compliance, hazardous materials storage documentation, underground storage
tank records, etc.;
statements of qualifications and certificates of insurance from consultants and contractors being
used on the proposed remediation;
description of contemplated changes in the future use of the site and names, or, at least the
expected characteristics, of prospective purchasers;
-45-
-------
any correspondence from state, federal or other regulatory agencies such as approval of the
remedial action plan, prospective purchaser agreements, voluntary cleanup agreements, etc.;
public records of complaints and/or suits against environmental conditions of the property;
legal description of property and map noting onsite businesses and surrounding properties and
land uses;
applicable title information including land use restrictions and easements;
applicable contracts and/or indemnifications between property owner, previous owners,
consultants and tenants, including those negotiated pending acquisition of the insurance policy;
existing insurance policies on the property;
annual financial reports from the insured and from prospective purchasers if they will be
included on the policy.
3.27 Negotiate Insurance
For some very large, complex projects, insurance policies are completely manuscripted or written
largely "from scratch." Most situations, however, share enough in common that a base policy form
can be used. The coverage then is tailored to the project by a series of endorsements or changes
added at the request of either the insured or the insurer.
At this point, an individual underwriter for the insurance company becomes involved. Although the
insured does not have influence over selection of this person, the broker may be able to affect the
underwriter selected by the insurance company by requesting someone with whom he or she has
worked before. Obviously, it is preferable to have an experienced underwriter who knows the risks
the insurance company is willing to take, has experience with the carrier's legal counsel, and has
experience submitting endorsements that will be accepted. If requested endorsements have not been
approved by the insurer before and/or if there are related contracts to review, such as a prospective
purchaser agreement or an indemnification, it is helpful to have the legal counsel for the insurer
involved in the early stages of negotiations.
It is also be useful to have the environmental consultant for the insured available to confer with the
underwriter to discuss the cleanup strategy. The insurer also may want to discuss the project with
state environmental agency staff to discuss their opinions of the work plan.
The length of time involved in negotiating a policy depends on the complexity of the project - and
that involves the complications of the contamination issues, the intricacies of the coverages
themselves, and the extent to which they may be contingent on the future actions of external parties
such as regulators, and the number of parties involved in the transaction. They also are compounded
by the extent to which those parties' interests are consistent with each other or exhibit conflict.
Negotiation on the School project had been underway for a year before the parties involved agreed
to insurance procurement and then lasted another seven months before the insurance policy was
worked out. The Hapiton case reflected a direct conflict between Baker's demand that nothing about
-46-
-------
the site condition be revealed and the RDA's need to reveal in order to resell the site. Insurance in
that case, had the sale gone forward, would have had to deal with the disclosure issue.
Time to negotiate can span anything from weeks to well over a year, since the parties involved cannot
drop all their other work for full commitment to insurance negotiations. Some consultations may
involve people from several different organizations, making scheduling a major problem. A week or
two may be ample time for a relatively simple project with good site investigation information to get
from submission to an insurer to completed underwriting. For more complex deals, similar speeds
may be attainable, but only at the sacrifice of the consultations that serve to (a) define the coverages
needed and, most significantly from a cost perspective, those not required; and (b) provide all the
information the insurer needs to determine the limits on the uncertainty it faces and thus to offer a
lower premium.
However the insurance acquisition process is managed, negotiating a policy can be a challenging
process. The next section discusses examples of some of the challenges that need to be considered.
3.3 The Need for Expertise in Negotiating Policies
Obtaining policy terms and conditions that are advantageous to an insured party depends on the
insurer's desire to close the deal (which often depends on the size of the premium and other business
with the prospective insured); the risk appetites and internal policies of the specific insurer; and the
risks associated with the brownfield site to be insured.8
Most importantly, however, crafting a good policy depends on the skill of individuals negotiating on
behalf of the insured. There are many complex elements of any brownfields policy. If a negotiator is
unaware of them, the policy may not provide the coverages the insured thinks it does and may not
be written so that claims will be paid.
The material in Section 3.3 is based on interview transcripts and notes from presentations by
environmental brokers and attorneys on negotiating brownfield insurance policies. In addition, data
were taken from articles on the topic (Avena 2001, Fersko and Waeger 2002, Taylor 2002, Waeger
2002) and collected during individual interviews.9
g
Some provisions desired by an insured will be impossible to obtain; a carrier will not be willing to insure
risks if they are too exceptional. Others may be so expensive the insured will not want to purchase them.
9 We especially acknowledge the expert contributions to this section of the report provided by (in
alphabetical order) Suzanne M. Avena (Garfunkel, Wild & Travis), Kathleen A. Moriarty (JCH Insurance
Brokers), and Ann M. Waeger (Farer Fersko).
-47-
-------
Based on these sources, we offer examples of issues that insureds and their advisors should discuss
The issues are not intended to be comprehensive, nor should the suggestions offered be relied upon
to manuscript a policy. More than anything, the points made should alert prospective insureds to the
need to consult with knowledgeable environmental brokers and attorneys. We begin by introducing
the discuss by describing the typical elements of a PL policy.
3.31 Pollution Liability Policies
A PL policy begins with a declarations page signed by the insurance company that sets forth the
parties involved in the contract; the property or properties insured; the policy term limits, limits of
liability (policy dollar limits), deductible, and premium; and a list of policy endorsements. This is
followed by several other sections in varying order depending on the carrier:
The 'Insuring Agreement' describes the overall coverages to be provided (e.g., indicating the
insurer will pay for loss arising from pollution conditions, for remediation expense).
The 'Definitions' section provides precise meanings of most - but not necessarily all - of the
policy's key terminology (e.g., the definitions of a pollution condition, remediation expense).
(Terms that are defined in this section are noted by bolded and/or capitalized text in the rest of
the contract.)
The 'Exclusions' section limits coverages, noting what will not be covered (e.g., certain
pollutants, criminal fines and penalties).
The 'Conditions' section specifies various contractual stipulations (e.g., cancellation procedures,
responsibilities of the named insured, subrogation rights, policy assignment).
The 'Extended Reporting Period' section describes the automatic extension to the policy term
limit and optional extension that can be purchased.
The 'Endorsements' attachment provides the modifications made by the insured and the
insurance company to the policy.
Other provisions of the insurance contract may be provided as separate sections that describe, among
other matters:
notification of claims requirements;
the rights of the company and duties of the insured;
limits of insurance and deductibles;
transfer of legal defense duties.
A policy needs to be reviewed in its entirety as each section is intricately tied to others. For example,
to understand any particular coverage, it is necessary to refer to the insuring agreement, definitions,
exclusions, and conditions sections. The following sections point to selected policy elements to which
prospective insureds and their advisors should be alert.
3.311 Selected Definitions and Exclusions. Definitions in brownfield insurance contracts are policy
specific. Different insurers use different terms for the same coverage and the same insurer may use
different definitions of the same term depending on the policy form. The following examples relate
to coverages for particular damages.
-48-
-------
Property damage. This term includes physical injury to or destruction of tangible property and/or loss
of use of tangible property that has not been physically injured. Depending on the location of the
brownfield site, it should include natural resource damage or physical injury to/loss of value of land,
water, air and wildlife that is owned or controlled by a government entity. Coverage for diminution
of property value of the insured's site and/or neighboring properties may be negotiated. However,
it will be extremely difficult or impossible to purchase coverage for loss in value simply due to
environmental stigma when there has been no actual damage to a property (e.g., loss in value of a
neighbor's site solely because of its proximity to the insured's brownfield site.)
Bodily injury. Bodily injury refers to physical injury, sickness, disease, or death. Ideally, it also should
include anxiety about possible injury caused by pollutants and medical monitoring if physical
symptoms are experienced by a third party.
Pollution conditions/incidents. Pollution conditions are defined with respect to the discharge or
release of an array of solid, liquid, gaseous or thermal contaminants. The definition needs to be broad
enough to encompass all types of contaminants that may be associated with a specific brownfield
(e.g., soil vapors, odors, medical and low-level radioactive waste). It also should include pollutants
deposited illegally by a midnight dumper or tenant if these sources of pollution are a possibility at a
site.
Pollutant exclusions. Typically, asbestos, asbestos-containing materials, lead-based paint in a
structure, mold and other microbial matter, and natural radioactive material (e.g., radon) are excluded
from coverage as are known underground storage tanks. An insured will need to buy an endorsement
for these contaminants if needed at a site. The endorsement may include a separate deductible for a
particular substance or a sub-limit on the most the carrier will pay on a loss arising from the
substance.
Known conditions exclusion. Policies often contain an exclusion specifying that coverage will not be
provided if a defined set of people knew or reasonably could have expected that a pollution condition
existed prior to the inception of the policy, but did not disclose the condition to the insurer. This
exclusion is key since the policy is voidable if a responsible insured conceals material circumstances
related to the insurance; failure to disclose known conditions is one of the most common reasons for
claim denial or policy cancellation on the part of the insurer.
Clear delineation of the parties that knew or could have expected a pollution condition is paramount.
Some policies define them as 'responsible insured,' a term that includes any manager, officer,
director, or partner of the named insured or a manager of the named insured responsible for
environmental affairs. The policy language should limit the parties to those who not only have the
opportunity to learn of a pollution condition, but also have a responsibility to report the condition.
In addition, the language should make clear that conditions described in any of the environmental
reports given to the insurer constitute disclosure.
-49-
-------
Note that, while it is not possible on a PL policy to negotiate coverage for cleanup of known
pollution conditions that have not yet been remediated, it is possible to purchase 're-opener' coverage
for cleanup of previously remediated conditions for which a regulatory agency issued a comfort
document, such as a No Further Action letter, if the additional cleanup is ordered by the regulator.
It also is possible to obtain coverage for bodily injury and property damage arising from a known
condition.
Cleanup costs. These costs include expenses incurred to remove, dispose, and remediate
contamination in the soil, groundwater, and surface-water to the extent required by environmental
law and legal expenses in connection with these activities. (See notes below on environmental law.)
The costs should include investigation and monitoring of contamination and, depending on the site,
restoration costs or costs to repair or replace property to its condition before it was damaged by
cleanup work.
3.312 Policy Triggers. The term 'policy trigger' may not be in a policy itself, but is an important
concept. It refers to conditions or events that activate coverages.
Claim. A claim - the first type of trigger - generally refers to a written demand or assertion received
by the insured that alleges the insured's responsibility for loss and seeks remedy from the insured. A
claim can come from (a) a private party demanding remediation and/or compensation for damages
stemming from a pollution condition (e.g., a lawsuit); or (b) a demand from a government authority
to take action with respect to a pollution condition. The latter often refers to actions required by
environmental laws. Ideally, this concept should be broadly defined to include all possible sources
of governmental mandates from environmental agencies and other government authorities (e.g.,
federal, state, and local laws; regulations; ordinances; guidance documents; administrative directives).
Some remediation standards are not yet codified, but exist only in EPA and other agency guidance
memoranda.
Discovery trigger. The second type of trigger for remediation coverage provides for expenses
incurred for remediation of previously unknown pollution conditions at actionable levels that are
discovered by the insured. While this trigger may not be included in a policy, it is important to
negotiate; if a policy does not have such a trigger, an insured would need to ask a government
authority to demand action before the policy would respond which would result in project delays.
3.313 Notice Provisions. All environmental insurance policies are claims made and reported policies.
This means that a claim must be submitted to the insurer during the policy period; no coverage will
be provided if a problem arises during the period, but the claim is not filed with the insurer until after
the policy has expired. All policies contain an automatic extended reporting period (e.g., 30 to 60
days). Insurers also offer an optional extended reporting period beyond this that can be purchased
although it may be expensive.
-50-
-------
Three points are noted here with regard to notification. First, the insured should be required to notify
the insurer of a claim "as soon as practicable" rather than "immediately." Second, the policy should
allow for oral notice to the insurer, with a provision that the insured agrees to furnish a written notice
as soon as practicable. Third, ideally, a policy should contain a notice of possible claim provision that
allows the insured to notify the insurer during the policy period of a pollution condition that the
insured reasonably expects may result in a claim. W ith this provision, a claim made against the insured
for a specified period of time after the end of the policy period will be deemed to have been first made
and reported during the policy period if the notice was filed.
3.314 Cancellation. Insurance companies vary in terms of specifying and limiting conditions under
which a PL policy can be cancelled by the insurer within a stated time period (e.g., sixty days). Some
list circumstances such as material misrepresentation by the insured and the insured's failure to
comply with the terms and conditions of the policy, including failure to pay premiums or deductibles
when due. Some companies specify that the insured may attempt to cure or rectify the circumstances
that gave rise to the notice of cancellation within the stated period. Other insurers simply indicate that
the company can cancel the policy by giving the insured notice within a stated time period. With
respect to these latter policies, the specific circumstances for cancellation and the opportunity to cure
the problem should be added to the policy by endorsement.
3.315 Number and Status of People on the Policy. A single insurance policy can and often does
insure a variety of parties (e.g., owners, former owners and operators, buyers, lenders, tenants,
investors, developers). Important decisions in structuring the contract pertain to how many should
be insured on a policy and the status they should have. Several issues should be kept in mind.
Shared limits. One difficulty with multiple insureds is the possibility that one or a few may exhaust
the total or aggregate policy dollar limit, leaving others unprotected. As more parties are included on
a policy, less of the total amount is available to each one. One way to address this is to assign
dedicated or reserved sub-limits so that each insured has only a designated proportion of the
aggregate limit available. This option, however, may be significantly more expensive, and, when it
is used, insureds must be aware that they cannot access the entire amount of the policy.
Types of insureds. Different parties insured on a policy will have different duties and rights.
Specifically, there can be the 'first named insured,' 'additional named insureds,' and 'additional
insureds.' Variation exists among policies with respect to the rights that each of these has; the policy
language should be examined to assure that all parties have the protections they believe they have.
The first named insured is listed first on the declarations page and is responsible for interactions with
the insurer (e.g., submitting premiums and deductibles, accepting claims payments). Named insureds
(including the first named insured) differ from additional insureds in most policies in that the latter
are covered only when their liability arises from the named insureds' operations or ownership of a
site. That is, an additional insured maybe able to submit a claim only if liability rests with the named
insured and, in some policies, only when a suit filed against them also is filed against the named
-51-
-------
insured. Moreover, some policies are structured so that claim limits are available to additional
insureds only after claims against the named insureds have been paid. Thus, it is important to be
certain that the policy language regarding additional insureds doesn't restrict their rights to the
insurance in such a way as to violate a contractual or other agreement to provide insurance for them.
One option is to craft the policy so that an additional insured becomes a named insured when or if
they assume ownership (e.g., in the case of a lender that desires protection in the event of
foreclosure).
Designating multiple named insureds is possible. However, depending on the likelihood that the
named insureds will be sued, this can be more expensive than endorsing additional insureds onto a
policy because the named insureds have direct access to the policy. Further, third-party claims that
jeopardize the aggregate limit are more likely since the policy will respond to each party
independently of the other.
Separation of insureds. One condition that should be included and carefully worded is separation of
insureds, also called severability. This specifies, first, that the insurance applies to each named insured
separately, i.e., each named insured will be treated as if they were the only named insured with respect
to filing claims. Second and importantly, a severability provision should specify that misrepresentation
or concealment under the contract by one named insured will not negatively affect the coverage for
other named insureds. Without this latter provision, a policy would be subject to cancellation if, for
example, one insured failed to disclose known pollution conditions. With it, coverage would be
denied for the insured at fault, but not for other insureds.
Insured versus insured exclusion. Policies often exclude from coverage claims made between named
insureds. (The exclusion does not apply to additional insureds.) This exclusion can be problematic
if it precludes critical coverage (e.g., if a buyer and seller are both named insureds, the policy would
not provide coverage if one party sues the other). Flexibility in the exclusion can be negotiated so
that, for example, the insurance company will cover claims between named insureds if they result
from claims initiated by a third party or if a claim arises from an indemnification agreement or other
contractual obligation between the parties.
3.32 Cost Cap Policies
3.321 Scope of Work. The primary consideration in a CC policy is attentive delineation of the scope
of work (or remediation plan) attached by endorsement to the policy. The insuring agreement
generally specifies that the insurer will pay remediation expenses in excess of the insured's self-
insured retention and any co-insurance participation for activities necessary to complete the plan (up
to the policy dollar limit). This includes expenses incurred as the result of the discovery of greater
quantities of known pollutants than were noted in the remediation plan and discovery of pollutants
not identified in the plan. For these coverages to apply, various conditions must be met (e.g.,
pollutants must be discovered in the course of executing the scope of work, discovered and reported
to the insurer during the policy period, and remediated during the policy period).
-52-
-------
If the insurance contract is not carefully crafted and understood, unanticipated problems in coverage
may arise. Examples include the following:
If the scope of work involves soil removal only and a pollutant requiring cleanup is found in the
groundwater, expenses to remediate the groundwater would be covered in some policies, but
only if the pollutant is a newly discovered pollutant. If it is a known pollutant that was included
in the scope of work, costs to remediate the groundwater may not be covered, depending on
the policy language. (In some cases, the insurer may add an endorsement excluding cleanup of
certain contaminants in certain media such as groundwater.)
If a remedy included in the scope of work fails to effectively remediate contaminants, costs to
utilize a different technology may not be covered unless the policy refers to remedy failure (e.g.,
indicating that the policy will cover any costs incurred due to regulatory requirements to reach
the agreed upon closure standard).
On some policies, the remediation plan is described in terms of very specific activities (e.g.,
excavation of soil, installation of soil vapor extraction). On such policies, the insured runs the
risk that an activity not listed may not be covered.
Also in this regard, an infrastructure expense exclusion should be heeded when a risk-based cleanup
involving engineering controls is used. That is, infrastructure components that are part of a
remediation shouldbe noted as remedial costs and not development costs (e.g., foundation thickness,
ventilation systems).
3.322 Policy Period. While the policy term limit is always important on a CC policy, it's significance
varies by specific policy provisions. Some insurers will continue to pay a claim made during the policy
period even after the policy term has ended. Others, however, stop paying a claim made during the
period when the policy period expires. For those policies, it is especially important to allow sufficient
leeway to assure that the term will continue until closure of the remediation.
3.323 Accompanying Pollution Liability Coverages. Because of the requirement that expenses
incurred under a CC policy be tied to the remediation plan, it is advisable that a CC policy be
purchased in conjunction with a PL policy. (It is possible to buy a policy that combines the two types
of coverages.) The PL coverages could provide protections for onsite cleanup expenses that would
not be insured with a CC policy alone. These include, for example, legal expenses associated with a
cleanup, coverage for remediation of newly discovered contamination that was not discovered during
the execution of the plan, and re-opener coverage for the costs for additional remediation required
by regulators after the CC policy has terminated.
3.4 The Pros and Cons of Finite Risk Programs
Finite Risk (FR) programs, also referred to as Blended Finite Risk or Pre-funded programs, entail pre-
funding of expenses at a brownfield site where a cleanup is planned.10 They include a CC and, in some
10 For additional information on FR programs, see Elliot (2000).
-53-
-------
policies, PL coverages; each FRprogram is tailored to the individual project and involves options that
can be complex.
At the outset of the program, the insured deposits all or a substantial portion of the net present value
of the expected cleanup costs plus the costs of the policy premium. This "commutation" account is
invested by the insurer. The insurer pays for cleanup expenses as they are incurred by the remediation
contractor. If there is a balance remaining in the fund at the end of the cleanup, the insured receives
a profit commission or interest based on a contractually defined market benchmark such as a US
Treasury Bill rate. The insurer, however, invests in instruments intended to yield a higher interest rate
and keeps the difference. Because the program concept is based on investment income over time, the
approach is appropriate for brownfields where cleanup costs are expected to be high and remediation
is expected to take at least five years.
If the cleanup costs are higher than expected or claims are made on the PL component of the policy,
the insurer pays the costs above the deductible, up to the policy dollar limit. This is the "underwriting
risk" associated with the program. The insurer also is accepting an "investment" risk - the chance that
it will not be able to realize the rate of return on investment it was expecting - and a "timing" risk -
the possibility that expenses will be paid out faster than estimated, leaving less time than anticipated
to earn investment income.
From a local government perspective, the disadvantages of a FR program include the facts that:
substantial funds must be paid up-front, requiring floating of a bond or raising the needed
monies in other ways;
it may take a longer time to arrange FR programs due to their complexity;
the program may require an aggregate limit that applies over multiple years so that large losses
early in the term may exhaust the policy dollar limit.
On the other hand, a FR approach has several advantages that should be considered. These include
the following:
If a local government is working with a private developer, use of a FR program assures that the
cleanup will be completed because funding is guaranteed by the financial strength of the insurer.
Longer policy terms for PL components can be built into a FR program than can be acquired
outside of a program.
The interest rate paid on the commutation account may pay more than a local government
otherwise would be able to earn.
The commutation account balance may be used in a variety of ways (e.g., it may be paid to the
contractor to reward rapid execution of remediation activities or used for post-remediation
operations and maintenance or engineering controls monitoring).
-54-
-------
3.5 Fixed-Price Contracts Versus Time and Materials Cleanups Using
Cost Cap Insurance
Any brownfield site mitigation faces uncertainties about what may be discovered underground,
regardless of the extent of the prior site assessment. It is thus appropriate to take steps to limit the
possible costs associated with remediation. In some instances, such as for responses costing under
$2 million, cost cap insurance may not be available. Even in states with special programs to facilitate
access to CC coverage for small sites, the total cost may be excessive. For the larger scale tasks for
which insurance is more cost effective, there remains a tradeoff between the purchase of coverage
and the alternative, which is contracting for a guaranteed or fixed remediation cost.
The elements of the tradeoffs apply to either public or private sector-led remediations. The values
placed on those elements, and thus the decision about which approach is most efficient, will vary with
the site and proj ect. Public sector remediator/developers need to be aware that their valuations of the
elements may be very different from those of private firms.
The two approaches may be broadly characterized as follows:
Traditional Time and Materials Contracts, also known as Cost-Pius Contracts, are the most
recognized engineering contract forms. The mitigation firm receives payment based upon the
actual time and materials costs of performing the cleanup, plus an agreed upon fee (which may
be written into the hourly billing rates and materials costs).The developer maintains control and
direction of the clean-up process, overseeing the work and remaining responsible for issuing
"change orders" for new effort that may be needed to respond to site conditions uncovered
during the work. It is up to the developer to decide whether or not to purchase CC insurance
to limit the possible cost of the proj ect, and the developer will have to be prepared to file claims
and deal with the insurer in order to collect in the event of cost overruns.
Fixed Price Remediation Contracts (FPRC, also known as Guaranteed Fixed Price Remediation
Contracts) mean exactly that: the contractor receives a fixed price to complete an agreed upon
level of cleanup. That level is generally defined as attaining the site condition required to obtain
a pre-defined state approval of a completed mitigation. Under the FPRC, it is the contractor that
would negotiate and hold environmental insurance to protect itself against unforeseen
circumstances.
There is no clear-cut advantage for one of these approaches over the other. The tradeoffs for a
developer are real in terms of money, effort levels, and control over risk exposures. They are
summarized below in T able 3.2, which shows the differences in the incentives to and behavior of the
remediation contractor and the cash and other costs to the developer ordering the work under the two
different approaches.
