Owners of contaminated properties, particularly corporate entities who have inventories of contaminated sites from historical operations, are torn between the attractive option of selling the sites to rid themselves and their balance sheets of the non-performing assets and the less attractive, but more cautious option of holding onto the sites in order to control and manage any trailing third party liabilities. A corporate real estate executive's worst nightmare is selling a property to a developer who agrees to assume liability for all cleanup and third party claims, only to buy the property back when it becomes clear that the developer does not have the financial resources to complete the cleanup, respond to the third party claims, or both. 

     The environmental insurance industry has responded with a number of insurance products designed to help facilitate the transfer of impacted properties by mitigating, capping or transferring the risks associated with a contaminated site. Insurance is becoming a necessary component of a brownfield transaction, not only as a risk allocation technique, but also as a means of bolstering the financial position of brownfield developers. 

     Most brownfield transactions involve some allocation of liability between the purchaser and the seller for known contamination, unknown contamination and third party claims. This allocation is often spelled out in an indemnity agreement. There are two obvious weaknesses to an indemnity agreement: first, it is based on the financial resources of the indemnifying party; and second, it's dependent upon the indemnifying party honoring the agreement. Environmental insurance can be used to fund an indemnity agreement, often with much stronger credit than what a brownfield developer alone can offer. Additionally, the presence of environmental insurance to respond to unexpected costs, third party claims or regulatory re-openers can help avoid future disputes that could result in expensive litigation between the parties to an indemnity provision.

Insurance Policies

     There are three types of insurance policies that can play a role in a brownfield transaction:

• First Party Cleanup and third party legal liability policies
• Remediation stop loss/cleanup cost cap policies
• Secured creditor policies

(1) First Party Cleanup and Third Party Liability Policies.

Typical coverages included in these policies are:

- Cleanup of the insured property for both a voluntary cleanup and/or a regulatory ordered cleanup for unknown, and in some cases, known contamination (pre-existing). It also covers cleanup for contamination that occurs after the policy goes into effect (new). 

- Cleanup of third party properties for contamination emanating from the insured property.

- Bodily Injury or property damage to third parties.

- Defense.
Some more specialized coverages that can be found in some policies and added to others include:

- Loss of income or loss of rents resulting from a pollution condition.

- Loss of value to the insured property resulting from a pollution condition.

(2) Remediation Stop-loss, also referred to as Cost Cap. 

     This coverage attaches over the estimated cost to cleanup the property as specified in the remedial or corrective action plan. It covers cost overruns for such things as contamination that is greater than expected or regulatory change orders that occur during the policy term. The policy is written to provide coverage over a self-insured retention that is generally equal to the estimated cost to cleanup plus a "buffer" of 10% - 20%. 

(3) Secured Creditor Policies.

     These policies provide coverage only to a lender. They respond in the event of two circumstances: the borrower defaults on the loan, and the property has contamination on it. Once these two triggers are tripped, the policy will pay to the lender the lesser of the cost to clean up the property or the outstanding loan balance. There are variations on this coverage available in the market. One company's policy responds to simply pay off the outstanding loan balance. Another company's policy says that if the estimated cost to cleanup is greater than a specified percentage of the outstanding loan balance ( 50%, for example), the lender has the option of choosing to have the property cleaned up or have the loan paid off. This is a relatively new coverage that is still evolving as it works its way into the marketplace. It does give a lender a level of comfort that they won't get stuck with a non-performing loan and a contaminated property. Often that comfort level is enough to make a loan on a property they might otherwise decline.

Case Example (hypothetical)

The following is a typical example of a transaction and the insurance package implemented to accommodate the deal. 

     The property is located within a quarter mile of a public transit station in an urban area targeted for high density, mixed use development. It was formerly used for the storage and mixing of pesticides. The environmental investigations done to date have revealed several areas of impacted soil. This has been reported to the appropriate State agency, however, the State has determined that the site does not pose an immediate threat to human health or the environment, and has not required a cleanup. The developer purchasing the site however, will have to clean it up in order to include it as part of a much larger development. The estimated cost to cleanup the site is $800,000. The seller is willing to account for that cost in the sale price, but does not want to remain on the hook if it costs more, or if third parties file claims as a result of the contamination. A remediation stop-loss policy is written, covering both the seller and the purchaser for cost overruns from the covered remedial action plan. Thus, the seller is relieved of the obligation to escrow additional funds until the cleanup is completed and the buyer is not exposed to unexpected remediation costs that could make the project economically unfeasible. A pollution legal liability policy is also purchased, covering both the seller and the buyer for claims in the event: previously undetected contamination is discovered that requires remediation; third parties on or off the site allege bodily injury or property damage losses resulting from the known or unknown contamination at the site. Once the remediation is completed, the stop loss policy expires, and the pollution legal liability policy is endorsed to provide coverage for any regulatory re-openers relating to the remediation. This policy is also structured to provide coverage for any subsequent sub-developers, purchasers or tenants for any liability arising out of the pre-existing contamination. Additionally, a Secured Creditor policy is written to address the lender's concerns about getting "stuck" with a contaminated property in the event of a default. This allowed the developer to borrow from a traditional lender instead of having to borrow from a specialty lender at a higher interest rate.

     Were it not for its redevelopment potential, this property would likely continue to be vacant and contaminated. The owner had no incentive to clean it up or to sell it. Environmental insurance was necessary to satisfy the seller's need for finality and the buyer's need to cap their exposure to financial risks associated with the contamination. Additionally, the policy was structured to provide an exit strategy for the developer in that they can assign the policy to subsequent purchasers of the site.

     From large industrial sites such as Atlantic Steel in Atlanta to former corner gas station sites, insurance is used every day to facilitate the transfer and redevelopment of impacted properties. 

Ms. Moriarty is a Managing Director of the Atlanta office of Environmental Warranty, a national broker specializing in environmental insurance coverages. She has been involved in the marketing and underwriting of environmental insurance products since the 1980's when these products first became available. With over twenty years commercial insurance experience, Ms. Moriarty has worked exclusively with environmental insurance since 1988. She specializes in commercial real estate transactions, merger & acquisition transactions, lender programs, brownfields redevelopment and complex environmental insurance programs. She is a certified instructor for the State of Georgia in environmental insurance for agent's licensing continuing education credits. She also lectures at Georgia State University to undergraduate and graduate students and to international visiting fellows on environmental insurance issues and products, and is a frequent guest speaker at environmental conferences and forums.