-55-
-------
Table 3.2 - Tradeoffs Between Insured Time and Materials and Fixed Price Remediation Contracts
Time &
Performance
Materials, with CC C
Insurance
Coverage
Risks
Fixed I
Performance
'rice Remediation C<
Insurance
jntract
Risks
Mitigation Contractor Incentives and Expected Behavior
- No rewards for
efficient work
- elapsed time and
SS billings may be
greater without
careful developer
oversight
None, other than
retention of the
firm's normal
Errors and
Omissions Policy;
burden retained by
the developer
-No assumption of
any performance
risks, except for
time and cost
target rewards &
penalties in the
remediation plan
contracts
- Fixed fees are
retained, so faster,
smarter, and more
efficient work will
maximize profit
- May cut corners
where regulatory
process permits
- Need to negotiate
CC Insurance
- Past performance
affects coverage
availability & cost
- Bid to mitigate at
high level to avoid
making any claims
- SIR could absorb
all expected profit
- Objections to
work scope from
adjacent sites
could add costs
- Uncertainty of
Regulatory OKs
Brownfield Developer Costs, Risks, and Off-Setting Benefits
Monetary
- Negotiation costs
for mitigation
"scope of work"
- Direct project
oversight expenses
- Hiring costs for
staff or contract
work oversight
- Premium costs
- Liquidity needed
to cover SIR funds
- Costs for filing,
enforcing claims
- possible fees for
insurance counsel
- Not negotiating
needed coverages
for the site, project
- Premiums paid
for unnecessary
coverages
- inability to
collect on claims
- Higher base costs
for price guarantee
- costs for off-site
impacts
- Benefit: Assured
that cleanup will
meet standards at a
known, fixed cost
- Project costs will
include more than
just the premium,
adding in:
* engineer's
negotiation charge
* some portion of
expected SIR
- Delay costs due
tp perverse timing
incentives if a
claim is not paid
promptly and
contractor needs to
find more funds to
complete the work
Process and
Transaction
- Delays due to
conflict over work
required or done
- Benefit: Insurer
review of cleanup
plans
- Time finding and
negotiating policy
- Organizational
issues in buying
new insurance
coverages
- Project elapsed
time lost during
claims processing
- Delayed cleanup
extending beyond
coverage term
- Time spent
drafting contract
- Neighborhood
objections due to
little concern for
off-site impacts
None, since all
coverage matters
and claims would
be between the
contractor and the
insurer
- Uncertainty over
adequacy of the
engineer's policy
- Developer might
have to take over
mitigation efforts
-56-
-------
Table 3.2 addresses three key features of each type of contract:
First, the incentives to which the engineering contract will respond varies when operating under a Time and
Materials (T&M) contract and with the obligation to remediate at a fixed price. This behavioral difference is
fundamental to the entire transaction.
Second, the quoted price for a FPRC will generally be substantially higher than for a T&M contract, and often
involves a major pre-payment element, thus requiring the developer to commit more cash at the outset.
Third, there are substantially different transaction and process costs to the developer, especially the need to
oversee a T&M remediation, that tend to counteract the lower cash cost of such contract relative to an
arrangement for a FPRC. The Table notes one clear compensating benefit to the developer deriving from the
process involved in each option.
To fully understand how these tradeoffs operate, and what role insurance plays in offsetting some costs and causing
others, it is necessary to consider how costs actually manifest themselves. The Table thus distinguishes three
elements of incentives and costs arising under any contract:
Performance involves how the mitigation will proceed and the costs and savings that are associated with the
contractor's incentives, expected behaviors and relationships to the developer.
Insurance describes the coverages needed and costs involved - and underscores the shift in responsibility for
cost overrun management from the developer under T&M to the contractor under a FPRC.
Risks describes the types of risks that carry real project costs but that may not be covered under the insurance
policies unless they are recognized and addressed.
Taken together, the entries in the Table should demonstrate that there is no single "correct" remediation contract
form for a development. Depending on the developer's appetite for different risks or experience in managing
remediators and/or relations with insurers, T&M might be more cost effective than FPRC.
Local governments and their arms-length development agencies are less likely than many private development firms
to have the in-house expertise needed to minimize insurance transaction costs and to cost-effectively manage and
oversee an engineering firm operating under a time and materials contract. Thus, there may be good grounds in
terms of total project costs for such entities to enter into FPRC arrangements, despite their higher up-front dollar
costs.
Many local governments operate under legal requirements for least-cost purchasing. Since FPRC proposals will
carry higher price tags than T&M bids for the same remediation work, a RFQ for remediation services should
specify the type of service contract required if a strict least-cost selection obligation limits the buyer's discretion.
The Parkville case involves precisely such a specification - that was why the initial contractor for the project had
to be replaced when it could not deliver a FPRC with appropriate financial assurances.
3.6 Drafting a Request For Qualifications for Brokerage Services
Whatever the legal and regulatory requirements governing the purchasing operations of a municipality, acquiring
the appropriate insurance coverage for a redevelopment with environmental concerns is likely to be difficult. One
mistake that can be made involves issuing a RFP for coverage on a specific project. The problem with this is that
-57-
-------
the first broker to contact an underwriter is the only broker with whom the carrier can work and the broker who
blocked other brokers may have little or no experience with brownfields.
Preferred or pre-approved vendor lists, even if they include insurance service firms with environmental units, will
not always require the involvement of the specialized divisions of national brokerages. Open records requirements,
and sometimes open bidding, can make it very difficult to attract bidders offering specific insurance products or
coverages.
These problems really are based in the complexity of the environmental insurance coverage decision, more than in
issues of price. Different coverages are needed as a project progresses over time, and the specific clauses needed
in each general coverage policy depend on an array of project characteristics. Price and budget constraints can, of
course, add to the problem, since tradeoffs between desired coverages might need to be considered. As the Hapiton
RDA discovered in its efforts to deal with the Baker Company, the decisions to be made generally will require the
help of a specialist in the management of environmental risks, no matter the developer's experience in other aspects
of real estate and economic development.
Therefore, a major problem facing those who want to pursue environmental insurance coverage for projects is
finding competent brokers and advisors. Despite some maturation of the field, the number of experienced brokers
remains small. (One experienced environmental insurance specialist claims there may be fewer than one hundred
highly qualified brokers negotiating coverages for clients.)" Given the need to individually craft policies, innovative
underwriters and brokers can make a huge difference in the coverages available and costs involved, so assuring the
availability of well qualified personnel through the RFQ process is an essential consideration.
Brokers usually are paid commissions only on policies sold. If an agency just posts a RFQ for commission-based
insurance services and requires environmental insurance experience in broad terms, the unspecialized local branches
of brokerage firms that have environmental records will apply, citing the experience of their parent organizations,
in order to win a contract. Unless the solicitation for offers is written carefully, the local brokers then might have
no legal obligation to bring in the personnel who have the brownfields and environmental insurance expertise - and
they would have an economic incentive not to call on them, to avoid sharing their commissions.
Any formal request for environmental insurance services thus has to be extremely specific and state that it requires
the services of personnel named in the proposal or quotation who actually have negotiated and implemented a
designated number of policies that included some or all of the types of coverages in which the requester has an
interest. The broker needs to be an "excess line broker" (also called an "excess and surplus line broker") who is
licensed in the state to broker "non-admitted" insurers or insurers that provide specialized insurance - such as
brownfield policies - and are not licensed in the state. Other possible elements to include in the RFQ posting thus
include:
11 One way to address the scarcity of specialized brokers is to procure the services of an environmental
consulting firm. The client, however, will have to pay a fee for these services even when no insurance is purchased.
-58-
-------
Requests for the qualifications of key named individuals, not just of the offering firm or its branch office or
division, including requests for documentation of their experience writing policies that were actually sold and
implemented (so one can judge if the people available fit one's needs).
Indication that heavy weight in ranking proposals will be given to the specific environmental insurance
experience in years and number of policies written of the named individuals offered in the response (to make
sure that one can demand that the needed specialists be available).
Specification of the types of policies that will count in demonstration of experience, including factors such as
size and number of policies implemented, number of sites in a single policy, types of contaminants covered,
types of coverages provided, and extent of work with public sector bodies (so one can emphasize experience
with the issues that are of concern to one's project).
A clear statement that national, not just local, experience is expected from the named individuals and the firm
(to make sure that the brokers have a broad enough perspective to help one to arrive at creative, possibly
more cost-effective or less expensive solutions, if they are available).
Some specification on the timeliness of service expected (since, otherwise, a broker would be free to stall,
while devoting time to a larger prospective sale offering a bigger commission).
Specific contract preferences: the expertise wanted, services desired, and remuneration offered. Questions that
the individual charged with crafting the RFQ might ask decision-makers include:
~ Do you want lawyers providing contract and legal advice on insurance issues with a primary concern for
your future rights as a claimant, or do you want lawyers and/or others with brokerage experience more
attuned to negotiating the right coverage so you have protection paid for by, say, the parties from whom
you are acquiring sites?
~ Do you simply want advice on options available and their costs and feasibility, or do you actually want
someone who can sell you a policy? (Remember, the broker is a salesman, and thus wants to sell, while the
advisor may be more objective and disinterested in whether or not insurance is purchased, but the advisor
needs to be paid whether or not you buy any coverage.)
~ Are you prepared to pay a fee for advice, or do you want to state that the RFQ is strictly for selecting the
party that will have the opportunity to earn a commission. (You will have to pay a fee for a pure advisor,
but this will get you someone who is less interested than a broker in consummating a sale.... and you may
be paying by the hour for education in the insurance field. A minimum fee contingency is also possible: a
fee for brokers to be paid only if commissions are not earned through the sale of insurance that cover the
amount.)
Whatever conditions are specified, care must be taken not to raise the bar too high. A requirement for 20 years
experience negotiating environmental insurance policies, or even 20 or more policies written, may result in no
qualified bidders being available.
The larger the possible insurance coverage purchase, or the more extensive the advice and guidance needed, the
more it may make sense to post the request nationally, not just locally. In many instances, in fact - basically outside
maj or metropolitan areas - it is unlikely that even the local office of a national brokerage firm with environmental
specialists will have the capacity to serve environmental insurance needs. Decisions about how to disseminate a
RFQ may be very important to its success. Standard vendor lists from local economic development organizations
-59-
-------
or state leagues or associations of municipalities or counties will not be sufficient. Notice of issuance of RFQs thus
should include distribution to:
Local commercial insurance brokers, even if the locality has never dealt with them and they have not
advertised environmental coverage as a specialty (since they can team with specialists and might help identify
non-local firms that way).
Any local, regional or state services broadcasting RFQs from public agencies and nonprofits (where such
systems exist, they can be a big help, since they are scanned by many possible providers).
Environmental law firms in the area, or the environmental specialists in large local or regional corporate law
firms (since they are as likely as any others to have worked with environmental insurance specialists).
Firms identified from worldwide web searches on more than one "yellow pages"or directory site (since no one
web site is likely to have links to all potential providers).
All of the insurers and underwriting firms known to the issuer (since the underwriters can forward the
announcement of a RFQ to brokers with whom they work).
The point is that dissemination of a summary of the RFQ and instructions of where the full documents are available
or to whom requests for copies can be directed is relatively inexpensive - especially if dissemination is by e-mail
or faxed one-page announcement. With a small universe of specialist firms out there, it is essential to get the word
out, and it is too easy to miss excellent providers through an overly narrow distribution list.
Finally, allow sufficient time. With an ever-changing mix of underwriters, brokers and advisors out there, the
objective is to locate specialists who can serve a project's special needs. Making all potential information sources
aware of a RFQ can take time. Make sure the process is initiated as soon as possible and reserve time to locate
providers - and then give them the time they need to respond.
-60-
-------
Appendix
A Sample Property Transfer and Remediation Agreement
This sample comes from the Parkville Case Study. The key parties to the agreement that moved the proj ect forward
were the original PRP, the Company, the City as redeveloper, and the Contractor that provided a fixed price
remediation to the negotiated mitigation standard. The capsule description below was compiled from the four
documents, including the insurance policy, that constituted the agreement between the three parties. The accuracy
of the description of the agreement terms was reviewed by the Parkville City Attorney. Statements about the
incentive consequences of some of those terms and conditions are the conclusions of the authors.
The Property Transfer involved the site in as is condition with an acknowledged and defined set of "Existing
Conditions" describing the pollution on site for which the Company retains ultimate legal liability. While the site
was valued by the Company at almost $1.5 million in its current condition, it was transferred to the City for the
symbolic $1, along with title insurance covering the multiple distinct parcels that made up the company facility.
Liability Releases and Assumptions involved the Company, XYZ Products, the City, Parkville, and Contractor,
Contract Remediators, Ltd., with the latter undertaking to remediate the site from its current Existing Conditions
to the Required Remediation condition required by the state in order for the City to begin construction of its park.
Key liability releases, assumptions and transfer rights in the agreements included the following:
All parties may transfer their rights and obligations to successor owners/entities.
The remediation is required to meet requirements "that may now be in effect or which may be enacted or
adopted at a future date" during the term of the agreement by any party other than the City. (Thus Parkville
cannot decide on its own to impose a higher mitigation standard on the Contractor, whatever reasons may
arise that recommend such an action.)
The Remediation Liability is defined so as to be independent of any current or future state-provided liability
relief to local governments such as the City (including the "sovereign immunity" from third party suits
provided to local governments in some states).
Despite the extensive site assessment by the Company, the Contractor is still explicitly liable for remediation
of unknown as well as known Existing Conditions.
XYZ Products retains responsibility for any off-site migration attributable to Existing Conditions that may
affect groundwater and for future liability for damages due to the Existing Conditions prior to the property
transfer, despite the sale of the site to the City.
The Contractor' s financial liability is limited to the total funds available under the Finite Risk insurance policy,
after which any additional needed expense has to be covered by the original PRP, the Company.
Parkville accepts responsibility for any New Pollution Conditions that may arise as a result of its efforts to
build a park, except for pollution conditions that may result from the work of Contract Remediators, Ltd. in
its demolition and remediation activities.
The Required Remediation agreement included provisions for possible on-site disposal of sufficiently clean
demolition debris as a means of holding down costs. The Contractor agreed not to use any wood or metal debris
on site, but could dispose of masonry and asphalt on-site or provide it as crushed material to the City for its use.
-61-
-------
These provision discretionary powers required a process of consultation and agreement between the City and
Contractor, along with a mediation process to resolve disputes.
Representations, Warranties, Indemnifications are included in the sales agreement, remediation contract, and
insurance policies included in the contractual arrangements between the three parties, and contain some important
provisions:
The Company assures all parties that it has provided all data it has on site conditions, without claiming it is
complete information.
The City asserts it accepts site ownership knowing the property has not met state requirements, and that the
Contractor has only to mitigate to a level appropriate for site use as a park, with any additional remediation
an expense the City would have to incur.
Both City and Company agree not to challenge the agreement in court, but both acknowledge that third party
suits may affect the terms, so a severability clause is included to protect the agreement as a whole in case any
portion of it is successfully challenged in court.
The Contractor relieves the Company of all Remediation Liability (up to the specified dollar level), but offers
that relief to the City only for Existing Conditions, since the City bears responsibility for New Pollution
Conditions.
Remedial Response Obligations accepted by the Contractor include:
A schedule of time limits for achieving key milestones in site demolition and remediation.
The status of Potentially Responsible Party for the remediation and of Generator of any hazardous wastes
transported from the site and disposed of at another location.
Granting the City the right to review all remediation/disposal plans since Contract Remediators. Ltd. can
dispose of demolition debris on site, under 18-24 inches of soil, but Parkville needs to be party to location
decisions in order to not disturb such deposits and create new problems when constructing its park.
But there are also key remedial response obligations for the City and Company, who are jointly the "Client" of the
Contractor:
The Client agrees not to have any independent contacts with regulators overseeing the mitigation, to provide
all data and to offer any municipal regulatory relief that may help ease the site preparation, and accepts that
the remedial response is completely under the control of the Contractor, in negotiation with the State
Regulator.
Client acceptance of a series of Institutional Controls on the site, including limiting a portion of the site
exclusively to Non-residential use with no use of on-site water for drinking, limits on placement of
underground utilities so as to not disturb any subsurface contaminants, and the registration of the site with
the state as having institutional controls and land use limitations.
City, specifically, accepts that any intervention or new demands for specific actions by the Contractor may
constitute "Change Orders" in the originally contracted scope of work, and that Parkville would be separately
billed to it.
All parties also agree to specified mediation and arbitration processes designed to speed conflict resolution and
avoid the costs and delays associated with litigation over provisions of the agreement.
-62-
-------
Insurance Costs and Coverages were central to the agreement. A Finite Risk policy is inherently complex and
has to be tailored to conform to the other provisions of the agreement between multiple parties in order to protect
them all. The manuscripted policy thus depended on all of the obligations, procedures, and liability allocations
described above.
Coverages, Limits, Deductibles, Co-insurance did not provide all that the Company and City
originally hoped to obtain:
~ Pollution Liability coverage for On-Site and Off-Site Cleanup of Existing Conditions and for Third Party
Claims for On-Site and Off-Site Bodily Injury and Property Damage. This coverage carries a $25,000
deductible (including legal expenses and defense) and a $4 Million aggregate with both the City and the
Company as Named Insureds.
~ Cost Cap coverage for both Known Contaminants and Unknown Contaminants carries a $7 Million
aggregate, no Self Insured Retention, and a 10% Co-Pay provision. This co-pay is to be guaranteed by an
irreversible letter of credit that had to be obtained by the Contractor. The Contractor has the status of
Named Insured unless the firm defaults on its project obligations or bankrupts, at which point the City
accepts being responsible for the cleanup and becomes Named Insured.
~ Only the City can add Named Insureds under its coverages, which it would do if it transferred all or part
of the site to another party for a different form of redevelopment.
Policy Premium, Limits and Terms, similarly, are not what the Company and City originally pursued,
but were acceptable in light of changes in the insurance market:
~ Total Finite Risk Policy Cost around $5.4 million, the maximum originally accepted by the City and
Company when they began the process but allocated differently.
~ The Commutation Account, the funds provided for the demolition and remediation amount to about $4.5
million, with "Demolition Costs," defined as including "removal of the buildings and structures," capped
at slightly under $2 million.
~ The Insurance Premium paid for the PL and CC coverages was about $900,000.
~ The Policy Term was limited to 10 years, with a 60 day extended reporting period for the PL coverage on
the termination of the policy, if new coverage was not purchased.
Duties of the Insured are specified separately for the PL and CC policies.
~For the Pollution Liability coverage, both the City and the Company have the duty to clean up Existing
Conditions that began prior to initiation of coverage as required by law, using professionals acceptable to
the Insurer (presumably the Contractor).
~For the Cost Cap coverage, the Contractor is expected to take steps to minimize remediation costs, except
that the City does not need to accept more restrictions on use or sale of site than are already present in its
Agreement with the Contractor, so the latter cannot take short cuts by renegotiating its RBCA
arrangements with the State Regulator.
Exclusions for all coverages include any natural resource damage, with policy-specific additions:
-63-
-------
~ The standard asbestos and lead exclusion under the PL coverage does not apply to either material that is
discovered to be in the soil or groundwater due to factors other than the Contractor's demolition work,
such as Existing Conditions.
~ The CC coverage pays for delay, suspension, or defects that cause problems only to the extent that the
problems cause an increase in the Remediation Costs or Loss.
Issues Raised in the Definitions section of the Insurance Policy are worthy of some note, since they affect both
costs and risks for the different parties. These matters did not, apparently, cause any problems in arrival at the
agreement, but represent decisions that others may want to make differently, given the incentives and impacts these
definitions generated.
"Demolition Costs," defined as including "removal of the buildings and structures," are capped at $ 1,752,095.
This means that the Contractor would not have any claim to any of the CC protection under the policy should
its removal costs exceed this amount, and it implies potentially very heavy pressure on the Contractor to
dispose of all masonry and asphalt debris on site. To the extent that such disposal might pose cost or other
problems for the City's plans for use of the site as a park, this incentive could generate conflicts.
"Named Insured" for CC coverage is defined as the Contractor OR the successor taking over the cleanup
obligations, which can only be the City. Only the Named Insured benefits from funds remaining in the Finite
Risk account after completed remediation. Since Parkville does not in any way benefit from expedited
remediation efforts except through speedier access to the premises, if other factors reduce its interest in the
project or the speed at which it progresses, the City may not be as willing to expedite site preparation as the
Contractor might prefer. That risk and the potential conflicts involved might have been reduced had the City
stood to benefit financially from a more rapid or lower cost mitigation. (The issue is not whether the City
really wanted this reward, but, rather, that it might actually have been in the interest of the Contractor to offer
to share the potential gain, in order to increase the likelihood of funds remaining when the remediation was
completed.)
"T ermination Date" for CC coverage is defined as the earliest of (1) termination of the 10 year time limit, (2)
exhausting of the funds in the Commutation Account, or (3) attainment of Project Completion, with no
extension due to a government entity's actions to reconsider site conditions after having previously approved
the remediation as complete. This explicitly states that no party has any access to CC coverage for re-openers
as the result of State Regulator action. Any additional remedial effort would have to be covered by the PL
policy that carries a lower monetary aggregate claims limit.
Commutation conditions permit commutation after the fifth policy year and on the policy anniversary every
year thereafter. This language could leave funds in the commutation account, earning for the Insurer, for as
many as 364 days if the work was completed a day after an anniversary date and suggests that none of the
insured parties had any serious interest in the potential proceeds of returned funds from that account.
Moreover, commutation prior to the completion of the Required Remediation included termination of the PL
coverage as well as the CC policy. There would therefore be virtually no reason for any of the parties
involved, all of whom would have to agree, to accept commutation prior to completed remediation.
-64-
-------
References
Avena, Suzanne M. 2001. "Request for Property Information Pertaining to Insurance Submission" pp. 46-48 in
Practical Approaches to the New Environmental Coverages. Gerard P. Cavaluzzi and Eileen D Millett (eds.)
New York: The Association of the Bar of the City of New York.
Bajari, Patrick, and Steven Tadelis. 2001. "Incentives versus Transaction Costs: A Theory of Procurement
Contracts." Rand Journal of Economics 32(3): 387-407.
Elliott, Michael W. 2000. Finite and Integrated Risk Insurance Plans. Malvern, PA: Insurance Institute of
America.
Fersko, Jack and Ann M. Waeger. 2000. "Environmental Insurance in Brownfield Transactions: Issues and
Answers." pp. 165-174 in Brownfields: A Comprehensive Guide to Redeveloping Contaminated Property
(second edition). Todd S. Davis (ed.). Chicago, IL: American Bar Association, Section of Environment,
Energy, and Resources.
Meyer, Peter B. and Thomas S. Lyons. 2000. Lessons from Private Sector Brownfield Redevelopers: Planning
Public Support for Urban Regeneration. Journal of the American Planning Association LXVI:(1): 46-57.
Northern Kentucky University and University of Louisville [Kristen R. Yount and Peter B. Meyer], 2000.
Environmental Insurance and Municipal Brownfield Programs: Factors Affecting Pursuit of Insurance as a
Redevelopment Tool. Washington, DC: US Environmental Protection Agency. Available at
-------
Environmental Insurance for
Brownfields Redevelopment:
A Feasibility Study
-------
-------
FOREWORD
Many American cities are now fiscally and economically stronger than they have been in
years. However, the task of revitalizing America's cities remains unfinished, as does the
challenge of pursuing sustainable development across metro areas and balancing the need for
new growth with smart reinvestments in already developed urban areas. Returning urban
brownfields to productive community use is a central aspect of both aims.
Towards this end, the Department is a principal partner in the Administration's initiative
to help communities clean up and sustainably redevelop brownfieldsa priority for State and
local elected officials. Our tools include a new Brownfields Economic Development Initiative
(BEDI) to specifically address brownfields redevelopment needs, participating in the
Administration's Showcase Communities Initiative, providing technical assistance to State and
local governments, and streamlining community development regulations to make them
"friendly" to brownfields redevelopment.
Expanding our knowledge base and developing new tools is a vital part of our
commitment. Consequently, the Office of Policy Development and Research has initiated an
active brownfields research and development program. The purpose of our brownfields R&D
work is to better understand how brownfields become barriers to revitalization of America's
distressed communities and to develop ways to overcome or eliminate those barriers.
We are examining a range of issues: how the linked issues of environmental risk and
neighborhood economic distress affect the redevelopment process, how the Community
Development Block Grant program supports local brownfields revitalization efforts, how to
pursue and reward innovative approaches for financing brownfields cleanup and development
activities, what kinds of state initiatives work and don't work, and in this report how a new
insurance tool could help.
This report, Environmental Insurance for Brownfields Redevelopment: A Feasibility
Study, explores whether a new tool, environmental insurance, can help stimulate the
redevelopment of urban brownfields. The report describes: 1) the types of environmental
insurance available, 2) how insurance could be used at various stages of the redevelopment
process, 3) current constraints on the use of such insurance as part of the redevelopment process,
4) case examples, and 5) suggested actions to overcome barriers to the effective use of
environmental insurance. I am pleased to make this report available to you as part of the HUD
commitment to empower America's communities.
Xavier de Souza Briggs
Deputy Assistant Secretary for Research
Evaluation, and Monitoring
-------
Environmental Insurance for Brownfields Redevelopment
v
PrefacePreface
Urban redevelopment efforts across the United States have been plagued by myriad
problems. Concerns about land contamination and the difficulties associated with cleanup for
reuse have compounded an already very difficult problem and has been examined in prior
research supported by the Office of Policy Development and Research (PD&R) in the U.S.
Department of Housing and Urban Development (HUD). Building on preliminary findings of the
research supported on The Impact of Environmental Hazards and Regulations on Urban
Redevelopment, PD&R noted the emergence of new forms of environmental insurance that
might have value in easing access to private sector capital for urban redevelopment, even in the
presence of contamination.
In May, 1997, PD&R issued grant HP972665 to The E.P. Systems Group, Inc., for the
conduct of a feasibility study into the potential value of stimulating utilization of such insurance
products. This Report is the product of that research effort.
No research that engages in information gathering is possible without the cooperation of
many willing individuals who provide the needed data, often at no direct benefit to themselves.
This is certainly true of this study. Major environmental insurance underwriters and a number of
insurance brokers and consultants provided us with extensive information and willingly donated
their time, providing background information and guidance through the workings of the
insurance industry in addition to describing their environmental insurance products and services
and the means by which they are marketed. We owe a debt of gratitude to John Welter and
Gary Lutz of the Commerce and Industry division of AIG, Inc; Bruce Amos of E.C.S., Inc.;
Wlliam McElroy of the Zurich American Insurance Group; Harry Shuford of the Corporate Risk
Insurance Group, LLC; Steven Hargreaves of The ERIC Companies; Ken Anderson and
Adrianne Cronas of Willis Corroon; and David Logue of Logue and Associates for their
contributions and responses to repeated questions.
In addition, a variety of public sector officials and staff of non-profit agencies engaged in
redevelopment efforts in twenty-four cities and two state-wide programs provided us with
information about their knowledge about and utilization of environmental insurance as a
redevelopment tool. Wthout their assistance and willingness to cooperate, we could not have
come to understand how municipalities are currently utilizing the available insurance tools. They
are the people who really made this report possible and focused our attention on the particular
needs and opportunities for urban government action in providing insurance to encourage
redevelopment. Most of them spoke in response to our promise of confidentiality so they could
be as open about process problems and other difficulties as possible. We, obviously, cannot
thank them by name. Three, however, provided us with the case study details that we report, in
comments that were very much for the record.
The people who helped us to develop the four case studies of insurance program
development described here permitted us a glimpse of possible futures for environmental
insurance and brownfield redevelopment: Harry Shuford, who described the New Jersey case;
Art Harrington of Godfrey and Kahn, an attorney who provided the information on Kenosha,
Wsconsin; Mary Jo Bohart, the Brownfields Coordinator, Somerville, Massachusetts, who
detailed their urban redevelopment efforts; and Bill Frederick of the Connecticut Department of
-------
vi
Environmental Insurance for Brownfields Redevelopment
Economic and Community Development, who discussed the department's use of environmental
insurance.
We hope this report reflects the effort they put into working with us and lives up to their
expectations of our work. Any errors are ours alone, and should not be attributed to the many
who helped us in this exploratory examination.
Peter B. Meyer
Kenneth M. Chilton
Louisville, KY
September 1997
-------
Environmental Insurance for Brownfields Redevelopment vii
Table of Contents
PREFACE V
CHAPTER 1 1
FEASIBILITY STUDY OF ENVIRONMENTAL INSURANCE FOR
BROWNFIELDS REDEVELOPMENT 1
CHAPTER 2 7
INTRODUCTION: THE RESEARCH PROBLEM 7
CHAPTER 3 9
RESEARCH METHODOLOGY 9
CHAPTER 4 11
BROWNFIELDS-RELATED INSURANCE: A TYPOLOGY 11
Insurance Policy Variables 11
Professional Liability Coverage 13
Owner/Operator Liability Coverage 13
Cleanup Cost-Cap or Stop-Loss Coverage 14
Legal Defense Coverage 14
Re-opener or Regulatory Action Coverage 14
Trends in Coverage 15
CHAPTER 5 17
REDEVELOPMENT STAGES AND THE POTENTIAL 17
CONTRIBUTION OF INSURANCE COVERAGE 17
The Stages of a Brownfield Redevelopment Effort 17
Insurance Facilitation for Construction Loans 18
Insurance Facilitation for Mortgages and Operating Loans 19
Insurance Facilitation for Mortgage Securitization 19
Environmental Insurance as a Redevelopment Subsidy Tool 19
CHAPTER 6 23
THE INSURANCE MARKETING PROCESS AND THE MUNICIPAL MARKET 23
How Insurance Companies Operate In Relationship to Municipal Governments 23
Insurance Sales: Brokers, Agents and Consultants 24
Municipal Insurance Buyers : Risk Management and Purchasing Agencies 24
-------
viii
Environmental Insurance for Brownfields Redevelopment
CHAPTER 7 27
OVERALL FINDINGS: THE STATE OF THE MUNICIPAL INSURANCE MARKET 27
What is "Known?" 27
What is Believed - and Why? 28
What are the Market Imperfections? 29
What Municipal Actions Are Contemplated or Taken in Different Types of Settings? 31
Case Examples of Brownfield Insurance as an Economic Development Subsidy 32
Kenosha, WI 33
Somerville, MA 33
New Jersey Municipal Environmental Risk Management Fund. 35
Connecticut Department of Economic and Community Development 37
CHAPTER 8 39
THE POTENTIAL CONTRIBUTION OF INSURANCE TO REDEVELOPMENT OF SMALL
URBAN BROWNFIELDS 39
How Can Municipalities Use Pooled Insurance to Stimulate Increased Urban Redevelopment
of Small-Scale Brownfields? 39
How Does the Contribution of Brownfield Insurance Vary by Region, Urban Area Size and
Extent of Contamination, or Local Economic Conditions ? 41
Recommendations for Possible HUD Actions and Additional Research Needed to Promote
Utilization of Insurance for Urban Redevelopment using Brownfields 42
Education and Information Provision Efforts 43
Departmental Data Collection Efforts 44
Extramural Research Effort 45
REFERENCES 49
-------
Environmental Insurance for Brownfields Redevelopment
1
Chapter 1
Executive Summary.OExecutive Summary
Environmental Insurance for Brownfields Redevelopment: A
Feasibility Study
This study has explored whether a new tool, known as environmental insurance, can be
used as a tool to help promote the redevelopment of at-risk urban sites as part of community
economic development initiatives. Environmental insurance is insurance intended to limit liability
associated with the discovery and cleanup of contamination on brownfields. There are a
growing number of types of environmental insurance now available. Specifically, the study
examined the following
(i) The potential of environmental insurance products as stimuli for increased
brownfields redevelopment investment; and,
(ii) The extent to which such policies could be targeted towards particular regions,
metropolitan areas or cities of particular sizes, or urban centers in particular
economic conditions (depressed, redeveloping, etc.).
This Report examines these two questions. In addition, it offers recommendations
regarding possible municipal actions and additional HUD information dissemination and
research activities that could be undertaken to more fully determine the role environmental
insurance can play in stimulating accelerated redevelopment of urban brownfield sites. There
will be special emphasis on pooled environmental insurance. Pooled insurance is a form of
group insurance.
Information on the emerging mix of environmental insurance (El) products was gathered
through interviews with senior staff from the three insurance companies that dominate the
market. This was complemented by data from recent studies examining barriers to reinvestment
in urban brownfield redevelopment efforts. Also, Interviews with economic development and
environmental management officials from cities across the nation operating with Brownfield Pilot
Project grants from the Environmental Protection Agency provided data on local awareness of
El products and beliefs about their potential contribution to urban redevelopment.
Primary findings include the following:
Environmental insurance (El) has the potential to reduce the uncertainties associated
with brownfield redevelopment projects. El policies that limit cleanup cost exposures
provide a strong basis for the quantification of risk that is often demanded by lending
institutions as a condition for investment.
The contribution that El products can make to urban redevelopment may vary with local
economic conditions, most particularly the strength of the local real estate market; in
-------
2
Environmental Insurance for Brownfields Redevelopment
weak markets even minor reductions in risk and uncertainty can enhance the
competitive position of brownfield sites.
There are at least five major types of environmental insurance, and each plays a
somewhat different role in limiting uncertainty and quantifying risk at different stages of
the redevelopment process, but public agencies charged with urban redevelopment
have limited knowledge of the products and services available. The broad types are:
0 Professional Liability Coverage, mainly for "errors and omissions" by
public and private parties dealing with or managing contaminated land
issues;
0 Owner/Operator Liability Coverage, for the firms or agencies actually
working on the site, whether doing business or engaged in cleanup
operations;
0 Cleanup Cost-Cap or Stop-Loss Coverage, which places an upper limit
on the costs of cleanup which site redevelopers may have to pay;
0 Legal Defense Coverage, for lawsuits associated with liability claims
made by enforcement agencies or third parties (injured private parties);
and,
0 Re-opener or Regulatory Action Coverage, for costs associated with any
future government actions that require further site cleanup, including the
costs associated with loss of use of the improvements on the site.
While the preponderant majority of the city officials contacted in the course of this study
are actively pursuing brownfield redevelopment, they were either unfamiliar with El, or
were skeptical that El would help their proposed or ongoing redevelopment efforts.
There is now a substantial array of environmental insurance products available, and both
underwriting fees and coverage premiums have fallen significantly in the five years El
has been readily available. However, the industry has not communicated this information
effectively to potential purchasers in the public and quasi-public sectors.
Private sector demand for El is growing rapidly, and speculative redevelopment of even
heavily contaminated sites is now being undertaken by venture capital pools using the
insurance coverage as a risk management and loss prevention tool.
Private sector demand is attracting most of the attention of the insurance agents,
brokers and consultants with expertise in El; hence, there is little incentive for the
industry to attempt to market to local community and economic development agencies.
At the same time, it appears that even the cities that are most innovative and creative in
brownfield regeneration efforts have not have not pursued the potential link between
their economic development efforts with environmental improvement approaches.
Consequently, there are few examples of local governments using El in support of their
economic development efforts.
In addition, public sector purchasing procedures, especially requirements for multiple
bids prior to purchase of any services or products such as insurance coverage, create
obstacles for insurance providers when they attempt to design tailored coverage to meet
municipal brownfield redevelopment needs. In fact, depending on the legal status of the
-------
Environmental Insurance for Brownfields Redevelopment
3
multiple bid requirements, this issue may not be addressable at the municipal level.
State law mandating particular purchasing requirements may have to be changed.
While public sector experience is limited, there are some examples of creative use of
environmental insurance coverage by municipalities and states to stimulate brownfield
redevelopment and reuse. Examples include the following:
Kenosha, Wisconsin, is using liability coverage and cost-cap insurance for two projects:
(a) a public agency's plans to sell; and (b) a municipal land acquisition for development.
The increased certainty provided by the insurance appears to be central to both projects.
Somerville, Massachusetts, has designed an innovative self-insurance program aimed at
small brownfield projects to deal with cleanup cost overruns on 110 sites under one-half
acre.
The New Jersey Municipal Environmental Risk Management Fund is being set up to
deal with the special problems of brownfields. The effort is being undertaken by an
alliance of 199 municipalities in the state that participate in the Environmental Joint
Insurance Fund. This Fund currently provides coverage for a range of environmental
liability exposures and related costs to reduce risks associated with urban
redevelopment.
The Connecticut Department of Economic and Community Development appears to
have more experience with environmental insurance than any other public sector body. It
has been utilizing El since 1993, almost exclusively for residential projects. The state
uses cost-cap coverage to make sure that it does not lose money when it signs contracts
with private investors promising mitigated publicly-owned sites at an agreed-upon price
for redevelopment into housing.
These examples represent demonstrations of how environmental insurance could
contribute to urban redevelopment. They illustrate ways in which the coverages can be used by
public sector agencies to promote reuse and reclamation of potentially contaminated sites.
However, they provide no reliable data on the cost-effectiveness of El as a redevelopment
subsidy.
Recommended actions by local development organizations and the Department of
Housing and Urban Development (HUD) may be derived from these findings, specifically:
> Municipal governments and other local economic and community development
organizations can promote urban redevelopment on difficult-to-regenerate small sites
through their ability to create pools of potential projects that could be covered by a
common environmental insurance policy. In assessing the desirability of such efforts,
local officials need to take a variety of factors into consideration, notably:
What type of pool of insurable sites (number of parcels, characteristics of
ownership, intended use, location, etc) can be created in a city?
How much could a municipal pool reduce the costs of insurance
coverages for individual parcels by spreading risk and reducing site-
specific underwriting effort, and how do those costs vary with the
characteristics of the pool?
-------
4
Environmental Insurance for Brownfields Redevelopment
Can pooling reduce the cost of needed coverages to levels that make
coverage economically efficient from a private investment perspective?
What is the relative value of publicly-financed insurance coverage to
would-be developers and their financial backers, compared to other, more
direct, financial subsidy?
Given this relative value and costs for publicly-provided insurance, what is
the relative cost-effectiveness of public provision of insurance relative to
other subsidies?
What reorganization of purchasing practices or other restructuring of
public sector decision-making is necessary to improve the workings of the
market for public acquisition of environmental insurance?
> A municipality interested in creating insurance pools in order to provide coverage for
developers of small-scale brownfield sites could take two different approaches to making
coverage available:
The municipality or an economic development agency could identify pools
of properties that would benefit from the economic benefits of risk sharing
and encourage current owners to buy group coverage to make their sites
more marketable; or,
The municipality or economic development organization could purchase
coverage for such pools and make the protection available to purchasers
and redevelopers of the sites, not relying on action by current owners.
> HUD could make a significant contribution to more systematic examination of
environmental insurance and its potential value as an urban redevelopment tool through
increasing local public sector awareness of the changes in El products, services,
availability and costs. The Department could develop the capacity to provide the
information needed by utilizing its extensive communications with local governments and
agencies that apply for and or receive grants for their urban redevelopment efforts.
> HUD grant applicants and recipients could be surveyed to determine their experience in
examining, and utilizing, El products and services.
> Finally, additional research is warranted before any formal federal position on the
advisability of urban development agencies' investment in environmental insurance can
be articulated. There is a need for systematic studies of the impact of various economic
development on brownfield redevelopment. Where examples of local use of El to
promote economic development are identified, detailed case studies describing the
coverages purchased and their impacts on rates of site redevelopment could assist
decision-making and policy development.
> Key issues to be addressed should include the following testable relationships between
the value of environmental insurance and other factors affecting brownfield viability:
In states with Voluntary Cleanup Programs (VCP) that protect brownfield
redevelopers from reopeners (reopeners are legal demands for additional
mitigation which could arise long after completion of the approved
cleanup), does the reopener insurance actually fall or is it lower than in
states without the VCP protections? If insurance is still in demand, that
-------
Environmental Insurance for Brownfields Redevelopment
5
suggests that the state assurances are not believed or not seen as
sufficient protection.
How does municipality or metropolitan area size affect the value that
insurance can provide to brownfield sites? Does a local real estate market
grow to such size that the differences in amenities and infrastructure
between central city and suburban sites become so great that the subsidy
that environmental insurance can contribute to promoting investment in
depressed areas becomes insignificant?
Does environment insurance make a difference by providing access to
capital that would not otherwise be available? That is, can insurance
enable a developer to get a loan that would not otherwise be available? In
this case, the extent to which the insurance changes the cost of the
project is not the important factor.
How does the role of environmental insurance change with the strength of
the local real estate market? Since insurance protects against risks and
uncertainties, it should be more valuable in weak real estate markets,
when other uncertainties are present, than in stronger markets or in real
estate boom conditions, when the environmental risks are the only aspect
of a project that does not appear to be virtually certain.
If HUD could provide municipalities with answers to these questions, or if cities and
towns could figure out partial answers for themselves, the capacity to make economic efficient
decisions on the use of environmental insurance as a tool for subsidizing private redevelopment
of urban brownfields would grow.
-------
Environmental Insurance for Brownfields Redevelopment
-------
Environmental Insurance for Brownfields Redevelopment
1
Chapter 2
Introduction: The Research Problem.O Introduction The Research
Problem
This study has attempted to determine whether or not new forms of pooled insurance for
at-risk urban sites is a tool that can contribute to urban economic development and should
therefore be actively promoted by the U.S. Department of Housing and Urban Development
(HUD). Decisions on the development of a program to encourage use of pooled insurance
policies to promote investments in brownfields need specific information on questions such as:
(i) The potential of pooled insurance products as stimuli for increased brownfields
redevelopment investment; and,
(ii) The extent to which such policies should be targeted as a matter of HUD policy
towards particular regions, metropolitan areas or cities of particular sizes, or
urban centers in particular economic conditions (depressed, redeveloping, etc.).
This Report examines these two questions pursuant to the requirements of HUD/PD&R
(Office of Policy Development and Research) Order for Services EP97-2665, dated May 5,
1997.
Answers to these questions presuppose knowledge about a number of other facets of
urban redevelopment processes. Most obviously, to the extent that contamination and fears
about cleanup or environmental liabilities on potentially or actually contaminated sites are not
factors undermining reinvestment in urban areas, insurance to cover such risks is not likely to
affect the rate of redevelopment. Whether the concerns about liabilities are warranted or not,
however, fears about them may inhibit site cleanup and reuse. Investor perceptions are thus
critical to the potential value of the insurance products. Actual behaviors and reported
responses to reduced liability exposures affect the potential that different forms of
environmental insurance may offer as stimuli to urban regeneration. We draw on the results of a
number of prior research studies supported by HUD and the U.S. Environmental Protection
Agency (EPA) in addressing these aspects of redevelopment obstacles and stimuli.
In order to address these questions given the limited utilization of any form of site-
specific insurance directly by municipalities, it is first necessary to provide background on the
products. Only then can we determine their potential utility as economic development stimuli
(which is, in fact, the value claimed by insurance providers). We took as our focus the value of
the insurance for efforts to redevelop urban "brownfields," using the U.S. Environmental
Protection Agency definition of such properties as:
"Abandoned, idled, or under-utilized industrial and commercial facilities where expansion
or redevelopment is complicated by real or perceived contamination."
Brownfields, therefore, may not really pose environmental costs or generate real liability
risks, but may only be perceived as doing so. The variation in the level of contamination across
all brownfields helps hold down the costs of insurance coverage through the economics of risk
spreading.
-------
8
Environmental Insurance for Brownfields Redevelopment
There are a number of different types of insurance coverage provided under the overall
umbrella of "environmental insurance," or, more specifically, "brownfields insurance." A policy
may combine these coverages in different ways, and each element, or combination of elements,
provides support for a distinct stage in an economic redevelopment effort. It is also necessary to
distinguish types of lending associated with these redevelopment steps, since each may benefit
differently from the availability of insurance against specific environmental risks feared at
brownfield sites. Finally, the current potential for local public sector utilization of these tools is
associated with two factors that need to be more closely examined: (1) the structure of the
insurance market - the procedures and practices governing how insurance is sold to, and
bought by, public sector agencies; and (2) the policy underwriting process - the specific steps
involved in tailoring environmental insurance policies to the unique characteristics of each
brownfield site.
This report begins with a description of research methods employed, including both
review of past evidence and collection of new data. We then review background considerations,
starting with an overview of relevant insurance products, then examining the potential
contribution of the various coverages to the completion of different stages of the brownfields
regeneration process, and finally describing the workings of the market for insurance sold to
municipalities. Findings from telephone interviews and other data collection are then presented
in light of this background. We conclude with a discussion of each key research question in turn,
addressing the implications for local public sector actions and offering recommendations for
further HUD effort, both in program actions and additional research.
-------
Environmental Insurance for Brownfields Redevelopment
9
Chapter 3
Research Methodology.O Research Methodology
This study combined review of the findings of prior research conducted on the factors
affecting redevelopment of urban brownfields with re-analysis of detailed data from prior studies
and a series of original data collection efforts addressing the specifics of the relevant insurance
products and markets.
The key prior research efforts on which this study built are:
(1) U.S. EPA. 1996. Potential Insurance Products for Brownfields. Washington, DC:
USGPO.
(2) Walker, C, P. Boxall, C. Bartsch, E. Collaton, P.B. Meyer and K.R. Yount. 1997. The
Impact of Environmental Hazards and Regulations on Urban Redevelopment. Prepared
by the Urban Institute with the Northeast-Midwest Institute, University of Louisville, and
Northern Kentucky University. Washington, DC: U.S. HUD.
(3) Yount, K.R., and P.B. Meyer. 1997. Financing Small-Scale Urban Redevelopment
Projects: A Sourcebook for Borrowers Reusing Environmentally Suspect Sites. Prepared
by The E.P. Systems Group, Inc. Washington, D.C.: U.S. EPA.
(4) Meyer, P.B. 1997. "Appraisers and Contaminated Lands: Valuation and Capital
Availability," in C. Bartsch, ed., Brownfield Financing Papers. Prepared by the Northeast-
Midwest Institute. Washington, DC: U.S. HUD.
The first of these studies, conducted in-house by the EPA, simply enumerated the types
of coverage available and the extent to which the products were being utilized as of 1996. It
provided key contact information on the major providers of environmental insurance (El) that
permitted this research project to be conceptualized and initiated.
The three contract research projects provided two types of information that contributed
to this study: (a) the findings contained in the published reports; and (b) the raw data collected
in the course of the research, which were re-analyzed with respect to the potential contribution
of environmental insurance to brownfield redevelopment. All three projects were based in part
on extensive interviews conducted with individuals who were active in, or had wide-ranging
experience with, brownfield redevelopment projects. In many instances the interview data
contained information that was not directly relevant to the prior research studies but could be
used to provide background for this investigation. The first study provided project-specific
information about risks and uncertainties that presented problems for redevelopment efforts;
these data were used to indicate the possible contribution of different forms of environmental
insurance to project completion. The second involved detailed examination of commercial
lending practices and bank responses to the risks associated with brownfields; these data were
used to project the potential impact of insurance protection on willingness to lend The third
analysis included a review of the literature on appraisal practices on brownfields as well as
interviews with practitioners; these data were used to project the effects of insurance on
valuation decisions.
-------
10
Environmental Insurance for Brownfields Redevelopment
A further, on-going, study of firms engaged in speculative redevelopment of brownfields
by The Center for Environmental Management at the University of Louisville provided
information on the dominant current market for environmental insurance. Using limited liability
companies and relying extensively on insurance coverage to control risks and costs, a growing
number of private sector firms are attracting venture capital and other funds for redevelopment
of heavily contaminated sites in prime, high-demand urban locations.
In addition to reviewing these studies and the data they generated, this project engaged
in the following data collection efforts:
(1) Meetings, phone contacts and fax exchanges with, and product description document
provided by, the three major national environmental insurance underwriters;
(2) Telephone conversations and fax exchanges with six insurance brokers or consultants
working with or for public or quasi-public sector clients on use of insurance for urban
redevelopment on brownfield sites.
(3) Telephone interviews or conversations based on a brief topical guide with representative
parties from over twenty states or municipalities, roughly evenly divided between
economic redevelopment, brownfield pilot, and land use planning personnel employed
by the city, state or some quasi-governmental unit, with the guide sometimes faxed to
the interviewee prior to the conversation.1
Additional phone calls were made to key contacts for confirmation of facts and
interpretations as needed over the course of the project.
1 When materials were faxed in advance to different interviewees, they were tailored to the city and state
context and the known job scope of the recipient.
-------
Environmental Insurance for Brownfields Redevelopment
11
Chapter 4
Brownfields-Related Insurance: A Typology.O Brownfields-Related
Insurance A Typology
A cursory examination of "environmental insurance" products available from the major
insurers underscores the number of different types of coverage involved: over twenty different
types of coverage are enumerated. Building on the materials provided by the three major
insurers in the environmental market, we can distinguish five broad classes of coverage.2 Each
has relevance to the role insurance can play in stimulating urban regeneration. We discuss
these classes of coverage below in this Part, before examining the risk takers and the potential
value of different policies to them in Part 5.0. First, however, a few definitions of policy variables
are in order.
Insurance Policy Variables4.1 Insurance Policy Variables
These definitions are not legally precise, but provide a layman's understanding of the
terms so they can be employed without further explanation in the balance of this Report. We
follow each definition with comment on the relevance of the variable to the insurance coverage
purchase decision.
Application Requirements - The information required and any fees or prepayments due from the
would-be insured party at the time of application for insurance coverage. The cost of
acquiring the necessary information can be substantial, and filing fees to pay for
preliminary underwriting may not be refundable if insurance is not purchased.
Coverage - The protection purchased, including a definition of the risks against which protection
is provided and the maximum payments to be made by the insurer. Minimum coverages
may far exceed the needs of small developers or projects on sites with only limited
contamination; maximum coverages may not be sufficient for large and complex
projects, although those maxima have been rising overtime.
Coverage Fee - That portion of the cost of insurance that pays for the coverage provided,
typically described in terms of cost per $1,000 in coverage and varying with the
coverage purchased. This amount is not predictable for many forms of environmental
insurance; it may depend on project- and site-specific data employed in underwriting.
Claim Filing Requirements - The requirements governing the filing of a claim, most particularly
the provisions for delayed filing if harm is not discovered until after expiration of the term
of the insurance policy. The broader the provisions for delayed filings on liability
2 The major insurers are the three companies identified in the 1996 EPA study of Potential Insurance Products
for Brownfields'. American Insurance Group (AIG), through its Commerce and Industry Insurance Branch; ECS, Inc.,
underwriters for Reliance Insurance; and Zurich American Insurance, Inc., through its Zurich American Specialties -
Environmental capacities. Project staff met with all three providers and obtained materials on products and services
offered in the environmental field.
-------
12
Environmental Insurance for Brownfields Redevelopment
coverages, the more valuable the policy is to the insured since these provisions increase
the protection against future liabilities.3
Policy (Underwriting) Fee - That portion of the cost of insurance that is fixed, regardless of the
amount of coverage purchased, which is charged for the costs incurred in writing the
insurance policy, including any effort committed to assessing the risks and determining
the appropriate level of the coverage fee. This fee can raise the total cost of coverage to
an uneconomical level for small projects or those with relatively low projected site
cleanup costs and similarly limited liability risks. Hence it may limit the value of insurance
to the majority of urban redevelopment sites, those of two acres or less.
Renewal or Rollover Conditions - The provisions for renewal of the insurance policy, including
any assurances of guaranteed renewal, the terms of renewal policies, and any
assurances about the cost of renewals. These conditions are important to the extent that
insurance coverage provides protection for long-term investors, since the terms of debt
instruments, or commitments to equity investments, may exceed the maximum term of
available insurance policies.
Retention or Deductible - The unreimbursable expenditure required of the insured prior to the
initiation of payment under the coverage in the event that insurance is activated. This is,
in effect, the "self-insured" portion of the risk and thus represents the remaining cost
uncertainty after the purchase of insurance.
Term - The period of time for which the insurance is in force and effect. Cost savings may be
possible through matching the term for policies covering remedial actions on a site to the
time period scheduled for cleanup; for assurance to longer-term investors, however, the
longer the term of other coverages, such as for liability or possible regulatory
reopenings, the more valuable the policy may be.
Transferability - The conditions under which the insurance coverage provided to an insured
owner of a property or other asset is transferred to subsequent owners of the asset.
Transferability provides protection to financiers in the event of loan default or other
developments that may lead them to become owners of the asset for which insurance
was purchased. The more easily the policy may be transferred, the more valuable it will
be.
Umbrella or Pooled Coverage - Provision of insurance protection to a defined group of
properties, currently available to the owner of a number of parcels, but potentially provided to a
single agent acting as the insured and representing a group of individual parties.
3 The filing requirements and potential coverage often depend on whether a policy is written to protect for
"claims" or "occurrences." For a policy with a limited term, the difference is essential, since the claims may be made
years after the occurrences that generated the damage. Under a pure claims policy, coverage is provided only for
claims made during the insurance term. An "occurrences" policy provides protection for claims made about damage
due to an occurrence that took place during the term of the policy, even if the damage is discovered at a later date,
and is subsequently more expensive to buy. Confusion over this distinction has led to unfortunate misunderstandings
about insurers willingness to honor claims failed for environmental coverage.
-------
Environmental Insurance for Brownfields Redevelopment
13
Professional Liability Coverage.2 Professional Liability Coverage
Brownfield redevelopment, involving issues of liability for cleanups and both on- and off-
site damages to people and/or ecosystems, has generally involved legal professionals to advise
on liability exposures and ways to minimize risks and engineering professionals to conduct the
site assessments and determine need for cleanups. No professional is immune to committing
errors or accidentally overlooking possible problems. Thus lenders, for example, were unwilling
as of the early 1990s to rely on site assessments by smaller engineering firms, preferring to
have work done by branches of national or international engineering corporations who were,
themselves, "deep pockets," and usable in the event of professional errors.4
By 1996, however, environment-specific "errors and omissions" insurance was routinely
available and largely carried by both engineering and legal firms with environmental practices.
Such insurance is generally underwritten at relatively fixed fees for virtually any amount, so
smaller as well as larger firms can now offer their clients the assurance of protection in the
event of professional error. That is, they could provide not merely for on- and off-site injury
coverage for first- and third party liability, but also for losses incurred by third parties as the
result of the errors and omissions. This combination provides some coverage for cleanup
burdens and other costs that lenders feared might be imposed on them in the event of such
errors or omissions.
In any given location, there may be a relatively small number of engineers or firms that
have the capacity to conduct CERCLA-standard site assessments. To the extent that the
availability of insurance (at decreasing unit costs as the policies have become more accepted)
increases the number of firms engaged in such assessments, or the number of firms on whom a
potential lender will rely, the costs of assessment may be reduced by competitive processes.
The availability of the insurance, therefore, may reduce the costs of assessments and thus
facilitate urban regeneration even as professionals pay fees for the coverage. This effect may
be exceptionally strong in smaller cities since the expenses associated with using non-local site
assessment firms may be eliminated by permitting a local engineering firm to qualify as an
assessor in the eyes of lenders.
Owner/Operator Liability Coverage.3 Owner/Operator Liability Coverage
This coverage is available to protect the parties actually conducting work or operating on
the site in question. It could be provided to the owner of the site, the business(es) operating on
the site, or firms engaged in mitigation or removal and transport of the hazardous materials
found on site. Coverage for "public official liability" and other personal liability for individuals'
actions taken for an organization (public or private) is generally included in such policies.
Examples of possible occurrences that would be covered under such policies include:
(a) accidental spills from 55 gallon drums being removed from a property; (b) puncture of
underground storage tanks in the course of excavation and spills of their contents; (c) post-
redevelopment discovery of remaining toxics and damage caused by their presence; (d)
accidents occurring off-site in the course of transport of the toxics removed to a disposal facility;
or, even, (e) accidents at the disposal facility itself, even though it is operated by a party not
4 Note that municipal officials are liable as environmental professionals if they work with contaminated
property transactions. The New Jersey Municipal Environmental Risk Management Fund discussed in this report
includes coverage for officials in its basic insurance package since lawsuits have been filed over permits given for
redevelopment of old brownfield sites.
-------
14
Environmental Insurance for Brownfields Redevelopment
involved in any actions on the site being cleaned up for redevelopment. In all these cases,
coverage may be provided for a number of different types of damage to third parties (or to the
first party - the owner/operator).
First, coverage may be provided for demonstrable health damage resulting from
exposure to some known toxic materials. In this case, evidence that the exposure is the cause
of the medical problem is needed; such evidence may be difficult to obtain, especially with
multiple causes for particular conditions - or multiple exposures to toxins.
Second, coverage may be provided for two types of economic damage: (i) for actual
immediate effects such as income losses associated with inability to use a site, including
adjacent sites, or the need to cleanup an adjacent property due to the movement of spilled
toxics; and, (ii) for so-called "diminution of value," reduction in the value of the property or
adjacent/nearby properties. This coverage may be needed for noise and aesthetic
consequences of mitigation efforts as well as with operations, even if the activities are not
directly associated with the toxics exposures, so long as they involve controlling regulated
substances.
Cleanup Cost-Cap or Stop-Loss Coverage4.4 Cleanup Cost-Cap or Stop-Loss Coverage
Any redevelopment project involving a brownfield site may incorporate actions taken to
cleanup past contamination or otherwise to mitigate exposure risks on the property. No projects
proceed without a budget for expenses and some allowance for cost overruns or other
uncertainties. This coverage is designed to limit the cost uncertainties by capping the cost of
cleanup to the redeveloper (or seller of the site). It generally involves a very significant
underwriting cost or base policy fee: The insurer may either demand that the insured conduct
more site characterization work than normally conducted at CERCLA Phase III or may conduct
its own site assessment, charging the insured for the effort, in addition to reviewing the
engineering work leading to the cleanup cost estimate.
Cost-cap coverage is generally provided with either a 10% or 25% "retention" by the
covered party for cost overruns, with limits starting at 200% of the initially budgeted cleanup
cost. The term of the policy, which can vary, may be critical for multi-year cleanups or
mitigations with post-cleanup monitoring that could require additional action at a later date.
Legal Defense Coverage4.5 Legal Defense Coverage
It is not uncommon for the costs of legal defense against civil liability claims to be a
major factor in settlements, even when the damage claims of plaintiffs are not particularly
strong. Coverage for the costs of legal defenses may help to prevent settlements that
encourage further suits and reduce the costs of environmentally risky redevelopment efforts.
This coverage is generally incorporated into the liability coverages discussed in Sections 4.2
and 4.3.
Re-opener or Regulatory Action Coverage.6 Re-opener or Regulatory Action Coverage
Prospective liability is unlimited under CERCLA. While this exposure exists in law in
principle, there is minimal experience of high reopener costs incurred by conscientious
-------
Environmental Insurance for Brownfields Redevelopment
15
mitigators.5 Nevertheless, some insurance against the possibility of a future reopening of a
previously approved cleanup may be desirable in order to minimize uncertainties, especially
since such reopeners may not only require expenditures but may limit use of the site, thus
reducing future revenues. Riders providing such coverage may be available for some cost-cap
policies. The availability and cost of reopener coverage does not now vary from state to state. In
the future, as more of the coverage is sold and experience gained, rate structures may well
evolve into a pattern that depends in part on individual states' regulatory policies governing
cleanups and reopeners. This trend may be anticipated in light of the spread of state-level
Voluntary Cleanup Programs (VCPs) and the EPA's willingness to delegate regulation of most
contaminated sites (those below some high threshold of risk to human health and the
environment) to the states. In effect, the states will increasingly de facto define both cleanup
standards and the most probable bases for reopeners, so the probability that an insurance claim
will be filed will depend on the state statutes and regulations, not on the federal standards.
Trends in Coverage.7 Trends in Coverage
New policies, new coverages, and new products that mix combinations of environmental
insurance coverage are constantly emerging. This segment of the otherwise stable insurance
industry is undergoing continuous innovation. The evident flux is due both to insurers'
acquisition of claims experience and policy payments by the insurers over time, and to
insurance sales personnel (brokers, agents and consultants) identifying the environmental
specialty as a lucrative new business area that rewards creative new marketing efforts.
Major changes that have affected the coverages available for urban regeneration and
their value to parties in the redevelopment process include:
Longer terms for many policies, which may now be purchased for coverage extending
for ten years when previously available for a maximum of three to five years;
Portfolio or pooled coverage for multiple properties owned by (or in some instances,
simply insured by) a single covered insured entity;
Increased flexibility in combining coverages and varying the amount of coverage in
different elements of a combined policy - moving away from fixed ratios to tailored
mixes; and, most significantly,
Reduced costs of coverage and lowered minimum premiums for virtually all lines of
environmental coverage.
These shifts have both decreased the cost and increased the value of environmental
insurance as a tool for use in the urban redevelopment process.
5 It must, however, be admitted that the nation has had under twenty years' experience under CERCLA and
even less under the more flexible cleanup standards now being adopted by the individual states in their Voluntary
Cleanup Programs. The past reopener cost and claims experience, therefore, may not be a good guide to future
patterns.
-------
16 Environmental Insurance for Brownfields Redevelopment
-------
Environmental Insurance for Brownfields Redevelopment
17
Chapter 5
Redevelopment Stages and the Potential
Contribution of Insurance Coverage.0 Redevelopment Stages and the
Potential Contribution of Insurance Coverage
The various types of insurance policies play different roles in cost definition and control
at the successive stages of the redevelopment process. We review here the stages of
redevelopment effort and the potential contribution of the varieties of insurance coverage to
brownfield regeneration efforts.
The Stages of a Brownfield Redevelopment Effort. 1 The Stages of a Brownfield
Redevelopment Effort
We can distinguish five key stages in the process leading to redevelopment of a
brownfield parcels or other urban sites. Each involves a slightly different mix of risk-taking
parties, but all need to be considered as possible beneficiaries of insurance coverage.
(1) Site selection, by a would-be redeveloper, will, at some point, involve CERCLA-
type site assessment efforts, and thus benefit from professional liability coverage.
(The same may be said of site acquisition, the point at which a municipality or
other authority decides whether to take title for tax delinquency or include a
parcel in a site assembly effort.)
(2) Remediation, if needed, is facilitated by both forms of third party liability coverage
and, of course, stop-loss protection.
(3) New construction/rehabilitation costs are more certain if comprehensive
owner/operator liability coverage is available; professionals involved in advising
on such operations, including architects and engineers, may benefit from
professional liability coverage.
(4) Ongoing operations involve uncertainties that are reduced by the availability of
owner/operator liability coverage, and would be further resolved if long-term
regulatory reopener coverage were available as the result of a prior cost-cap
policy.
(5) Refinancing (and lender sale or securitization of a mortgage) will tend to be
easier if long-term and guaranteed renewable owner/operator and reopener
insurance coverage is available.
-------
18
Environmental Insurance for Brownfields Redevelopment
In all these cases, insurance could facilitate progress in urban redevelopment and
revitalization efforts. The key contribution such coverages can make is through their dual effects
on access to capital and the conditions under which loans are made.
First, whether or not liability concerns constitute real barriers to brownfield projects, the
perception of risks and/or high levels of uncertainties about project costs have been found to
inhibit investment, especially bank loans.6 Insurance, with a known premium and providing a
specified ceiling on possible liability and cleanup expenditures, reduces uncertainty and
simplifies the calculation of expected rates of return on redevelopment investments. Coverage
thus may not only increase the likelihood of loan approvals but, by reducing the need to make
allowances for uncertain risks, may reduce the costs of capital or improve the terms under
which it is provided, regardless of the development stage.
Second, property values are routinely discounted by appraisers for known and
anticipated environmental impairments, including some "stigma" attributable to past
contamination, even if fully mitigated.7 Financiers will only lend some proportion of the value of
assets offered as collateral. Thus, when brownfield loans are collateralized by the properties to
be redeveloped, insurance coverage, by increasing the value of the collateral, can have the
effect of increasing the amount of debt capital available to developers.
Insurance Facilitation for Construction Loans.2 Insurance Facilitation for Construction
Loans
Short term coverage under cost-cap and operator liability policies for the firms involved
in site mitigation will improve access to debt capital. As we have noted, lenders tend to be more
willing to provide funds when cleanup cost uncertainty is resolved; improved liability coverage
limits the possibility that the lender will be dragged into a dispute over cost shares for cleanups
or other liabilities. Transferability may be important in the event of lender foreclosure if the site
itself is accepted as the loan collateral.
Construction loans, which are for short periods of time, can thus be easily facilitated by
policies covering one to five years, depending on the level of effort involved. The coverage may
or may not affect the value placed on the parcel itself as loan collateral, but it may have the
effect of lowering the interest charged and/or increasing the loan to value ratio demanded by the
lender on whatever property is offered as collateral.8
6 Banks reported a strong emphasis on quantification of risks as a precondition for a positive decision on a
loan application for any project involving environmentally suspect loans, as noted in Yount and Meyer, 1997.
7 A number of articles in The Appraisal Journal, the refereed publication of the Appraisal Institute, specifically
recommend such downward adjustments to property valuations based on routine appraisal practices (the use of
"comparables" or capitalization of expected income streams. While there is evidence that practicing appraisers do not
always follow this guidance, the Institute recommends such reductions in valuations. Meyer, 1997, documents these
practices and notes that both the authors proposing methods for adjusting property values for contamination and the
practicing appraisers he interviewed indicate that the availability of insurance protection should minimize valuation
reductions due to past pollution.
8 Yount and Meyer, 1997.
-------
Environmental Insurance for Brownfields Redevelopment
19
Insurance Facilitation for Mortgages and Operating Loans.3 Insurance Facilitation for
Mortgages and Operating Loans
Since industrial, commercial and residential mortgages can have very long terms (up to
forty years), lenders do not benefit much from the short-term (up to five year) liability policies
currently available - unless, of course, renewal guarantees are built into the policies. Lenders
will be very interested in any coverage for costs resulting from future regulatory actions.
Pursuing such a rider at the outset may affect redeveloper - or subsequent purchaser or lessee
- access to mortgage capital.
Loans for operating expenses tend to be short term (under five years). However, since
they may be taken out decades after a cleanup and redevelopment has taken place, the loan
conditions may reflect concerns about long-term insurance coverage akin to those associated
with mortgages.9 Such loans that use the property and improvements on it as collateral could
become easier or less expensive to obtain if liability coverage and protection for regulatory
action costs were available.10
Insurance Facilitation for Mortgage Securitization.4 Insurance Facilitation for Mortgage
Securitization
The capacity to sell mortgages on the secondary market, which frees up capital for new
investment can increase the profitability of long-term lending for commercial banks and other
financiers. Therefore, any insurance coverage that increases the acceptability of loans on
brownfield properties in so-called securitized mortgage packages makes such loans more
attractive to lenders. In practice, it appears that purchasers of securitized mortgages do not yet
see the available insurance products as significant contributors to the projected safety and
profitability of possible mortgage purchases. No impact is yet visible on the secondary mortgage
market.
Requirements for maintenance of liability and reopener insurance coverage over the
course of a mortgage reduces risk exposures. The securitization, or sale, of mortgages,
therefore, depends less on the availability of the insurance, and more on the conditions included
in new mortgages. Interviews conducted with secondary mortgage purchasers suggest that,
with the spread of renewable policies and the greater knowledge and utilization of such
coverages over time, insurance may eventually contribute to improved prospects for resale of
primary mortgages. The ability of a lender to "recycle" loan funds contributes to its profits; thus
any factor increasing the acceptance of such loans in secondary markets will help to improve
access to debt capital for urban redevelopment. The needed improvements in coverage,
including the "secured creditor" policies that insure lenders directly, appear to have reduced the
environmental risk exclusions and raised transferability to subsequent owners.
Environmental Insurance as a Redevelopment Subsidy Tool.5 Environmental Insurance
as a Redevelopment Subsidy Tool
Economic development efforts by municipalities and other agencies with a mandate to
promote a local economy have employed many different subsidies over time. Loans at below-
9 Yount and Meyer, 1997.
10 Evidence that lending institutions would not routinely accept previously contaminated sites as the sole
collateral covering loans was uncovered in the work of both Walker, et at., 1997, and Yount and Meyer, 1997.
-------
20
Environmental Insurance for Brownfields Redevelopment
market interest rates, tax abatements and sale of publicly controlled lands have all been
employed as subsidies to attract new capital investment. These tools have not, by and large,
been focused on brownfield sites in particular, although some states and local governments
have set up programs to promote the cleanup and reuse of previously contaminated lands.
The growth of the El industry provides a new, potentially valuable, tool that could be
used by local development agencies to promote the redevelopment of brownfields. The
descriptions above illustrate the possible value of different types of insurance at the various
stages of a property development process. Local efforts could range from simply increasing the
private sector's awareness of the availability of these insurance products through to utilization of
funds available to promote economic development to cover some or all of potential brownfield
redevelopers' environmental insurance costs.
The limited history of these new insurance products and the absence of a track record of
claims filed and accepted for payment has led to confusion about their possible contribution to a
brownfield redevelopment effort. There is certainly no clear cut evidence that subsidizing access
to El is preferable to other forms of subsidy for urban redevelopment projects.11 The data
collected in this project, however, suggest that the accepted wisdom about environmental
insurance shared by many local governments and agencies is out of date and, in some
instances, simply wrong.
Interviews with local development officials conducted during this project revealed that
most believe that:
El is too expensive
El does not pay-out claims
El is not flexible (not available in most cases)
El is a waste of money
Environmental insurance suffers from the perception of being cost prohibitive for most
projects. Insurance companies and brokers admit that this was the case when the products first
were introduced in the early nineties. They also concede that the policies were inflexible, and
that the insurance industry has failed to adequately address these misperceptions as the
products became better, less expensive, and more flexible. Environmental insurance is no
longer a cookie-cutter solution to overcoming environmental risk. Policies are tailored to meet
the unique needs of specific redevelopment projects- often times developed from scratch for
the client. Little evidence exists to support the criticism that El does not pay claims;
misunderstandings about coverages, claim filing requirements, and policy terms appear to have
generated the perception that claims are not honored. The case studies we present in Part 7.0
illustrate the constructive role that El can now play in a variety of contexts.
Individual development organizations and municipalities need to learn when and how to
wield El in order to maximize their returns on subsidization efforts. Like any other economic
development stimulus tool, El is not efficient in all circumstances. With a wide array of
approaches to promoting local economic development available to them, responsible agencies
should develop the capacity to selecting the most efficient tools. Unfortunately, some local
11 One potential benefit of pursuing El is that insurers will be another party demanding extremely thorough site
assessments and cleanup plans prior to project initiation. This incentive is not available from other economic
development incentives.
-------
Environmental Insurance for Brownfields Redevelopment
21
efforts reflect a degree of desperation and/or indiscriminate adoption of the latest new approach
that funds may be expended with little understanding of the benefits to be gained relative to the
costs. The problem lies not in the development subsidy tool itself, but in the uses to which it is
put. Hence, blaming environmental insurance for misallocation of funds may really constitute
scapegoating the industry for poor management decisions by some redevelopment agencies.
The findings we present below should help local governments and other economic
development organizations to become better consumers of environmental insurance and to
improve their decision-making about whether - and when - to utilize this new toll for promoting
the cleanup and redevelopment of abandoned, derelict and potentially or actually contaminated
urban sites. We turn next, in Part 6.0, to issues relating to the processes by which public sector
bodies may get information about, and make decisions about, environmental insurance. Part 7.0
provides the findings on the actual municipal market today and comments about its apparent
new directions, along with some case study examples of the current use of pooled insurance
products by public sector bodies as tools for promoting site regeneration and economic
development.
-------
22 Environmental Insurance for Brownfields Redevelopment
-------
Environmental Insurance for Brownfields Redevelopment
23
Chapter 6
The Insurance Marketing Process and the Municipal Market.O The
Insurance Marketing Process and the Municipal Market
A brief overview of the organization of the insurance industry as it affects marketing and
delivery of environmental insurance products is needed to set the findings in context. These
observations do not constitute a full description of the market, but provide some needed
background.
How Insurance Companies Operate In Relationship to Municipal Governments
.1 How Insurance Companies Operate In Relationship to Municipal Governments
The major environmental insurance providers all incorporate a mix of services and
products including both insurance and environmental engineering support. The environmental
engineering arms of the insurers serve in three capacities. They: (1) conduct project oversight;
(2) review engineering data critical to underwriting decisions; and, (3) are available as loss
prevention specialists to provide fee-for-service consulting to clients.
Product development and fee structures appear to emerge from the combination of
experience under past policies and the information garnered through loss prevention
consultation activities. New products, new mixes of existing coverages, new terms and
conditions of coverage appear to emerge continuously.12 As one insurer described the process,
the providers will consider writing insurance for virtually any environmental risk and respond
significantly to requests from potential policy holders.
According to both the major firms writing environmental insurance policies and the
various El agencies selling the coverage, the current demand for El protection is coming
overwhelmingly from the private sector. The demand takes two forms: first, from major firms
with multiple brownfield sites, for protection of their portfolios of properties; and, second, from
developers of major projects, for coverage of their individual investments. No specialty products
have been developed specifically for municipalities or other possible public or quasi-public
insured parties, simply because of lack of demand. Thus pooled coverage, which is available for
multiple sites, is currently structured for a portfolio of sites owned or financed by a single
insured. This structure serves the needs of the private sector multi-facility company with a
number of sites that is attempting to reduce company environmental liabilities. The policies do
not necessarily meet the needs of a municipality or even a redevelopment authority with a
portfolio of sites with redevelopment potential.
Environmental insurance marketing to the public sector at the present time is at best
haphazard. While the companies and El brokers all respond to public sector requests for
information and have met with and attempted to market policies to some public and quasi-public
organizations, these efforts have not been systematic or particularly successful. There is
sufficient private sector demand at present to occupy the marketing specialists at the insurance
12 New products announcements were made to the research team in the course of this project, indicative of the
constantly evolving mix of environmental insurance available.
-------
24
Environmental Insurance for Brownfields Redevelopment
companies, an indication of the extent to which environmental risks associated with brownfields
are attracting the attention of private sector decision-makers.13
Insurance Sales: Brokers, Agents and Consultants.2 Insurance Sales Brokers, Agents
and Consultants
Another factor that limits company marketing to the public sector is the structure of the
industry as a whole. Policies and fees, as well as certain marketing practices, are subject to
regulation at the state level. There are no national standards for insurance underwriting, since
the industry has systematically avoided federal regulation in favor of control by the individual
states.
In addition, it must be noted that the insurers themselves generally cannot sell their
products directly. They operate through independent brokers who sell insurance from a number
of different companies and through agents who, while selling a single company's products and
services, have autonomy in deciding what business to pursue. The market is further shaped by
independent insurance consultants that provide clients guidance on the products and services
they need, but who do not collect commissions on the purchases they advise their clients to
make. In some instances, these latter market actors create demands for products that are not
currently available, often in structuring mixes of self-insurance with negotiated and tailored
catastrophic loss coverage from insurers. (The New Jersey case discussed in Part 7.0 is one
example of the impact an entrepreneurial and creative consultant can have on the market.)
The fragmentation of the sales processes has implications for the workings of the market
for all insurance. In the environmental coverage arena, the spread of utilization of the available
types of policies is critically dependent on the local availability of brokers and consultants with
environmental insurance experience. The extent of current private utilization of environmental
insurance in a region or metropolitan area therefore affects the ready availability of information
to other possible private redevelopers as well as to potential public sector environmental
insurance clients.
Municipal Insurance Buyers: Risk Management and Purchasing Agencies.3 Municipal
Insurance Buyers Risk Management and Purchasing Agencies
At the municipal level itself, environmental insurance is not well understood by most
potential public sector purchasers. Typical public sector coverage, for property and casualty
claims, is purchased through a centralized risk management or purchasing department. If the
municipality has not experienced extensive environmental claims, that office may never have
acquired information on available environmental coverages.
The urban redevelopment mission is often the purview of a specialized and distinct
public or quasi-public entity, such as a Redevelopment Authority, Economic Development
Corporation, or the like. Such bodies often are covered by their municipalities' umbrella
insurance policies and have no independent experience in purchasing potentially useful
protection. They are thus not well informed about the availability or potential utility, of insurance
products that cover brownfields as tools to promote urban redevelopment. This lack of
13 The relative novelty of the entire environmental insurance sector of the insurance industry, coupled with the
even narrower specialization associated with coverage specifically for brownfields, appears to explain this limited
marketing effort. El agencies reported that they have their hands full with private sector demand and they have not yet
made systematic attempts to penetrate the public sector due to their limited marketing and claims processing
capacities.
-------
Environmental Insurance for Brownfields Redevelopment
25
knowledge was notable across the public sector officials interviewed who had brownfield
redevelopment responsibilities.14 Given that, unless they were acting as brownfield
redevelopers themselves, the cities are not the direct consumers of the coverage, this may be
understandable. However, this minimal understanding translates into a potential failure to
recognize when assistance to private developers in the form of improved access to El may be a
useful redevelopment strategy.
Municipal insurance purchasing powers may be structured differently in each local
government. Marketing efforts may be made difficult by varying objectives associated with the
insurance decision and by legal constraints on the purchasing process. In a context in which the
most useful El products available must be tailored to each individual case, the insurers must
make significant investments in policy design prior to a sale. Both insurance companies and
brokers reported their concerns about purchasing procedures that require a minimum number of
bids on any insurance coverage. The minimum number is commonly three, equal to the number
of firms writing El insurance nationwide. Without some assurance of significant cost recovery on
policy design and underwriting expenditures, they argued, they saw little incentive for such
expenditure, since their competition might be expected to underbid them on the cost of
coverage.15 Thus, tailored products are not likely to be developed. Overall, then, it is not
surprising that insurance companies are having some difficulties in marketing innovative
products for new risks to public and quasi-public bodies.
14 Telephone contacts were pursued primarily with environment and development officials in cities with EPA-
support Brownfield Pilot Projects. Overall, people involved with efforts to develop innovative approaches to
brownfields should be expected to have more knowledge of possible tools to support such efforts than other economic
development personnel without such targeted responsibilities. Unfortunately, the individuals interviewed exhibited little
more than a minimal working knowledge of El, when they even knew of the availability of such coverage. Our contacts
appeared to cling to myths regarding cost, flexibility, and utility of El; when asked for specific examples that verified
their statements and beliefs, few could provide any evidence, and the data that were reported were seriously dated.
The limited knowledge of the possible value of the insurance tool on the part of the individuals interviewed thus
suggests a severe information gap that would need to be overcome for El to make a significant contribution to public
sector brownfield redevelopment efforts.
15 The economics suggesting that the firm designing the insurance coverage might be underbid is
straightforward. The company initially contacted by a possible purchaser subject to multiple bid requirements would
have to recover the cost of designing the policy through the fees charged. Its competition, not having expended funds
on the design of the El policy or insurance program, would only have to be able to turn a profit on the provision of
coverage, not on the combination of the costs of coverage and underwriting.
-------
26 Environmental Insurance for Brownfields Redevelopment
-------
Environmental Insurance for Brownfields Redevelopment
27
Chapter 7
Overall Findings: The State of the Municipal Insurance Market.O
Overall Findings The State of the Municipal Insurance Market
We examine first our evidence on the actual state of public sector knowledge about the
available environmental insurance products and how they can be used as redevelopment tools.
Next, we review the prevailing beliefs about insurance availability and its strengths and
weaknesses as a tool to promote urban redevelopment. In this context, we note differences in
perceived insurance applicability to large and small projects, and to publicly and privately owned
sites, as well as the accuracy of the expressed beliefs, given the data available on actual policy
potential. Third, we attempt to generalize from our small sample about what types of efforts are
being pursued in different settings, what stimulates those activities, and what their impacts
might be. We conclude with some examples of current efforts to use insurance or other
guarantees to promote urban redevelopment on brownfield sites.
What is "Known?".1 What is Known?
Based on our contacts with people in over two dozen cities and a half-dozen states, very
little is known about environmental insurance as a whole, let alone its potential as a tool for
urban redevelopment. Given this lack of knowledge, the current impact on the rate of brownfield
redevelopment of the policies available for use or promotion by public sector bodies is minimal,
simply because they generally are not being used in such agencies' economic regeneration
efforts. The exceptions to this rule we have uncovered (in Kenosha, Wsconsin and by the
Connecticut Department of Housing) suggest that the positive cases are the results of
accidental convergence of events, not systematic efforts or any generalizable processes.
This situation is evident from the results we obtained from interviews with personnel from
24 cities in 20 states across the United States, plus from state-wide activities in two additional
states.16 We found that only two cities are actively using any form of insurance to promote
urban redevelopment on brownfield sites. This minimal utilization is understandable in light of
the findings on their knowledge about insurance, the extent to which they have been briefed on
the products and services available, and their degree of preparedness to use insurance: the
extent to which they had prioritized brownfields for urban redevelopment effort.
(1) While only two cites registered a complete negative on their familiarity with
environmental insurance, eight more reported that they knew of the existence of
environmental insurance but could not distinguish different types of coverage. As is
evident from Part 5.0 above, without a detailed understanding of the policies, effective
utilization to promote redevelopment is difficult at best.
16 It should be noted that in most cases we had only one contact in a municipality, although in some cases we
had as many as four or five. The knowledge and activity reported may thus not be an accurate reflection of the
situation in the city or metropolitan area as a whole. The responses we discuss reflect the knowledge and belief of
some of the key redevelopment actors that we interviewed in each city contacted. While others may know more and
be more interested in pursuing the insurance tool, the limited knowledge we found is indicative of the internal divisions
that, as we noted in Section 4.3, may preclude coherent purchasing decisions by public sector bodies.
-------
28
Environmental Insurance for Brownfields Redevelopment
(2) In some measure, the lack of full understanding of the types and potentials of insurance
coverage is attributable to limited marketing effort on the part of the insurance industry.
In-person provision of information about the complex mix of environmental insurance
services was reported in only ten of the cities. Our contacts in four of the cities reported
that they had not even received written descriptive or publicity materials about
environmental insurance products.
(3) It is possible that the ability to utilize insurance products accounts for the level of interest
and effort to acquire information. Cities with no systematic enumeration and site
assessment on brownfields would be hard pressed to use insurance to help in
redevelopment of such parcels. However, fourteen of the cities reported that they had
identified "priority sites" for redevelopment.
These findings suggest that, on balance, it is lack of information about insurance, rather
than lack of possible projects that might benefit from the coverages available, that is the
dominant cause of the low level of utilization exhibited by public sector urban redevelopment
organizations.
Since most of the cities in which we made contact have active Brownfield Pilot Projects,
it is reasonable to assume that the level of knowledge and utilization of environmental insurance
we encountered in our interviews exceeds that for U.S. cities as a whole. It is reasonable to
conclude, therefore, that at present very little is known about environmental insurance on the
part of the key potential municipal users. Most of the cities we contacted expressed interest in
the coverages, but their knowledge of the products and applications was limited. Most of the
interviewees saw some promise for environmental insurance in the future, but their current
assessments of the products and services were clouded by rumor and innuendo. This can be
partly explained by the insurance industry's minimal effort to market to municipalities. In addition
to the disincentives to private El marketers generated by the bidding requirements discussed in
Part 6.0, we also found that the insurers presume that the coverage would be the first budgetary
item dropped when a city-sponsored brownfield redevelopment encountered financial
constraints. We found only one case in which this had occurred, which suggests that the
problems of the municipal market for El are a function of misinformation and false assumptions
on the part of the sellers as well as the buyers.
What is Believed - and Why?7.2 What is Believed - and Why?
Beliefs on the part of both buyers and sellers do not accurately reflect the realities of the
availability, terms and utility of environmental insurance products. As we have noted, buyers in
cities have not kept up with the changes in the coverages and pricing that have occurred. At the
same time, the marketers of this specialized form of insurance have yet to invest the effort
needed to understand and serve potential public sector clients. There is no consensus
regarding the types of policies that would be most useful; however, cost-cap and third party
liability are the most mentioned alternatives.
The reported myths about environmental coverages, the claims that the policies (a) are
cost prohibitive; (b) are more important to private sector projects than redevelopments on public
property; and, (c) only makes sense on large sites appear to reflect past insurance industry
practices, or overgeneralizations from very limited observations of current insurers' efforts.
Additional claims include the charge that the insurers "cherry-pick" projects and are not willing to
participate in higher risk properties that constitute the public priorities for redevelopment (such
as properties in Empowerment Zones and Enterprise Communities). The information costs for
coverage are also cited by many officials as prohibitive, especially the high costs incurred in
providing the site characterization data demanded by insurers that may far exceed CERCI-A site
-------
Environmental Insurance for Brownfields Redevelopment
29
assessment norms. One comment made repeatedly was "if you have enough information to
quantify the risks for the insurers, your uncertainty is so low that the insurance is not needed."
These problems are, in some measure, inevitable in the early days of any new insurance
coverage. Prior to the development of a record of claims and losses, the environmental
insurance industry itself faced information gaps and undertook significant risks with high levels
of uncertainty. As experience has been gained and a record of losses and coverage payments
built up, these problems have declined, with the result that the policies are increasingly
attractive to private sector brownfield developers.17 This finding suggests that the insurers
themselves have not done a good job of communicating the greater affordability and
applicability of their policies today to potential public sector clients.
What are the Market Imperfections?.3 What are the Market Imperfections?
These findings suggest that many of these fears could be mitigated if insurance
companies, agents and brokers were actively marketing to cities at this time. Their failure to do
so reflects in part some misconceptions and misunderstandings on the part of the sellers of
environmental insurance coverage. Some marketers reported meeting with senior personnel
involved in municipal insurance coverage purchasing - and then discovering that their contacts
did not remember them two months later when they followed up. Often, they were marketing to
municipal property and casualty insurance buyers - who might also have had responsibility for
liability coverage for current municipal operations. These officials would have no interest in
purchasing environmental insurance which is a potential contributor to economic development
efforts and could comprise an incentive used to attract new investment.
As we have described, the public sector purchasing process can, at times constitute a
real impediment to the marketers of specialized niche products and services: since insurance
policies take time to craft and design, and many municipalities are obligated to get multiple bids
for any product or service they purchase, agents are worried that their efforts cannot be
rewarded - that they will be underbid by their competition. While this prospect may pose a
problem in some contexts, the underlying problem lies in a level of decentralization - or partial
privatization to private-public redevelopment partnerships - that is not recognized or understood
by the few parties attempting to sell to municipalities.
The relative profitability of marketing to the public sector is questioned in light of a
booming private sector demand for all the forms of environmental insurance. Deals take longer
to finalize with the public sector, and the industry is not yet prepared to commit the effort
needed to find the 'right' person, the prospective environmental insurance purchaser, in each
individual municipal government and economic development establishment structure. It appears
as though the industry representatives do not fully understand the differential utility of the
insurance coverages they offer at the different stages of economic development efforts that we
discussed in Part 3.0 above.
Environmental insurance today is more flexible than it has been. Products can be and
are being crafted to the unique characteristics of contaminated properties - or the unique needs
17 The growing entrepreneurial sector number of firms engaged in speculative brownfield regeneration efforts
appears to have emerged from the growth in El availability, while stimulating the new insurance sector through
demands for coverage. Venture capital investors, the most common source of capital for such efforts, will accept high
risks in return for the probability of high returns, but they expect quantification of the costs, risks and returns. Such
calculations for brownfields are exceedingly difficult without some insurance coverage. This symbiotic development of
new economic activities appears to have arisen largely outside the view of municipal and other redevelopment
officials.
-------
30
Environmental Insurance for Brownfields Redevelopment
of particular municipal redevelopment efforts or programs. Cities also need tailored policies to
meet the demands of different sites and the buyers, developers, and sellers involved with them.
The major insurers all offer a list of specific policies, but all also offer a negotiable bundle or
specialized mix that can be tailored to particular needs. Similarly, some brokers claim that they
must always start from scratch with clients - that realistically there is no catch-all type policy.18
This very flexibility contributes to the breakdown of the municipal environmental
insurance market. Information is extremely valuable - and is very expensive to acquire or impart.
Part of the problem is attributable to a lack of expertise. Quality environmental insurance
underwriters are rare and spread thin; most are so busy responding to private sector demands
that they do not have time to solicit business from the public sector. Insurance companies'
strong ties with the real estate industry provide them with leads for brownfield and other
redevelopment projects than can benefit from insurance coverage. There is no comparable
mechanism for accessing public sector development decision-makers, so marketing to the
sector is more expensive. At least one major national insurance brokerage is making current
plans to begin municipal marketing in 1998, and others may be doing the same.
The maintenance of expertise is a further cost, especially for municipal clients. Each of
the over thirty states that has promulgated some form of voluntary cleanup program, for
example, provides slightly different liability protection for municipalities or other quasi-public
bodies. Insurance coverages, then, have to be tailored differently for public bodies that may be
protected by law from some liability exposures, while all private sector entities, not provided with
such legislative shields, share the same liability risks. Each legislative change designed to
enhance urban redevelopment prospects, then, may require modification of insurance products,
services or prices.19
None of these considerations, however, address the possible, or most appropriate, local
government responses to the development of the El industry or how it might best utilize the new
products and services to promote the regeneration of urban brownfields. Municipal actors are
keenly aware of their state programs, funding capacities, and local economic development
plans. They have been provided with extensive information on brownfield regeneration
possibilities by EPA, HUD, and various economic development media. Nevertheless, the pace
of brownfields redevelopment is not as quick as would be socially and politically, not to mention
environmentally, desirable. The main value of El is risk quantification; it is a tool for limiting the
financial unknowns which are recognized as serious impediments to investment. Yet, El
remains underutilized by the public sector.
Local governments must actively seek information regarding environmental insurance.
Knowledgeable insurance industry representatives are conspicuously absent from most
Brownfield Task Forces pursuing new redevelopment efforts as part of the EPA Brownfield Pilot
Projects. Developers, bankers, planners, environmental engineers, public development officials,
attorneys and community representatives are routinely included among the stakeholders
18 This is not surprising, given the rate of change in the industry and the coverages available. For example, in
the less than three months since this study was initiated, at least one new product has been introduced, a portfolio
protection plan insuring lenders from environmental risk, including defaults attributable to cleanup cost overruns,
liability claims, or reopeners.
19 This constant flux, however, is not a problem limited to public sector insurance coverage. The movement
towards state authorization for risk-based corrective action (RBCA), for example, may reduce the appeal of insurance
protection against reopeners if, in the future, environmental problems can be dealt with on a less than absolute
cleanup standard. On the other hand, if a trend emerges that risks are consistently found to have been
underestimated, then all the cleanups based on RBCA may be more vulnerable to reopeners. This ambiguity is
illustrative of the expertise needed to devise and tailor policies across the states and for different prior and intended
land uses.
-------
Environmental Insurance for Brownfields Redevelopment
31
designing new approaches. So long as insurers are excluded from the decision-making
apparatus, the misinformation about the potential contributions of environmental insurance will
remain the accepted wisdom. If insurance has any value, it follows that the pace of regeneration
of urban brownfields will not reach the economically attainable level.
What Municipal Actions Are Contemplated or Taken in Different Types of Settings?.4
What Municipal Actions Are Contemplated or Taken in Different Types of Settings?
Most of the cities contacted in this study currently have Brownfield Pilot Project grants
from the Environmental Protection Agency. Yet, as we have noted, few have systematically
examined the use of insurance instruments. The few that have seriously considered using the
products seem to have progressed further in the brownfield reclamation efforts than others. That
is, they have completed full scale brownfield redevelopment strategies, have produced some
sort of inventory of available sites, possibly going so far as to conduct partial or complete Phase
I assessments, and, by and large, are in municipal settings that have defined brownfields as
economic development priorities.
Where insurance is being considered or used, the urban redevelopment sites that are
candidates for such coverage tend to be large industrial parcels that have high visibility and job
creation potential. The reported reliance of independent entrepreneurial for-profit brownfield
developers on a variety of El products reflects their perception that insurance can play a role
when a project is nagged by one or two specific problems and that it can be a useful tool for
overcoming obstacles.20 The focus on larger sites is understandable given the economics of
coverage, especially the high basic underwriting fees that characterize most available policies.
At the same time, however, this orientation toward large visible redevelopment efforts reflects a
recurring problem in local economic development policy: the provision of more subsidies to
showcase projects than are needed to make them profitable for developers.21
Most interviewees who expressed any knowledge about the subject appear to have
concluded that insurance is not feasible on small projects. This claim is likely to be most
accurate with respect to cost-cap coverage for individual cleanups, given substantial fixed
underwriting fees. However, this conclusion ignores the new availability of pooled or umbrella
coverage that could include a number of smaller sites or redevelopment projects in a single
policy. The potential municipal buyers' failure to distinguish types of insurance has led to an
overgeneralized conclusion about the utility of El coverage. Economic development specialists
are well aware of the stages of a redevelopment project, but appear from our interviews to have
not acquired the complementary knowledge about the applicability of different types of
insurance to facilitating progress at those stages, the information we covered in Part 4.0. The
data gathered from the insurance industry suggests that, even in the absence of efforts to
obtain pooled coverage for smaller brownfield projects, the owner/operator liability and reopener
coverages that can contribute significantly to the certainty of long-term returns on
redevelopment projects are increasingly affordable for small parcels and less complex mitigation
projects.
The majority of the estimated 400,000 urban brownfields in the United States are
precisely the smaller parcels that the interviewed participants in Brownfield Pilot Projects
20 The availability of environmental insurance was cited by such entrepreneurs as an absolute necessity for
most projects, or even for their going into business in a Fall, 1997, survey. See Meyer and Lyons, 1997.
21 This excessive or unintended interaction of multiple subsidies is a problem already noted in prior analysis of
efforts to redevelop urban brownfields. See Walker, et at., 1997.
-------
32
Environmental Insurance for Brownfields Redevelopment
believe cannot benefit from insurance. The overall contribution of environmental insurance as a
tool to facilitate urban redevelopment is dependent upon the development of means of providing
such coverage to the small parcels that dot the nation's cities. It is precisely for this reason that
public sector efforts to create pools of small potentially redevelopable parcels and arrange
insurance coverage for them at different stages of their regeneration have the potential of
making a major contribution to the overall rate of brownfield reclamation and reuse. There is
little indication that either the insurance companies and brokers or municipalities and economic
development agencies themselves are systematically investigating, let alone utilizing, the
existing and available portfolio coverages to accelerate the rate of brownfield redevelopment.
One of the reasons marketing is such a problem is because too many actors are
approaching brownfields with institutional blinders. They tend to think in terms of what has been
done-not what could be done-- to overcome liability concerns and other investment
uncertainties. The vast majority of the case study data available thus far to guide decision-
makers involves projects in which insurance played at most a marginal role. Conventional
wisdom dictates that insurance is only applicable to large, highly contaminated properties.
Again, reality differs from perception. Small parcels can be excellent candidates for El or
innovative programs, as the example below of Somerville, MA, illustrates. Although small
brownfield sites are more numerous than large ones, most cities appear to have targeted large
sites as the focus of their brownfields development strategy. El is applicable to both, but actually
may be more germane to smaller, less contaminated sites. Cities have not developed a broad or
long-range strategy to deal with brownfields. Strategies appear to have been enacted to affect
change on isolated parcels of land rather than incorporating an array of brownfield
redevelopment promotion components into a coherent and comprehensive long-range
approach. So long as environmental insurance is not systematically included in the portfolio of
tools strategically employed to promote brownfield redevelopment, neither large nor small
parcels will reach their full potential.
We found little evidence of major differences in knowledge about, or attitudes towards
the use of, environmental insurance as a tool for urban redevelopment across our interviewees.
Systematic variations did not appear across geographic, city size, or regional contamination
experience variables, nor did knowledge or attitude appear to vary much with the roles played
by our different interviewees. As a group, they were almost uniformly cautious. They are
generally unwilling to commit significant personnel, organizational effort, or financial resources
to the pursuit of environmental insurance for urban redevelopment. Most are taking a wait-and-
see approach. Many officials and municipalities appear to want someone or someplace else to
serve as the environmental insurance guinea pig. This situation suggests that federally
supported demonstration projects may be needed to promote a breakthrough in acceptance of
the available insurance tools.
Case Examples of Brownfield Insurance as an Economic Development Subsidy.5 The
Potential of Brownfield Insurance as an Economic Development Subsidy
This study found four interesting cases of state and local utilization of environmental
insurance. They are illustrative of how states and communities have begun to use
environmental insurance in support of redevelopment initiatives. The first two case examples
are local examples and the latter two are state level efforts of environmental insurance in
support of urban redevelopment efforts.
-------
Environmental Insurance for Brownfields Redevelopment
33
Kenosha, WIKenosha, Wl
The City of Kenosha, Wisconsin, is in the process of structuring two deals that are
dependent upon the use of environmental insurance. While the policies have not been
purchased and the projects are not yet underway, the city expects to proceed shortly. Each
case is a textbook example of how insurance can be used to overcome brownfields uncertainty
and liability issues inherent in urban redevelopment. These cases provide excellent examples of
the use of insurance to increase the market value of a property by reducing the risks associated
with its reuse. The first involves a public agency's plans to sell; the second, an acquisition by the
municipality; in both cases, the increased certainty provided by insurance coverage got a
project moving again after it had stalled and was drifting toward termination, providing the
prospect of full-scale reclamation and reuse.
One parcel is strategically located on Lake Michigan and is central to the revitalization
efforts of Kenosha. The site is 42 acres in size and has an industrial history dating back to the
1860s. At present, the site is vacant; all structures were razed several years ago. Kenosha
acquired the land through a negotiated settlement between the previous site owner and lessor.
The deal was structured under Wsconsin's Land Recycling Law which protects the purchaser
and future owners from pre-existing contamination problems. This procedure required Kenosha
to undertake some testing and cleanup activities. At present, the parcel is close to being
approved by the State for future use, and investors are awaiting the state mandate before they
initiate redevelopment efforts. Kenosha development officials remain concerned about possible
stigma and its impact on future site use. They thus have approached insurers to provide
additional "suspenders on the belt." The insurance product is being designed to protect the city,
and future lessors and lenders, and the policy will provide at least seven years protection
against third-party liability. If everything goes according to plan, the Kenosha Common Council
will approve the plan by September. It is anticipated that this additional assurance will stimulate
a higher level of investment, and more intensive reuse, than might otherwise have occurred.
The investment in insurance coverage is thus expected to yield a return to the city in the form of
higher real estate taxes.
Another parcel in the city that appears to need additional safeguards to spur reuse is a
site adjacent to a former municipal landfill. The property owner had entered into negotiations to
sell the property, but during the site assessment phase, contamination was discovered. As a
result of the potential liability risk, the prospective buyer walked away from the project. The
parcel owner claims that the city is responsible for the contamination that has migrated from the
landfill. Kenosha has entered into negotiations with the owner and will take title on the property
if two conditions are met: (1) the State agrees not to require further cleanup based upon
environmental tests, and (2) the owner bears half the cost of an "environmental impairment"
policy that provides third-party and reopener liability coverage for seven years and names the
city as the insured party. Kenosha has received a quote from an insurer (the details of which
were confidential) and is waiting for State decision regarding approval of the cleanup. If these
conditions are met, the deal will go forward to the municipal council for approval. According to
our source, "insurance will be a positive factor affecting the decision of the Common Council" to
incur the risk on behalf of the city. Wthout the insurance, the property would remain in limbo
and, while not imposing an environmental threat, could not be used for economic development
purposes.
Somerville, MASomerville, MA
In direct contradiction to the generally cautious approach exhibited by most cities,
Somerville has taken the insurance initiative. Its approach, however, has thus far avoided the
-------
34
Environmental Insurance for Brownfields Redevelopment
insurance marketplace: the city has designed an innovative self-insurance program aimed at
small brownfield projects. For the past decade, city officials have used public money to
purchase, assemble, and clean large brownfield sites, but felt that the level of public sector
resource commitment to such projects, including site assembly and public sector-financed
mitigation, was excessive. They thus shifted their focus to the roughly 110 small sites under
one-half acre in size that remain underutilized or abandoned and apparently contaminated.
While Somerville has a long history of industrial activity, it is close to high cost areas in the
Boston metropolitan area, currently exhibits high density of land use, and would enjoy high
market value on the remaining parcels if they were redeveloped. City economic development
efforts enjoy very attractive market conditions, private sector demand and relatively low financial
risks in publicly supported redevelopment.
Their approach to their small sites involves reliance on private sector redevelopers
supported by protection for cleanup cost overruns provided by a city self-insurance system.22
Somerville has identified some of its most marketable small brownfield sites and is trying to be a
catalyst for private development on those parcels. Under the plan now being finalized, the
private sector buyer and seller of each site will work out the cost estimates and details of
financing for the actual cleanup (i.e., cleanup could be a condition of sale or allowance for the
mitigation costs could be included in a reduced property sale price), after which the city would
provide up to $100,000 in additional funds to cover any unexpected cost overruns on each
cleanup. Resources used for this program includes EPA Brownfield Pilot Project funds used to
site assessments and HUD CDBG grants and loan repayments and interest escrowed to
provide the pool to cover potential cost overruns.
Final details of the program are still being structured, but the process will in general
include:
(1) Initiation by an interested buyer that signs up and enters into an agreement with city.
(2) City collaboration with buyers, sellers and financiers in the selection of an engineering
firm to the conduct site assessments (at city cost), providing the site owner provides
needed access.
(3) Following testing, a determination of the need for remediation and its projected cost.
(4) Use of this cost figure to provide the basis for the negotiated cost overrun cap insurance
coverage, to be provided by the municipality in an agreement about mitigation and
intended land uses signed by the city, the buyer and the seller.
(5) Escrowing of the agreed-upon funds by the city against a possible claim on the policy
until the cleanup is completed.
If everything goes according to plan, the city would spend money only on the site
assessment. At present, in fact, the city would spend nothing because the site assessment
monies come from their EPA Brownfield Pilot Project grant. The city is limiting the type sites that
will be eligible for the program and will vary the overrun coverage depending on the site
condition and the developer's end-use plans (under criteria yet to be determined). While it is
possible that some developers may walk away from deals after tests are conducted, the site
information, once collected, can be reused in the future. If cost-cap-covered mitigation efforts
are initiated, however, developers would have a financial obligation to proceed or to pay
indemnifications to the city and property owner.
22 The apparent rationale for self-insurance is that officials believe that economic revitalization funds are more efficiently
used to provide cost-overrun protection for developers, rather than financial subsidies to actual costs.
-------
Environmental Insurance for Brownfields Redevelopment
35
While the City of Somerville has not yet considered the possibility of purchasing cost-cap
insurance to protect redevelopers against "catastrophic" cost overruns that exceed the city
maximum of $100,000, such a policy could be constructed readily by the major insurers with
whom we met or any of the brokers with whom we talked. In effect, the properties may be
considered to be a pool of sites for which an umbrella policy is constructed, paying for cost
overruns that exceed a retention level that may be as high as 200% of the initial cost estimate.23
New Jersey Municipal Environmental Risk Management FundNew Jersey Municipal
Environmental Risk Management Fund
Small cities across New Jersey - 199 of them - have joined together into the so-called
Environmental Joint Insurance Fund (EJIF) to provide themselves with coverage for a range of
environmental liability exposures and related costs, some of which contribute to facilitation of
urban redevelopment. While the state's bigger cities, including Newark, its largest with a
population of about 200,000, are not part of the pool, EJIF covers a population of about 2 million
people and includes municipalities with as many as 60,000 residents.
The current insurance program includes self-insurance with catastrophic loss coverage
purchased from a major insurer and covers four major classes of risks:
(1) Environmental liabilities related to current municipal operations (primarily third party
bodily injury and property damage, including loss due to diminution of value);
(2) Liabilities related to hazardous materials accident responses that damage potable
drinking systems and runoffs from stormwater systems, but not sanitary systems;
(3) Site-specific coverages for municipal facilities including recycling centers, Department of
Public Works premises and both above- and under-ground petroleum storage tanks;
and,
(4) Special coverages for (a) "midnight dumping" by unknown parties on municipal property,
including costs for emergency cleanups if needed, (b) de minimis municipal contributions
to abandoned waste disposal facilities that have been classified as Superfund sites, and
(c) public officials' liability for actions excluded from standard municipal liability
coverages.
In addition to providing insurance coverage, the pool has built-in engineering
consultations to assure compliance with state and federal regulatory requirements for the
covered operations. This consultation is necessitated since full compliance is a condition for
protection under the fund. The program benefits from, and keeps costs lower as the result of, a
New Jersey state law that provides some immunity to municipalities for tort liability.
A number of these coverages contribute directly to urban redevelopment: (a) The
protections for current operations and emergency responses constitute liability protection for
municipalities undertaking the cleanup of contaminated sites and (b) the protection for public
officials' actions covers the issuance of building and occupancy permits for the use of sites that
have been mitigated to current standards. Claims have been paid with respect to liability suits
23 It appears that the city, despite the sophistication that has led it to recognize the value of cost-cap insurance
as a tool for promoting brownfield investment, remains skeptical of the commercial environmental insurance industry.
It does not appear to be aware of the availability of portfolio coverage that could insure the pool of sites Somerville
has targeted for support and we have no indications that it is investigating the possibility of adding commercial
coverage to its self-insurance plan.
-------
36
Environmental Insurance for Brownfields Redevelopment
filed against some officials that authorized cleanup and new construction on what had been a
public landfill.
EJIF is, however, attempting to more directly facilitate redevelopment of sites that
remain contaminated. It has designed a feasibility study of the possibility of providing coverage
for municipal property with known contamination. Its members already have agreed to bear half
the cost of the study and have received approval from the New Jersey Joint Incentive Grant
Program for funds to cover the other half. The new program includes pooling municipal funds
and buying coverage to address risks involved with four classes of properties that are or may be
acquired by member municipalities:
potentially foreclosed properties, to finance Phase I and II studies before exercise of
acquisition powers (with the costs of studies returned to the pool following successful
redevelopment);
properties that cities would like to acquire for specific redevelopment projects;
current municipal properties that have known contamination from past municipal use;
and,
closed municipal owned landfills.
The elements of the protection to be considered in the feasibility and cost study include
(a) immediate liability coverage for cities as owners, (b) cost-cap protection for remediations
undertaken by municipalities, and (c) municipally-guaranteed indemnifications of new owners
and lenders subsequent to remediation. The current structure contemplated for cleanup cost
cap coverage is a 120% cost retention, with the first 100% budgeted by the city undertaking the
effort, an additional 20% covered by EJIF, and any remaining cost overruns covered by a
blanket policy from a major insurer providing up to some maximum figure across all participating
municipalities and their projects. Preliminary discussions with insurers indicates that such
pooled coverage will reduce the underwriting costs since the spread of risk across a large
number of cities and sites reduces the need for detailed engineering risk assessment on each
individual parcel to be remediated.
New Jersey presents a somewhat unique case: it has far more Superfund sites than any
other state. Over half of the payouts under the existing EJIF pool have been to settle de minimis
contribution claims and claims for municipal officials' actions that exposed others to
environmental risks, sometimes involving the Superfund sites or nearby locations. However, the
pooled insurance model that is contemplated by EJIF as an extension of its current insurance
activity is precisely the type of tool that might facilitate redevelopment of small urban parcels.
The small cities participating in EJIF have to form a common pool across their jurisdictions to
have sufficient diversity of risk exposures and volume of activity to interest potential insurers in
providing umbrella coverage. Larger municipalities in the state, on the other hand, may well
have a sufficient number of redevelopable brownfield sites within their individual boundaries to
be able to form a pool for which affordable coverage may be available.24
24 Insurance industry personnel indicate that both underwriting costs and the costs of coverage are likely to be
lower for a more diverse than a more concentrated pool of sites. That is, coverage for a given acreage in a single
neighborhood is likely to be more expensive than coverage for the same area composed of sites scattered around a
city. Similarly, EJIF, with its wide geographic dispersion and diversity of municipalities may face lower costs for
coverage of its proposed pool than would a single major city in New Jersey, such as Newark, if it were to seek
coverage for a similar number of acres.
-------
Environmental Insurance for Brownfields Redevelopment
37
Connecticut Department of Economic and Community DeveiopmentConnecticut Department of
Economic and Community Development
The Connecticut Department of Economic and Community Development (CDECD) may
well have more experience with environmental insurance than any other public sector body. It
has been utilizing El since 1993, almost exclusively for residential projects. A need for
insurance emerged after several redevelopment projects encountered contamination after
housing construction had been initiated. As a result, about $500,000 was spent to remediate
some unanticipated contamination. The CDECD officials realized that some protection from
costly cleanups was needed if they were to continue brownfield redevelopment in the state.
Without an adequate way of quantifying risks, their ability to market sites and pursue targeted
development projects would be limited by the need to set aside funds for unknown uncertain
costs.
Officials thus worked actively with private sector insurers to design policies that cover
the Department for unexpected costs associated with the remediation of undiscovered
contaminants. The result is a program of cleanup cost-cap coverage that permits the CDECD to
enter into firm, fixed-price purchase agreements with private sector developers, protecting itself
against cost overruns in site preparation. In the case of property sales, market demand
determines sale prices, so CDECD can determine its ability to deliver a clean site at the demand
price through the cost control provided by the insurance.
Most urban redevelopment projects encounter some minor types of contamination like
asbestos insulation, lead-based paint, storage tanks (both above ground and below), and even
PCBs from transformers. Qualified developers who apply for assistance from CDECD (grants,
loans, guarantees, etc.) are educated about environmental problems. Depending on the
magnitude of the contamination found during Phase II site investigations, CDECD makes a
decision about whether to proceed with the development; if contamination is too great, they may
abandon the possible deal. If the contamination is manageable, that is, if the cost-cap coverage
appears to be reasonably available, the viability of insurance protection is explored and a
decision made on whether to absorb the cost of coverage or add it to the projected property
sale price.
The cost of the coverage is generally about $7,500 to $10,000 for a three year policy. A
typical redevelopment deal is about $1 million, so the actual burden of environmental insurance
is relatively small. According to our contact, the premium costs have indeed fallen over time,
consistent with the industry claims that coverage has become more affordable. The CDECD
have had one project that required unforeseen remediation. The insurance provider promptly
"did everything they were supposed to do," and paid about a $20,000 claim for remediating
some contamination from an orphaned storage tank. So far, their experience has been
satisfactory- the insurance products have helped the CDECD better manage the risks of
brownfields development.
-------
38 Environmental Insurance for Brownfields Redevelopment
-------
Environmental Insurance for Brownfields Redevelopment
39
Chapter 8
The Potential Contribution of Insurance to Redevelopment
Of Small Urban Brownfields.0 The Potential Contribution of Insurance to
Redevelopment of Small Urban Brownfields
In providing recommendations for HUD action with respect to utilization of environmental
insurance to promote urban redevelopment, we first examine the core research questions
specified in the work order. We then turn to specific recommendations for HUD departmental
effort and research support.
How Can Municipalities Use Pooled Insurance to Stimulate Increased Urban
Redevelopment of Small-Scale Brownfields?8.1 How Can Municipalities Use Pooled
Insurance to Stimulate Increased Urban Redevelopment of Small-Scale Brownfields?
The reportedly booming private sector demand for environmental insurance projects is
associated with speculative redevelopment of relatively large and heavily contaminated sites in
prime urban locations. Most such use of insurance products and services appears to involve
predominantly private deals with little or no municipal or other government participation. We can
conclude from this utilization pattern and prior studies of the brownfields financing process
discussed in this Report that insurance does contribute to the economic viability of
redevelopment projects involving environmental risks. Risks are quantified and reduced, loans
become more accessible or are available on better terms, and project viability is enhanced.
This experience, however, does not translate directly to small parcels or those with
limited environmental remediation needs. Given the high fixed costs associated with cost-cap
policy underwriting for single sites, insurance for individual projects appears to still be too
expensive to benefit redevelopment efforts with relatively low cleanup costs, even if the
mitigation constitutes a high percentage of project expenditures. This poses a problem for local
governments since the majority of brownfields are, in fact, small in both size and degree of
contamination requiring cleanup. The redevelopment difficulties are further compounded by the
fact that smaller sites generally attract smaller scale developers, whom lenders see as risky
prospects for financing.25
It logically follows that provision of insurance coverage to small brownfield sites, if
possible, may help to accelerate their redevelopment. Pooling parcels has the potential to
reduce the effective unit cost for coverage by distributing underwriting costs across more sites,
assuming the risk spread across the parcels reduces insurance company needs for site
assessments that extend beyond those done routinely for a project. While most small brownfield
sites are likely to be privately owned, municipalities often have title to many such parcels,
25 As Yount and Meyer, 1997, discuss, brownfield lenders consider three forms of risk: loan risk, associated
with the likelihood of successful debt service by the borrower, collateral risk, associated with the probability that
foreclosure will result in full recouping of the capital invested, and liability risk, associated with environmental factors.
They report that, while the latter two risks do not vary with the size of the borrower, lenders routinely consider
borrower financial capacity overall in measuring loan risk, which they consider to be higher for smaller developers.
-------
40
Environmental Insurance for Brownfields Redevelopment
frequently acquired through tax foreclosure after abandonment. Thus the local public sector may
play a central role in the creation of insurable portfolios of small brownfield sites.
If such insurance pools are to serve urban economic regeneration, the public sector may
play one or both of two distinct roles:
(1) Municipal or economic development agency action to create pools of properties that can
gain the economic benefits of risk-sharing and, as a result, obtain environmental
insurance that will enhance their prospects for redevelopment; and,
(2) Municipal or economic development agency purchase of insurance for such pools, and
the provision of such coverage to would-be redevelopers and their financiers.
In the first case, the public sector activity may be limited to facilitation; no direct public
outlay for insurance coverage may be involved, except, perhaps, in purchase of coverage for
publicly owned sites. The latter case involves direct expenditures on insurance, possibly
requiring reallocation of economic development funds from other forms of subsidy. If the
municipal government or some quasi-public or public-private economic development
organization both creates the pool and purchases the umbrella insurance policy, a variety of
alternatives exist for the financial conditions governing provision of coverage to private parties:
(a) The protection may be provided free of charge as a full subsidy to all registered
parcels and redevelopment projects;
(b) the purchasing organization might absorb the underwriting costs, paying the fees
for creation of the policy but charge individual property owners or redevelopers
the coverage fees for the levels of insurance they demand, thus offering a partial
subsidy; or,
(c) the owners or redevelopers may be charged the full costs of the coverage,
including a proportional share of the underwriting fee, in which case they benefit
only from the cost reductions associated with the creation of the pools
themselves.
Obviously the costs to the local economic development agency will depend on the
approach undertaken. Even in the last instance, in which the municipality acts only as a
facilitator or market-maker, public action has the potential of accelerating urban regeneration by
improving the access to insurance for small brownfield sites.
The key policy questions that need to be considered in order to derive a strategy for any
given urban setting include:
What type of pool of sites (number of parcels, characteristics of ownership, intended
use, location, etc) can be created in a city?
How much can the pool generated by a city reduce the costs of different insurance
coverages for individual parcels by spreading risk and reducing the need for site-specific
underwriting effort, and how do those costs vary with the characteristics of the pool?
Can pooling reduce the cost of needed coverages to levels that make coverage
economically efficient from a private investment perspective?
What is the relative value of publicly-financed insurance coverage to would-be
developers and their financial backers, compared to other, more direct, financial
subsidy?
-------
Environmental Insurance for Brownfields Redevelopment
41
Given this relative value, which could be zero, and costs for publicly-provided insurance,
what is the relative cost-effectiveness of public provision of insurance relative to other
subsidies?
What reorganization of purchasing practices or other restructuring of public sector
decision-making is necessary to improve the workings of the market for public
acquisition of environmental insurance?
The first three questions address the potential of simply creating a pool and providing
insurance coverage at cost. The next two questions address the potential of diverting municipal
economic development resources from other subsidies toward provision of insurance. The last
involves the apparent market failures now characterizing the potential municipal public sector
market for environmental insurance. The data needed to address these issues are not yet
available, but could be obtained.
Provision of pooled insurance is clearly feasible and has demonstrable potential as a
tool for urban redevelopment. Answers to these questions are needed to determine how great
the potential actually is and to derive efficient and effective mechanisms for municipal utilization
of environmental insurance. Whatever national policy may be derived to encourage the use of
insurance for urban redevelopment, it will need to take account of the fact that the answers to
these questions is likely to vary across cities and regions.
How Does the Contribution of Brownfield Insurance Vary by Region, Urban Area Size and
Extent of Contamination, or Local Economic Conditions?8.2 How Does the Contribution
of Brownfield Insurance Vary by Region, Urban Area Size and Extent of Contamination,
or Local Economic Conditions?
This study has only indicative findings to offer on this topic, given the limited scope of
the inquiry conducted. The limited data available from this study can, however, be augmented
with observations from experience with urban regeneration in general and other research on the
problems of brownfields redevelopment in particular.26 We address each of the variables in turn.
Regional variation may be present, but it is associated closely with two other variables:
(1) state policies, including the provisions of state voluntary cleanup plans (VCPs) and the state-
legislated liability shelters provided to municipalities (which may show a regional pattern); and,
(2) the extent of contamination. We return to the latter variable below.
State Voluntary Cleanup Programs (VCPs) are unlikely to have any immediate impact on
the potential contribution to redevelopment of different forms of liability coverage.27 Participation
in a VCP normally results in well regulated and careful state-monitored site assessment
26 Immediately relevant prior data collection and analysis that has informed these observations includes the
previously mentioned studies: Walker, et at., 1997, Yount and Meyer, 1997, and Meyer, 1997. Specific finding are
attributed to individual studies where appropriate.
27 We have already noted that insurers are not yet adjusting coverage fees in response to variation in VCP
coverages. Liability exposures - and, for that matter, the probability of reopeners on sites that suffered from acute
contamination - remain ultimately governed by CERCLA and are thus minimally sensitive to the subordinate state-to-
state variation in requirements. From the financiers' perspective, the Asset Conservation, Lender Liability and Deposit
Insurance Act of 1996, the CERCLA amendment that relieves them of most of their liability exposures in the event of
foreclosure does not reduce their concern for the impact of environmental liabilities on the viability of their borrowers
or the projects they may support. Those liabilities are dominated by the federal law, especially as regards claims for
damages, and are thus not variant across the individual states.
-------
42
Environmental Insurance for Brownfields Redevelopment
activities. Thus, if a state exhibits a track record that insurers find reliable, the oversight
activities it engages in as part of its VCP may reduce the underwriting effort committed by the
insurance providers. As a result, some insurance such as cleanup cost cap coverage may
become more affordable since policy fees to cover underwriting costs may be reduced. On the
other hand, the VCPs affect the contribution of reopener coverage directly, to the extent that No
Further Action letters or Covenants Not to Sue are perceived as effectively limiting exposure to
reopenings. In states in which protection from such assurances are readily available, the logic of
insurance suggests that the demand for reopener coverage may be expected to decline
significantly, since the risk of reopenings would be reduced.
Urban area size and extent of contamination both affect the competitive position of
central city lands relative to suburban sites. In doing so, they can affect the value associated
with insurance coverage as a subsidy to redevelopment of brownfields. The smaller the city, the
closer the suburbs are to the center and the lower the locational differences between the two; in
such a setting even minor gains from insurance coverage can be exceptionally valuable.28 In
larger settings, the amenity and infrastructural differences between central city and suburban
sites may be so great and/or either the suburbs or the center may have such a comparative
advantage in location that the marginal contribution of insurance to the spatial distribution of
development may be insignificant.
To the extent that site contamination is pervasive across a metropolitan area or a city
and its suburbs, environmental risks are already internalized in investment decisions. Insurance
coverage at cost may attract new capital to the region, but it is not likely to make much
difference to the spatial allocation of redevelopment capital that is already committed to the
area. If, however, a city has insurance available at minimal or zero cost to developers while its
suburbs does not and developers want the protection provided by the insurance, such coverage
may have the potential to tilt the comparative advantage of competing sites in its favor.
Local economic conditions affect the urban redevelopment investment decision by
determining the potential returns on all real estate projects. The hotter the local real estate
market, the greater will be the potential rewards for new investment. As a result, developers and
their backers will be willing to tolerate higher environmental risks in such settings. By contrast,
environmental risk avoidance will be greater in soft real estate markets. Since environmental
insurance reduces risks, it may be expected to make a greater contribution to urban
redevelopment in soft markets, when other financial risks are present, than in strong, growing
urban areas, in which the environmental risks may pose the only project uncertainties.
Recommendations for Possible HUD Actions and Additional Research Needed to
Promote Utilization of Insurance for Urban Redevelopment using Brownfields8.3
Recommendations for Possible HUD Actions and Additional Research Needed to
Promote Utilization of Insurance for Urban Redevelopment using Brownfields
We offer three sets of recommendations here. First we consider possible HUD efforts to
support municipal redevelopment efforts through provision of information about the potential
value of environmental insurance as a tool for economic development stimulus that may
stimulate local government interest in its utilization. Next, we address actions that may be taken
by the Department of Housing and Urban Development to increase its own information base
about environmental insurance as a tool for urban redevelopment. Finally, we turn to extramural
28 Re-analyzed data from the Walker, et at., 1997, study demonstrated that the relative difference in location
and infrastructure characteristics between small cities and their suburbs was not a significant factor in developer
decisions about project site locations. Thus environmental conditions alone accounted for much of the location
decisions.
-------
Environmental Insurance for Brownfields Redevelopment
43
research that could be conducted to address the policy questions that remain outstanding and
could provide useful information while the Department pursues the recommended internal
analyses and possible clarification of grant conditions to recipients.
Education and Information Provision EffortsEducation and Information Provision Efforts
The data available at this point in time do not justify any Departmental policy shifts or
preferences for urban projects that promote or support the use of environmental insurance for
urban redevelopment. This finding, however, does not preclude efforts to collect more
information and, at the same time, provide publicity about the potential of this available but
minimally utilized tool.
On the contrary, the evidence collected demonstrates a general lack of knowledge about
the possible use of El on the part of community and economic development professionals. This
study found that even those officials who have specific responsibility for brownfields
regeneration appear to have little or new information about the details of the insurance tools
available to them. The information gap may be expected to be even wider in the economic
development community as a whole. Little attention has been given in the economic
development press to the potential inherent in the new El products, and even the professional
experts serving as consultants to local economic regeneration efforts appear to lack the
necessary knowledge to make intelligent choices about the use of such coverage as a
redevelopment tool.29
El is one of the many tools that can be used to aid a brownfield redevelopment, but the
evidence we have to date suggests that it is underutilized.. It is the responsibility of individual
municipalities and their economic and community development bodies to determine under what
circumstances insurance can best enhance the prospects for brownfield reclamation and reuse.
Using El entails new perspectives, rooted in knowledge, to overcoming environmental
uncertainty. Cities need to acquire better information on the potential contributions of El in order
to determine if, when and how to use the development tool to improve the overall efficiency of
their urban regeneration efforts. The costs and benefits of insurance must be weighted against
other urban redevelopment promotion alternatives such as public subsidies for environmental
assessments and remediation. Cities need a greater level of sophistication, innovation, and a
more well-rounded approach for creating effective brownfield strategies. HUD can help this
process along through information dissemination.
Publication of the findings of research on brownfields redevelopment, such as the
studies on which this project has built, as well as this report itself is clearly a first step, and the
easiest information dissemination method available to the Department. However, many other
information dissemination tools are available that may have more impact on municipal
29 One reputed expert in urban land markets and redevelopment, reviewing an earlier draft of this report,
inadvertently provided evidence of the prevailing misinformation. His comments are testament to the breadth of
acceptance of the inaccurate myths referred to in the report. Specifically, he criticizes insurance for being too
expensive or unavailable; we have noted that this is simply not the case in 1997. Similarly, the extensive use of
environmental insurance in the private sector refutes his claim that private insurance "doesn't help very much with the
liabilities associated with the existing contamination." Focusing on one subset of the urban land market, this expert
also pointed out that competitive pricing in industrial warehouse land markets works against brownfields development
- arguing that spending on environmental insurance serves to price brownfield sites out of the market. He may be
right for such relatively low use intensities such as warehouses, but the rapid growth of firms engaged in speculative
redevelopment of brownfields with high location values, a redevelopment sector that is critically dependent on El for
its operations, suggests that, at best, he is overgeneralizing. The emergence of this new sector is discussed by Meyer
and Lyons, 1997.
-------
44
Environmental Insurance for Brownfields Redevelopment
redevelopment efforts. HUD is in routine contact with a vast array of local governments and
economic development organizations through its administration of the Community Development
Block Grant (CDBG), Section 108, and other grant program. It publishes program guidelines,
enumerating uses to which grant funds and the "float" on local loan programs using the federal
dollars may be put. Simply adding provision of brownfield redevelopment subsidies through
environmental insurance to the list of possible uses of grant funds could at least draw new
attention to El, without recommending its use or attempting to enumerate the conditions under
which the tool could be most valuable.
If all the information dissemination effort accomplished initially was new inquiries to
insurance companies about the availability and characteristics of El. HUD might be able to
improve the working of the market for public sector purchases of these insurance products.
Economic and community development organizations, the potential buyers, would acquire more
information about this emerging insurance sector. At the same time, the insurance companies
would learn more about the needs of potential public and quasi-public sector clients from the
questions posed to them. Thus, even in the absence of any information about the actual
contribution that El could ultimately make to urban redevelopment efforts in any one setting,
HUD information dissemination could increase the possibility of experimentation and successful
adaptation of El products to the needs of public sector economic developers attempting to
reclaim urban brownfields.
Departmental Data Collection Efforts Departmental Data Collection Efforts
HUD data collection efforts could improve the quality of information available to assist
local development bodies in assessing the potential contributions of El to their urban
regeneration strategies. But the very act of data collection will, in fact, augment other efforts at
dissemination of information about the role of insurance at the same time as it provides a
foundation for further analysis of how municipalities may optimize their use of this new
redevelopment tool.
It is inevitable that a broad-based Departmental effort to collect case data on municipal
use of environmental insurance for urban redevelopment will advertise the possible use of the
tool as well as generate data. The simple expedient of letters to all recipients of Community
Development Block Grants, for example, requesting outline information of any local efforts to
utilize such insurance to stimulate brownfield regeneration could provide a mass of case data.
At the same time, however, and independent of whether the case data are ever employed in
further research, such a call for information would constitute a non-directive, non-coercive alert
to recipients about the potential role of environmental insurance in urban redevelopment. If
extensive evidence of ongoing efforts to use HUD funds for insurance is uncovered through
such a preliminary request, then more detailed examination of the ongoing efforts would be
warranted. Simply requesting notification about the use for funds for environmental insurance
may be a cost-effective means of determining both knowledge and activity regarding such
coverages at the local level, after which other, more in-depth, data collection might be
attempted.
Obviously, since any information request imposes the costs of responding on local
organizations, the data collection effort should be carefully developed to produce the greatest
possible value to HUD and its urban government constituency. Yet such costs are minimal
compared to those that would be engendered if the Department had to contract out for basic
data collection. A staged collaborative effort with extra-mural researchers to first determine the
extent of El knowledge and activity and then use HUD channels to elicit more information about
on-going uses of insurance for urban regeneration could provide the most cost-effective
approach in terms of both Department and local government expenditure and effort levels.
-------
Environmental Insurance for Brownfields Redevelopment
45
Extramural Research EffortExtramural Research Effort
Three obvious extensions of this research project emerge from the analysis above. The
first is the collaborative systematic national data collection effort just mentioned. The second is
the expansion of this initial feasibility study into a full scale investigation of the potential of
municipal utilization of environmental insurance, a task that can be undertaken independent of
any national "survey" of HUD grant recipients. The third is an effort to maximize the national
benefits of the study being launched in New Jersey on the potential for cross-municipal pooling
as a tool to be used by smaller cities and urban areas.
Collaboration on systematic national data collection through HUD grant program
administrationCollaboration on systematic national data collection through HUD grant program
administration. The Department does not necessarily need any external input to preliminary
efforts to determine the extent of knowledge about, or the current levels of utilization of,
environmental insurance by its grant recipients. Building a collaborative relationship with
external researchers prior to the conduct of some data collection effort through grant
administration channels, however, has the potential of significantly increasing the benefits to be
gained from the costs of federal data collection - and the local costs of compliance with HUD
information requests.
The specific characteristics of questions asked of grant applicants' and recipients'
knowledge about, and utilization of, environmental insurance in the context of brownfield
redevelopment efforts can affect the analysis that may be conducted on the data collected.
While the information gathering effort may be relatively straight-forward, if it is conducted as part
of a broader research and analysis plan, it will reduce the costs of extramural research using
the data and may help to maximize the utility of the studies conducted as sources of information
for urban community and economic development organizations.
Two types of expertise should thus be available from the Department's external
collaborators in such an effort:
(1) detailed knowledge about local economic development approaches, practices
and techniques, and of the various grant programs operated by HUD in support
of urban development; and,
(2) in-depth understanding of the specific problems and challenges facing brownfield
regeneration efforts, and of the track record of experience with developers' and
financiers' responses to the different forms of support for brownfield projects,
including financial support, liability relief, and information provision to reduce
uncertainty and risk.
The first knowledge base will assure that the research planned is directed at the
concerns and decision-making frameworks of the agencies that would have to use the
information about El in making decisions about how best to support urban brownfield
redevelopment efforts. The second will be critical to the collection of the needed information
about insurance utilization, and will help insure that the data collected will make the necessary
distinctions between the various types of El policies and the stages of brownfield redevelopment
at which they may be utilized.
In-depth data on the nuances shaping local pursuit of information about environmental
insurance for redevelopment projects or local agencies' utilization of El will not be available from
any cost-effective survey of the universe of HUD grant applicants and recipients. However, the
national data can be matched to Census, and other information sources to provide some
understanding of the contextual variation in local responses. These national data will be most
useful in providing a foundation that could be used to support generalization of findings from
-------
46
Environmental Insurance for Brownfields Redevelopment
more in-depth studies of smaller samples of municipalities. They may thus be critical to any
decisions regarding the advisability of Department policy shifts or recommendations to local
urban development bodies regarding the use of environmental insurance for brownfield
regeneration.
Further examination of the potential of environmental insurance for urban
redevelopmentFurther examination of the potential of environmental insurance for urban
redevelopment. Given the preliminary and exploratory findings described here, three aspects of
the environmental insurance market warrant immediate additional research effort:
(1) The insurance purchase decision processes within municipal governments and
economic development organizations to uncover interventions that might accelerate the
use of specific environmental insurance coverage;
(2) Developers' and financiers' assessments of the utility of different insurance products,
especially as compared to direct cash subsidies for projects at either the short- or long-
term lending stage; and,
(3) Economic and community development officials' perceptions of environmental insurance
and its relevance to their urban redevelopment efforts.
These are linked issues and they can provide substantial insight into the six policy
questions posed in Section 8.1 above. With appropriate sampling of urban settings for analysis,
and a sufficient number of cases for examination and comparison, analysis of these questions
can also address the issues of variation in impact posed in Section 8.2.
These three types of questions are best examined through structured focus groups.
Given regional variation in experience with brownfields redevelopment, at least one city from
each federal Region should be included in the study sample. Since more will be learned in
settings already actively engaged in brownfield redevelopment, the ideal sample would include
cities of different sizes and experiencing different local economic conditions, but all drawn from
Brownfield Pilot Project recipients. Consonant with the two research questions, two different
focus groups should be held in each location:
(1) Public and nonprofit sector environmental and economic development decision-makers;
and,
(2) Developers, lenders and others involved in private investment in the local real estate
market.
The focus groups could be conducted using a number of different data collection
approaches. One good prospect is a process known as Nominal Group Technique (NGT).30
This method involves structured collaborative decision-making over a three-hour period used to
uncover both consensus and dissensus on issues and approaches. The first group could be
asked to address possible means to facilitate public sector use of insurance for urban
brownfield redevelopment. The second group should be asked to define the insurance products
most useful to redevelopment projects and to attach monetary value to the coverage to the
extent possible.
Such a study could produce immediately useful information on local governments'
capacities to productively employ insurance products and on federal support, including program
guidance documents, that could improve insurance utilization. In addition, assuming that the
private sector focus groups place a significant value on insurance coverage, the results of the
30 We have effectively employed these methods in previous research. They are based on techniques described
by A.L. Delbecq, A.H. Van de Ven and D.H Gustafson in Group Techniques for Program Planning: A guide to nominal
group and delphi processes (Glenville, IL: Scott, Foresman & Co., 1976).
-------
Environmental Insurance for Brownfields Redevelopment
47
study could provide the foundation for the more comprehensive survey research that would then
be justified. This next level of analysis could employ Contingent Valuation techniques to
measure potential urban redevelopment investors' perceptions and valuations of the tradeoffs
between environmental insurance coverage and other public sector support such as interest
rate subsidies, loan guarantees, tax credits or abatements, or direct cost sharing. This
information is essential for developing criteria that can be used by economic development
agencies in making decisions about optimal ways to stimulate urban redevelopment within tight
budget constraints.
Assessment of the potential for multi-municipal site pooling for environmental
insuranceAssessment of the potential for multi-municipal site pooling for environmental
insurance. The New Jersey Environmental Joint Insurance Fund (EJIF) will engage in a
feasibility study for an environmental insurance pool covering some or all of its 199 member
municipalities. Oversight and cooperation with their research effort should permit examination of
the potential of such a tool for use in other states and settings.
There are over four hundred municipal joint insurance pools for property and casualty
insurance in the United States. EJIF in New Jersey is the only example of such pools combining
to move into the environmental insurance arena identified in this study. (The Fund was originally
formed by five pools and has grown to include the municipalities that are the members of nine
different property and casualty insurance pools.) Many of the other existing cases of municipal
collaboration in pursuit of cost-effective insurance coverage could potentially provide a platform
for cooperation in purchasing environmental insurance that may help to stimulate
redevelopment of contaminated lands.
As EJIF assesses the feasibility of taking the next step of actively incorporating coverage
for contaminated sites, the methods used in the feasibility study and the potentially unique
factors that have led to the emergence of EJIF itself should be examined to determine the
possibility of extending such pooling to other parts of the country where smaller municipalities,
often with too small a portfolio of sites to permit them independently to form insurance pools,
could band together to provide this form of stimulus to urban redevelopment.
The Department could augment the research support available to the feasibility study to
permit examination of variables that are not being examined in New Jersey to determine the
feasibility of similar funds in other settings, possibly involving a different research team to work
with the EJIF personnel. Additional variables warranting examination would include the structure
of policies and pool sizes as well as existing patterns of local insurance purchasing cooperation
and the extent and pervasiveness of local contaminated land problems. An alternative approach
might be HUD funding for oversight and reporting on the EJIF feasibility study by a third party
researcher, who would independently undertake the analysis needed to determine the
generalizability of the approaches examined or adopted in New Jersey.
-------
48 Environmental Insurance for Brownfields Redevelopment
-------
Environmental Insurance for Brownfields Redevelopment
49
ReferencesReferences
Meyer, P.B. 1997 (forthcoming, 1999). "Appraisers and Contaminated Lands: Valuation and
Capital Availability," in C. Bartsch, ed., Brownfield Financing Papers. Prepared by the
Northeast-Midwest Institute. Washington, DC: U.S. HUD.
Meyer, P.B., and T.S. Lyons. 1997. Environmental Merchant Banking: Entrepreneurship and
Brownfields Cleanup. Working Paper 97-7. Louisville, KY: Center for Environmental
Management, University of Louisville.
U.S. EPA. 1996. Potential Insurance Products for Brownfields. Washington, DC: USGPO.
Walker, C, P. Boxall, C. Bartsch, E. Collaton, P.B. Meyer and K.R. Yount. 1997 (forthcoming).
The Impact of Environmental Hazards and Regulations on Urban Redevelopment.
Prepared by the Urban Institute with the Northeast-Midwest Institute, University of
Louisville, and Northern Kentucky University. Washington, DC: U.S. HUD.
Yount, K.R., and P.B. Meyer. 1997 (forthcoming, 1999). Financing Small-Scale Urban
Redevelopment Projects: A Sourcebook for Borrowers Reusing Environmentally Suspect
Sites. Final Report to EPA Urban and Economic Development Division prepared by The
E.P. Systems Group, Inc. Washington, D.C.: U.S. EPA.
-------
Environmental Insurance Policy Coverage and Terms
Policy Name/Type1
Targeted Policy
Holder(s)2
Coverage Explanation3'4'5
Key Exclusions5'6'7
Most Common Insurance Utilized to Cover Property Contamination Liabilities and Costs (Continued on Page 2)
Pollution Legal
Liability (PLL)
Property Owners
Others Named to the
Policy (e.g., developers,
investors, remedial
contractors)
Third party claims for cleanup, bodily injury, and property damage
First party claims for bodily injury and property damage
Defense costs
Optional: Contractual liability, Business Interruption, Extra expense,
Transportation, and Non-owned disposal site
Owned property (i.e., property owned, leased, or operated
by the policy holder)
Contractual liability7*
Underground storage tanks*
Certain types of indoor air pollution
Cleanup Cost Cap
(CCC)12
Property Owners
Developer
Municipalities
Contractors
Covers an unanticipated increase in costs of a known cleanup (i.e., if the cost tc
perform the cleanup is greater than estimated by the contractor).
Typically, policies limit coverage to three identified triggers only: 1) discovery of
unidentified pollution, 2) additional amounts of pollution, or 3) a change in
regulatory requirements.
Cleanup of contamination not specifically covered in the
policy
Legal costs (e.g., negotiating with governmental authorities
or government oversight costs)
Other exclusions: professional negligence, faulty
workmanship, breach of warranty, unreasonable contractor
delays, bankruptcy, strikes, and acts of God.
Investigation costs associated with the discovery of new or
different contamination and monitoring activities are
frequently excluded.
>
a
Q.
o'
3
fi)_
C/)
fi)
3
"O
Combined PLL and
CCC Policies13
Property Owners
Others Named to the
Policy
See PLL and CCC coverage
/Vote: Essentially, this policy is a combination (or a hybrid) of Pollution Legal
Liability and Cleanup Cost Cap insurance.
This type of policy is designed to cover properties with known environmental
problems in which there is a planned remediation and a planned
redevelopment.
See exclusions for PLL and CCC
(D
¦o
O
O
<
5"
31
3
&)
i-
o'
Other Insurance Available to Cover Property Contamination Liabilities and Costs
(Continued on Page 2)
Property Transfer/
Property Owner's
Policy
Property Seller
Property Buyer
Developer
Lender
Third party claims for cleanup, bodily injury, and property damage on or offsite
Note: This is a form of PLL coverage marketed towards the parties involved in
a property transaction.
Owned property (i.e., property owned, leased, or operated
by the policy holder)
Contractual liability*
Underground storage tanks*
Certain types of indoor air pollution
(/>"
o
o
3
l~
d"
c
Contractor's Pollution
Liability14
Contractors
Consultants
Bodily injury, property damage, and environmental damage arising out of
covered operations performed by the insured contractor or consultant on a third
party's real property.
Pollution arising out of professional services rendered by the insured contractor
or consultant.
On and offsite cleanup costs.
Defense costs.
Note: Joint venture coverage and extended discovery periods are available.
Policy can be written on an occurrence or claims-made basis.
Not Available
CD
a
o
3
¦0
fi)
(Q
a>
ro
Errors and Omissions
Insurance14
Property Owner
Environmental
Consultants
Environmental
Laboratories
Damages (including pollution liability) from acts, errors, or omissions in
professional services. Events such as the failure of the consultant to detect
contamination during a Phase I or Phase II audit, or the negligent design of a
remedial system.
Note: Policy is offered as claims-made or occurrence coverage. Claims-made
policies may offer an extension period.
Not Available
Page 1 of 4
-------
Environmental Insurance Policy Coverage and Terms
Policy Name/Type1
Targeted Policy
Holder(s)2
Coverage Explanation3'4'5
Key Exclusions5'6'7
Other Insurance Available to Cover Property Contamination Liabilities and Costs
(Continued on Page 4)
Finite Risk15
All Parties
Transfers the financial liabilities associated with contaminated properties from
the legally Responsible Party to an insurance carrier. The Responsible Party
pays the insurer the entire present value of the projected cleanup cost when the
insurance is obtained, and the insurer takes on the financial responsibility for
cleaning up the property. Typically, the policy incorporates CCC and PLL
insurance elements, as well as timing and inflation protection.
Not Available
>
a
Q.
1^
o
3
£1
(/>
fit
3
-c
a>
"O
o
a
5"
o
&>
o
3
<75"
O
o
3
Lender Liability16'17
Lenders
Note: In some cases,
lenders may require a
property owner to
purchase this insurance
for the Lender as terms
of the loan.
Typically, the policy is designed to cover the lesser of: (i) the outstanding
covered loan balance due on the date of default with respect to the insured real
property that is found to be contaminated; (ii) the cost to clean up such property
or (iii) the fair market value of the covered location at the time the loan closed.
Defense coverage for third party claims.
First party cleanup coverage to the insured, but not for those matters that were
subject to a claim under the collateral value loss coverage.
Note: Often, coverage is also available under this policy for CERCLA and state
lender liability claims, as well as third party claims for bodily injury and property
damage, and certain on-site cleanup costs.
Contractual liability
Fines and penalties
Loans entering into default outside the policy period
Institutional Controls
and Post Remediation
Care Insurance18
Property Owner
Cost overruns related to the design and initial implementation of the institutiona
control.
Third party bodily injury and property damage and cleanup coverage in
instances where there are errors in the design or establishment of an
institutional control by a professional.
Third party bodily injury and property damage and cleanup costs associated
Not available
3
C
a>
o.
o
3
"0
CD
a>
with an error or omission by a party responsible to maintain or enforce an
engineering or institutional control, which has been both properly designed and
established.
u
NOTES:
1. Most of these insurance products are offered by all major environmental insurance companies. Additional, more tailored policies are also offered by major
insurance companies.
2. The entities for which these policies are most applicable are listed. In some cases, multiple entities can be covered as Named Insured on a policy (e.g., PLL).
3. The claim type of all policies is claims-made, unless otherwise stated.
4. Typically, insurance policies cover only listed policy holders, properties, locations, or operations.
5. Natural resource damages (NRD) may be included or excluded from coverage, contingent on the insurer. As a result, inclusion of NRD coverage is typically negotiable.
6. Many policies contain the following key exclusions: mold and other microbial matter; asbestos; war and terrorism; naturally occurring radioactive materials; lead paint; known
and pre-existing contamination known to the insured; intentional acts or omissions; and deliberate non-compliance with law.
7. A number of exclusions are either highly negotiable or may (or may not) be listed in a policy, contingent on the insurer. Such exclusions are identified with an asterisk ("*").
8. Each insurer sets his/her own premiums; therefore the premium listed is only for guidance purposes. If only one dollar value is identified, then it should be considered the
minimum value, unless otherwise indicated.
9. It is possible that lower premiums can be negotiated where there is minimal expected environmental risk.
10. Insurers may apply aggregate limits to the policy limits.
11. Typically, insurers will also require an application and/or questionnaire. Documentation required may vary widely among insurers.
12. Cleanup Cap policies are also known as: Cost Cap, Remediation Stop Loss, or Cost Containment.
13. Combined PLL and CCC policies are also known as Contaminated Property Development Policy, Brownfields Restoration and Development Policy or Commercial Property and
Redevelopment Pollution Policy.
Page 2 of 4
-------
Environmental Insurance Policy Coverage and Terms
Policy Name/Type1
Sample Periods
Sample
Premiums8'9
Sample Policy
Limits10
Sample Deductibles/SIRs8
Typical Documentation Requested11
Most Common Insurance Utilized to Cover Property Contamination Liabilities and Costs
Pollution Legal
Liability (PLL)
1 to 10 years
$5,000 and
greater
$1,000,000 to
$150,000,000
Note: Typically,
insurers will not insure
liabilities valued at
less than $1,000,000
$5,000 and up per incident
-Phase I Environmental Site Assessment (Phase I ESA)
-Other existing environmental studies
-Audited Financial statements
Cleanup Cost Cap
(CCC)12
Negotiable with 10-year maximum.
Typically, coverage ends at completion
of project and following the receipt of No
Further Action (NFA) letter (or similar
documentation) from a governmental
authority.
About 8% of the
estimated cleanup
cost
$1,000,000 to
$150,000,000
Note: Typically,
insurers will not insure
cleanups valued at
less than $1,000,000
SIR is usually calculated as the
sum of the approved cleanup
estimate plus between 10% and
30% of the cleanup estimate
Note: Some insurers only offer co-
payment arrangements once the
cleanup costs go beyond the SIR.
-Cleanup plan (approved by the regulating agency or the
insurance company)
-Contractor cost estimate
-Audited Financial statements
Combined PLL and
CCC Policies13
Negotiable
See PLL and CCC coverage.
$50,000 (average)
$1,000,000 and up to
$100,000,000
PLL: $10,000 and up
CCC: Sum of cleanup estimate
and 10% of the cleanup estimate
-Phase I ESA
-Other existing environmental studies
-Cleanup plan (approved by the regulating agency or the
insurance company)
-Contractor cost estimate
-Remedial Action Plan (RAP)
-Schedule
Other Available Insurance Utilized to Cover Property Contamination Liabilities and Costs
Property Transfer/
Property Owner's
Policy
3 to 10 years
Negotiable
$1,000,000 to
$150,000,000
$5,000 and up per incident
Not Available
Contractor's
Pollution Liability14'15
1 to 10 years
Note: Should be renewed for each year
work is performed at the site.
$5,000
$1,000,000 to
$100,000,000
$2,500 and up
-Project Plan/Specifications
-Audited Financial Statements
-Prior Project History
Errors and
Omissions
Insurance15
1 to 10 years
Note: Should be renewed each year
work is performed. For claims-made
coverage, renewal should be for an
agreed upon number of years after
performance of work.
$5,000
$1,000,000 to
$100,000,000
$2,500 and up
-Copies of standard Client/Subcontractor Agreement
-Project Plan/Specifications
-Audited Financial statements
-Prior Project History
-Resumes of key personnel
-Corporate capabilities statement
Page 3 of 4
-------
Environmental Insurance Policy Coverage and Terms
Policy Name/Type1
Sample Periods
Sample
Premiums8'9
Sample Policy
Limits10
Sample Deductibles/SIRs8
Typical Documentation Requested11
Other Insurance Available to Cover Property Contamination Liabilities and Costs
Finite Risk15
Negotiable
Typically, 30 years
The underwriting of the process typically takes the present value of the
anticipated cash disbursements over the course of the property's remediation
Thus, the underwriter collects the entire present value cost of the remediation
at the project's inception and assumes the credit and timing risk of the policy.
Deferred payment options may be offered to allow the remediation cost to be
paid in over the course of the project.
Not Available
Lender Liability16'17
Negotiable
Negotiable
$1,000,000 and up to
$100,000,000
$5,000 and up
Frequently, these policies are written based on the
financial strength of the borrower, rather than on the
environmental condition of the property. However, in
some cases insurers may require:
-Phase 1 ESA
-Phase 2 ESA
-Commercial Real Estate Loan Documents, including
sections pertaining to the Definitions and Conditions of
Default, Environmental Matters and a copy of any
applicable environmental indemnity.
-Audited Financial Statements
Institutional Controls
and Post
Remediation Care
Insurance18
Negotiable
Negotiable
Negotiable
Negotiable
Not available
NOTES (continued):
14. Errors and Omissions and Contractors Pollution Liability policies are often offered together as a package. These package policies may be called Construction Consulting,
Engineering, and Design Professional Liability Policy; Engineers and Consultants Professional Liability Policy; or Contractor Operations and Professional Services Package.
15. Finite Risk is not traditional insurance coverage. Rather it is a type of self-insurance program fully funded by the insured and administered by the insurance company. It is sometimes
recommended by insurance companies when dealing with a long-term costly cleanup. Finite Risk policies are used to extend the term of a typical policy beyond 10 years to even 20 or 30
years. Additionally, Finite Risk policies may include a CCC policy or PLL policy as a component.
16. Lender Liability policies are also known as Secured Creditor, Creditor Reimbursement, and Lender Collateral policies.
17. Lender policy terms and conditions for this type of policy vary widely among insurers; therefore, please carefully review insurer information for more specific data on this policy.
18. This a newer coverage that is being offered; therefore, there is little information available on it to date.
DISCLAIMER: This document was developed by a U.S. Environmental Protection Agency (EPA) contractor through review and compilation of a number
of environmental insurance sources. This document does not reflect the views and policies of the EPA; no official endorsement should be inferred.
Page 4 of 4
-------
^eo sr4r
<
O
V o
PRO"fe
I)
z
lli
o
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
-------
Though interested in converting the mattress facility into a foil-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 The South Bayfront industrial site
n 1 ~ . . in Emeryville, CA.
a paint factory, pesticide production facility, and drum reconditioning factory m the
1920s, became the planned site of a 350-unit residential, 250-rooni 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 of2003. 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.
Brownfields Success Story
Environmental Insurance
Solid Waste
and Emergency
Response (5105T)
EPA500-F-03-232
July 2003
www. epa. gov/brownfields/
-------
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
Insurance carriers such as AIG Environmental, XL Environmental, Inc., mattress, factory site in SomervMe.
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 rapidlyand 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 EPAs
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:
httD://www.epa.aov/brownfields/
Brownfields Success Story
Environmental Insurance
Solid Waste
and Emergency
Response (5105T)
EPA 500-F-03-232
July 2003
www epa. gov/brownfieldsZ
-------
Environmental Insurance and Risk Management Tools
Glossary of Terms
The following terms are typically used by the environmental insurance industry, transactional
specialists, and other parties involved in using environmental insurance or risk management tools.
While many ofthe terms may have more than one definition (e.g., Amendment and Third Party), only
the definition specific to its application to environmental insurance and risk management tools is
provided. Italicized words represent words used in the definition of a term that are also defined
elsewhere in this glossary.
- A-
Accident - An unexpected event that happens by chance and is not expected in the normal
course of events.
Act of God - A sudden and violent act of nature that could not have been foreseen or prevented
(e.g., flood, earthquake).
Additional Insured - An individual or entity that is not automatically included as an insured
under the policy of another, but for whom the named insured's policy provides a certain degree of
protection. The named insured's impetus for providing additional insured status to others may be
a desire to protect the other party because of a close relationship with that party (e.g.,
redevelopment authority serving as an intermediary during the cleanup and redevelopment
process) or to comply with a contractual agreement requiring the named insured to do so (e.g.,
customers or owners of property leased by the named insured). In most cases, additional
insureds are protected only when a claim filed against them also is filed against the named
insured.
Admitted Policy - An insurance policy that is written and issued in a specific locale, by an
insurer authorized to transact business under the confines of the local insurance laws.
Aggregate Limits - Indicates the amount of coverage that the insured has under the insurance
policy for a specific period of time, usually the contract period, no matter how many separate
accidents may occur. Once the aggregate limit has been reached, no more damages can be
allocated to that policy. For example, if you have a property covered under a policy with a SI
million limit per occurrence and a $2 million aggregate limit, you will have coverage for up to
$1 million per occurrence or incident, and coverage for up to $2 million in total damages under
the policy. Thus, if you have three claims in a year for $750,000 each, your insurance will cover
the first $2 million dollars, at which point the $2 million aggregate will have been reached, and
the remaining $250,000 will not be covered by the policy.
Amendment - A formal document revising the provisions of an insurance policy.
1
-------
As-Is - A risk allocation tool used in property transactions that involves an express statement
that seller makes no representations or warranties about the condition of the property. It is
intended to preclude buyer from recovering damages from seller for known or unknown
conditions at time of sale. Also, it is intended to assist enforceability. Specific environmental
conditions, including latent defects, should be disclosed to buyer and indemnification should
expressly state that the property transfer includes all risks associated with listed federal and state
environmental laws.
Assumed Liability - Liability that would not rest upon a person except that he has accepted
responsibility by contract, expressed, or implied (a.k.a., a contractual liability).
Assumption, Retention, and Releases Provisions - A risk allocation tool used in property
transactions wherein buyer accepts or seller retains, responsibility for known or unknown
environmental conditions and releases other party from liability for current and future claims
arising from the specified conditions.
Attachment Point - Monetary level of expenditures that must be exhausted before payment
from an insurance policy begins.
-B-
Bodily Injury - Bodily injury, sickness, disease, mental anguish injury, shock, or building-
related illness sustained by any person, including death resulting therefrom, caused by
pollution conditions.
Bodily Injury Liability Insurance - This coverage protects an insured against legal liability for
injury to another person arising from pollution conditions or an accident.
Broker - An independent person or firm who acts on behalf of the insured in placing business
with the insurance company. Typically, a broker's compensation is on a commission basis.
Brownfields - With certain legal exclusions and additions, the term "brownfield site" means real
property, the expansion, redevelopment, or reuse of which may be complicated by the presence
or potential presence of a hazardous substance, pollutant, or contaminant.
Brownfields Act of 2002 - The Small Business Liability Relief and Brownfields Revitalization
Act (H.R. 2869) (Brownfields Act of 2002) was signed by the President on January 11, 2002. The
intent of the act is "to provide certain relief for small businesses from liability under the
Comprehension Environmental Response, Compensation, and Liability Act (CERCLA) of 1980,
and to amend such Act to promote the cleanup and reuse of brownfields, to provide financial
assistance for brownfields revitalization, to enhance State response programs, and for other
purposes." Under the law, the purchase of environmental insurance is an eligible activity for
grantees.
Business Interruption - Business expenses and loss of income resulting from fire or other
insured peril.
2
-------
-c-
Cancellation - Termination of an insurance coverage during the policy period by the voluntary
act of the insurance company or insured, effected in accordance with provisions in the contract or
by mutual agreement.
Captive Insurer - A bona fide insurance or reinsurance company that is established and owned
by a parent company or group of companies (who are non-insurance companies) to insure their
own risks. Captive insurance is a form of self-insurance.
Carrier - The insurance company or the one who agrees to pay the losses. The carrier may be
organized as a stock or mutual company, a reciprocal exchange, an association of underwriters,
or a state fund.
Claim (on an insurer) - A request for payment for a loss that may come under the terms of an
insurance contract. There are two types of claims: first party and third party.
Claim (on a policyholder) - The assertion of a legal right alleging liability or responsibility on
the part of the insured, arising out of pollution conditions (e.g., lawsuits, regulatory actions).
Claims Made Based Coverage - The trigger of coverage is a claim being made and reported
during the policy period; therefore, insurance coverage is applicable only if the insured files a
claim with the insurer during the period expressed in the policy.
Clause - A term used to identify a particular part of a policy or endorsement.
Comprehensive General Liability (CGL) Insurance - This policy provides broad protection
against situations in which a business must defend itself against lawsuits or pay damages for
bodily injury or property damage from third party claims. CGL contracts are enforced and
interpreted based on state law. CGL insurance has become more restrictive over time; therefore,
it rarely covers environmental liabilities.
Conditions - Provisions of an insurance policy that state the rights and duties of the insured and
insurer.
Covenants - A risk allocation tool used in property transactions which may involve a promise or
agreement by seller or buyer to do, or refrain from doing, an act. For example, a covenant may
allocate responsibility for tasks, particularly elements of the cleanup, transferring permits,
continued operations of assets, and compliance with environmental laws.
Coverage - The scope of the protection provided under a contract of an insurance policy.
-D-
Declarations - A term used in insurance for the portion of the contract (a.k.a., Dec Sheet or Dec
Page) that contains information such as the name and address of the insured, the property
insured, its location and description, the policy period, the amount of insurance coverage,
applicable premiums, and supplemental representations by the insured.
3
-------
Deductible - A threshold on a policy basis that the insured must pay for damages (i.e., insured
loss) before an insurer will provide coverage. In other words, whether the policy covers one year
or 10 years, the deductible applies to the entire policy period; therefore, a deductible needs only
to be met once during that policy period, not on an annual basis (unless otherwise stipulated in
the insurance policy).
Defense Clause - A provision in a casualty insurance policy that provides additional coverage
for defense costs.
Defense Costs - Legal costs, charges, and expenses incurred in the investigation, defense, or the
adjustment of a claim.
Defined Excluded Liabilities - A risk allocation tool used in property transactions that
identifies and allocates between seller and buyer particular risks associated with the business and
some or all of the assets and liabilities and specifies whether they are included in or excluded
from the risks allocated in the transaction.
De Minimis - This is a Latin phrase which means "the law does not care about very small
matters." In other words, the issue of concern is unlikely to have substantial impact, is
immaterial, or is insignificant.
Due Diligence - Due Diligence is a term of art in the business community that refers to the
combination of procedures and investigation undertaken before a business transaction (e.g.,
acquisition of real property or granting a loan in order to assess potential liabilities and
problems). In particular, information is gathered to gauge the level of environmental risks
associated with the proposed transaction so that parties may mitigate or allocate such risks, as
well as qualify for any special liability relief available (e.g., innocent landowner defense, secured
creditor protection). In order to qualify for any special liability relief, a party must often meet a
test called "all appropriate inquiry," which is a standard that is normally consistent with good
commercial practices that a person exercises for his own protection.
-E-
Effective Date - The date on which an insurance policy goes into effect.
Endorsement - An addition, not a part of the original contract, which cites certain terms and
which becomes a legal part of that insurance contract. Typically, it is an amendment to the policy
used to add or delete coverage. It is also referred to as a "rider."
Entity - Property owners, property purchasers, developers, investors, municipalities, and other
groups that may have a financial stake in a property and/or insurance policy.
Environmental Impairment Liability (EIL) Policies - Insurance policies introduced in the
early 1990s designed to cover environmental liabilities. Due to high premiums and limited
coverage, EIL policies were soon discontinued.
Excess Limits Coverage - Provides coverage against losses in excess of a specified dollar limit
or attachment point.
Expiration Date - The date (often shown on the Dec Page of the policy) when coverage will
stop. It may be a specific date or a statement that coverage is continuous until cancelled.
4
-------
Exposure - Degree of hazard threatening a risk because of physical conditions (external or
internal). In the insurance field this term may have several meanings: 1) possibility of loss; 2)
possibility of a loss to a risk caused by its surroundings; or 3) extent of risk (e.g., one car insured
for one year).
-F-
First Party Claim - A claim made by the policyholder for reimbursement by his or her
insurance company.
-H-
Hazard - A specific situation that increases the probability of the occurrence of loss arising
from a peril, or that may influence the extent of the loss. For example, accident, sickness, fire,
flood, liability, burglary, and explosion are perils. Slippery floors, unsanitary conditions, shingled
roofs, congested traffic, unguarded premises, and uninspected boilers are also hazards.
-I-
Indemnification - A risk allocation tool used in property transactions which typically involves
an agreement that provides for one party to bear the costs, either directly or by reimbursement,
for damages or losses incurred by a second party. Typical costs may include costs of
investigations and cleanup actions, third party personal injury claims, etc.
Indemnify - To restore the victim of a loss, in whole or in part, by payment, repair, or
replacement.
Indemnity - In general, means the reimbursement for a loss, but also can be used to mean a
benefit provided by a policy.
Indirect Loss (or Damage) - Loss resulting from a peril but not caused directly and immediately
thereby. For example, loss of property due to fire is a direct loss, while the loss of rental income
as the result of the fire would be an indirect loss.
Insurability - Acceptability of an applicant for insurance by an insurance company.
Insurance Archeology - The reconstruction of an organization's insurance policy history (e.g.,
CGL policies) for the purpose of filing claims based on those policies.
Insurance Policy - Legal document issued to the insured setting out the terms of the contract of
insurance in order to transfer the risks from insured to insurer.
Insured - The person or persons [a.k.a., the policyholder(s)] whose risk of financial loss from a
peril covered by the insurance policy is protected by an insurance policy.
Insurer - The insurance company offering insurance coverage.
-K-
Known Conditions - Conditions existing (e.g., on a property) prior to the inception of an
insurance policy.
5
-------
-L-
Legal Defense Costs - See Defense Costs
Liability - Broadly, this is any legally enforceable obligation to another party (e.g., legal
responsibility, duty, or obligation). This liability may arise from contracts either expressed or
implied or in consequence of torts committed.
Liability Limits - The sum or sums beyond which an insurance company does not protect the
insured on a particular policy (i.e., the maximum amount a policy will pay).
Litigation - The process of a lawsuit.
Loss - An occurrence that is the basis for submission and/or payment of a claim. Losses can be
covered, limited, or excluded from coverage, depending on the terms of the policy.
-M-
Manuscript - To individually tailor policies to suit each insured. Unlike "boilerplate" policies
for vehicle or workers' compensation coverage, environmental insurance policies are generally
always manuscripted.
Moral hazard - 1.) Relates to an increased probability of a loss through moral lapse of the
owner (e.g., an insured previously convicted of arson, "Burn down the house to collect the
insurance."). 2.) Relates to an increased probability of a loss arising from an apathetic insured or
an insured who is indifferent to loss because of the existence of insurance to cover the loss, (e.g.,
"Let it burn because it is insured", failure to repair faulty wiring which is considered more
expensive than insurance premiums to cover the risk).
-N-
Named Insured - The person (or persons) in whose names the insurance policy is issued.
Negligence - Failure to use the degree of care which an ordinary person of reasonable prudence
would use under the given circumstances.
Non-Admitted Policy - An insurance policy that does not require the insurer to transact
business under the confines of local insurance laws, allowing the insurer greater flexibility in the
design of the policy and the coverage.
-O-
Occurrence - An event that results in an insured loss.
Occurrence Based Coverage - The trigger of insurance coverage is the occurrence, not the
claim,', therefore, the claim can be made anytime during or after the policy period.
Owned Property - Property that is owned or leased by the insured.
6
-------
-p-
Personal Property - Any property of an insured other than real property (i.e., land and any
structures or minerals associated with the land).
Policy - See Insurance Policy.
Policyholder - See Insured.
Policy Period (or Term) - The period during which the policy contract provides protection (e.g.,
six months or one or three years).
Pooled Insurance - An insurance pool refers to a group of organizations that insures certain
risks, sharing premiums, losses, and expenses among themselves. Generally, "pooling" is used
when a single entity does not have significant enough liabilities or resources to attain insurance
and/or is not large enough to self-insure.
Portfolio - Refers to insurance coverages for a combined set of sites, whether or not there is
more than one insured organization.
Post-Signing and Pre-Closing Conditions - A risk allocation tool used in property transactions
which involves the requirement that some act be performed by a party to an agreement before
closing the transaction. It establishes certain conditions that must be met, typically by the seller,
prior to closing, and it may allow party to "back out" of deal or adjust purchase price or other
terms, if conditions not met
Premises - The particular location of property or a portion thereof as designated in a policy.
Premium - The amount of money charged a policyholder for an insurance policy.
Product Liability Insurance - Provides protection against financial loss arising out of the legal
liability incurred by a manufacturer, merchant, or distributor because of injury or damage
resulting from the use of a covered product.
Property Damage - This can have a number of meanings: 1) physical injury to or destruction of
tangible property, including the personal property of third parties; 2) loss of use of such property
that has not been physically injured or destroyed; or 3) diminished third party property value
provided that such physical injury or destruction and/or loss of use are caused by pollution
conditions.
Property Insurance - Property insurance indemnifies an insured whose property is stolen,
damaged, or destroyed by a covered peril.
Protection - Term used interchangeably with the word "coverage" to denote the insurance
provided under the terms of a policy.
-Q-
Quote - An estimate of the cost of insurance supplied by the insurance company.
-R-
Rate - The per unit cost of insurance. See also Premium.
7
-------
Reinsurance - A procedure by which an insurance company insures its risks (e.g., those
liabilities associated with its policyholders) with another insurance company. It is an
arrangement by which one insurer transfers all or a portion of its risk under a policy or group of
policies to another insurer or reinsurers. Thus, reinsurance is insurance purchased by an
insurance company from another insurer to reduce risk for the original insurer.
Remediation Expense - Expenses incurred for or in connection with the investigation,
monitoring, removal, disposal, treatment, or neutralization of pollution conditions, including
replacement costs. Often, to be covered under insurance, such activities would need to be
required by: 1) federal, state, local or provincial laws, regulations or statutes, or any subsequent
amendments thereof, enacted to address pollution conditions', 2) a legally executed state
voluntary program governing the cleanup of pollution conditions', or 3) determination or
settlement of a lawsuit.
Replacement Cost - May include: 1) the cost of replacing property without deduction for
depreciation; and/or 2) costs necessarily incurred by the insured to repair or replace real or
personal property damaged during the course of remediation expense in order to restore the
property to the condition it was in prior to remediation expense. Within the insurance field, it is
often required that these costs shall not exceed the net present value of such property prior to the
investigation, removal, disposal, treatment, or neutralization of pollution conditions.
Representations and Warranties - A risk allocation tool used in property transactions which
involve statements of fact (representations) and promises (warranties) that a seller makes to a
buyer. Typically provided by seller to disclose environmental risks associated with acquisition of
business or some or all of its assets.
Rider - See Endorsement.
Risk - A chance of loss with respect to person, liability, or the property of the insured.
Risk Management - Management of the pure risks to which a company might be subject.
Typically, it involves analyzing all exposures to the possibility of loss and determining how to
handle these exposures through such practices as avoiding the risk, retaining the risk, reducing
the risk, or transferring the risk, often by insurance.
-S-
Self-Insurance - A form of risk financing through which an entity assumes all or a part of its
own losses. Self insurers may purchase insurance to cover excess losses.
Self-Insured Retention (SIR) - Threshold(s) on an annual basis that must be met before
coverage will be applied.
Surrogation - The right of an insurance company to step into the role of the party whom they
compensate and sue any party whom the compensated party could have sued.
-T-
Term - A period of time for which a policy is issued.
8
-------
Third Party - A party that is not a party to the insurance policy. Parties to the policy are
typically the insurer and the insured. Third parties may include private parties and government
entities enforcing regulations. A claim (e.g., a lawsuit) by an entity against a policyholder of
another company and the payment, if any, will be made by the policyholder's company or
insurance policy.
Third Party Insurance - Protection of the insured against liability for damage to or destruction of the
bodies or property of others.
Tort - Any wrongful act, damage, or injury done willfully, negligently, or in circumstances involving
strict liability, but not involving breach of contract, for which a civil lawsuit can be brought.
Toxic Tort Claims - Include a wide variety of claims of harm due to long-term exposure to toxic
chemicals and contamination. Includes claims for bodily injury, property damage, property stigma,
medical monitoring, and product liability.
-U-
Umbrella Liability - A form of insurance protection against losses in excess of amounts covered by
other liability insurance policies. Also may protect the insured in many situations not covered by the
usual liability policies.
Underwriter - A person trained in evaluating risks and determining the rates and coverages that will be
used for them.
Underwriting - The process of selecting risks for insurance and determining in what amounts and on
what terms the insurance company accepts the risk.
- W-
Workers' Compensation - A system (established under state laws) under which employers provide
insurance for benefit payments to employees for their work-related injury, death, and disease regardless
of fault.
9
-------
SOURCES
Definitions. W.E. Davis Insurance Company, http://www.wedavis.com/definitions.htm_ Last
accessed 25 April 2003.
Glossary. Insure.com. http://info.insure.com/glossary.cfm Last accessed 28 April 2003.
Glossary. Westland Insurance Group, Ltd.
http://www.westland-insurance.com/insurancel01 .html Last Accessed 28 April 2003.
Glossary of Insurance Terms. Insurance Information Institute.
http://www.iii.Org/media/glossary/alfa.A/ Last accessed 28 April 2003.
Glossary of Insurance Terms. Royal & SunAlliance Insurance Company of Canada.
http://www.royalsunalliance.ca/royalsun/sections/tools_info/terms/terms. asp# Last
accessed 25 April 2003.
Glossary of Terms. NILS INSource on the Web.
http://insource.nils.com/gloss/GlossarySearchTerms.asp Last accessed 22 December
2003.
Glossary of Insurance Terms and Concepts. The National Underwriter Company.
http://www.imms.com/glossary/Agloss.htm Last accessed 22 December 2003.
Leach, Alicemarv. MBA Issues Paper: Environmental Issues. August 2002. Mortgage Bankers
Association of America, http://www.mbaa.org/library/isp/2002_4/03_03.html Last
accessed 25 April 2003
Meyer, Peter B. & Yount, Kristen R. Environmental Insurance Products Available for
Brownfields Redevelopment. 1999. United States Environmental Protection Agency.
http://www.epa.gov/brownfields/pdf/insrep99.pdf Last accessed 28 April 2003.
Meyer, Peter B. & Yount, Kristen R. Environmental Insurance and Public Sector Brownfields
Programs: Factors Affecting Pursuit of Insurance as a Redevelopment Tool. United States
Environmental Protection Agency, http://www.epa.gov/brownfields/pdf/meyeryou.pdf
Last accessed 28 April 2003.
Pollution and Remediation Legal Liability Policy. Greenwich Insurance Company.
http://www.ecsinc.com/forms/pdf/GIC-parl5cp.pdf Last accessed 22 December 2003.
Public Law 107-118 (H.R. 2869) "Small Business Liability Relief and Brownfields
Revitalization Act" signed into law January 11, 2002
http://www.epa. gov.brownfields/gdc.htm
Rupp's Insurance Glossary. NILS, http://insurance.cch.com/rupps/index.htm Last accessed 22
December 2003.
10
-------
Waeger, Ann. Current Insurance Policies for Insuring Against Environmental Risks. 2002.
Fifteenth Annual ALI-ABA Advanced Course of Study: The Impact Environmental Law
on Real Estate and Business Transactions Brownfields and Beyond. October, 2002,
Boston, MA.
DISCLAIMER: This document was developed by a U.S. Environmental Protection Agency (EPA) contractor
through review and compilation of a number of sources. This document does not reflect the views and policies of
the EPA, no official endorsement should be inferred.
11
------- |