Environmental Insurance Products Available for Brownfields Redevelopment 1999

Northern Kentucky University
Highland Heights, KY
November 1999

Preface and Acknowledgments

Reclamation of the large number of potentially contaminated sites in the United States has long been a concern of the Environmental Protection Agency (EPA). The Agency has gone well beyond regulatory functions to engage in pro-active efforts to encourage site mitigation and reuse efforts. The Outreach and Special Projects Staff (OSPS) of EPA's Office of Solid Waste and Emergency Response has played a leading role in promoting the redevelopment of what have come to be known as "brownfield" sites. The Staff has provided critical information to brownfields stakeholders -- property owners, redevelopers, potentially responsible parties, community organizations, financiers, and others. Central to their activities have been efforts to assist with risk minimization and reduction of the uncertainties associated with brownfields.

As part of the support to stakeholders, EPA published Potential Insurance Products for Brownfields Cleanup and Redevelopment in June 1996. Compared to the products available in 1999, the environmental insurance industry was just beginning to develop at that time, but OSPS recognized the importance of this emerging tool for risk management. This report is an extension of that earlier work.

In the last few years, the insurance industry has evolved rapidly and continues to do so today. A snapshot taken at one point in time will quickly become obsolete as new products and services develop, new insurance providers and brokers enter the market, and the mix of purchasers changes as governmental and quasi-public agencies become more active users of the insurance coverages. The findings reported here are a reflection of the status of the market as of 1999. Comments are offered on the strengths and weaknesses of the market, but these conclusions cannot predict the nature and directions of the changes that are unfolding. Future reviews of the state of the industry will be needed to update the results presented here.

This report is based on responses to detailed questionnaires and interview questions asked of representatives of five insurance carriers and four brokers. Their contributions are greatly appreciated; without their full cooperation, time, and patience during the various stages involved in preparing this report, the document would not have been possible. The companies whose representatives provided information include the following, listed in alphabetical order:

Insurance Carriers/Representatives

AIG Environmental

ECS, Inc.

Kemper Environmental

United Capitol Insurance Company

Zurich-American Insurance Company

Insurance Brokers

Averbeck Environmental Insurance Brokers

Eric Companies

Marsh Risk Consulting, Environmental Consulting Practice

Willis Environmental Practice

Appreciation is also extended to Professor Peter B. Meyer from the University of Louisville who offered his expertise on environmental insurance for brownfields and contributed insightful recommendations throughout the preparation of this report. Finally, a major debt of gratitude goes to Susan Neuman, President of the Environmental Insurance Agency, who was not a respondent, but who gave many hours of her time to provide useful comments and suggestions on the second questionnaire and first draft of this report.

November, 1999

Kristen R. Yount
Northern Kentucky University
3205 Huntersridge
Taylor Mill, KY 41015
Phone: 859+491-9226 or 859+491-9298
Fax: 859+491-9252
E-mail: yountk@nku.edu

List of Tables

Cautionary Statement

1.0 Executive Summary

2.0 Introduction and Methodology

3.0 The Risks of Brownfields Redevelopment
and Risk Management Options 9

4.0 Available Coverages, Policy Limits, and Costs

4.1 Cleanup Cost Cap Policies
4.2 Pollution Liability Policies.
4.3 Secured Creditor Polices.
4.4 Other Coverages.

5.0 Discussion

5.1 Increased Demand for Environmental Insurance for Brownfields
5.2 Recent Changes in Environmental Insurance Products
5.3 The Limitations of Environmental Insurance
5.31 Small-Scale Projects
5.32 Environmental Insurance and Public Entities
5.4 Variation Among Policies and the Need for Expertise

References

Table 1 Cleanup Cost Cap Policy Coverages

Table 2 Carrier Meanings of 'Remediation Costs' in Cleanup Cost Cap Policies

Table 3 Cleanup Cost Cap Policy Limits

Table 4 Insurer Site Assessment Requirements for Providing
Non-Binding Cleanup Cost Cap Policy Quotation

Table 5 Percent of Cases for which Carriers Require Repeated or Augmented Assessments for Cleanup Cost Cap Policies

Table 6 Percent of Cases in which Carriers Require Government Approval of Remediation Plan for Cleanup Cost Cap Policies

Table 7 Cleanup Cost Cap Policy Premiums and Self-Insured Retentions

as a Percentage of Estimated Cleanup Costs

Table 8 Pollution Liability Policy Coverages

Table 9 Carrier Meanings of 'Remediation Costs' in Pollution Liability Policies

Table 10 Pollution Liability Policy Dollar Limits for a Five-Year Policy

Table 11 Pollution Liability Policy Costs for a Five-Year Policy

Table 12 Minimum Site Assessment Requirements for Pollution Liability Policies

Table 13 Percent of Cases in which Carriers Require Repeated or Augmented

Assessments for Pollution Liability Policies

Table 14 Number of Pollution Liability Policies Sold in the Last Three Years

Table 15 Pollution Liability Policy Period Limits

Table 16 Extended Reporting Periods Offered by Carriers

for Pollution Liability Policies

Table 17 Retro-Dating Pollution Liability Policies

Table 18 Percent of Pollution Liability Policies Transferrable to Successor Owners

Table 19 Secured Creditor Policy Coverages

Table 20 Secured Creditor Policy Period Limits

Table 21 Secured Creditor Policy Dollar Limits for a One-Year Policy

Table 22 Secured Creditor Policy Costs for a One-Year Policy

Table 23 Secured Creditor Portfolio Policies

Table 24 Lender Procedures for Purchase of Secured Creditor Policies

Table 25 Assessment Requirements Most Often Used for Secured Creditor Policies

Table 26 Lenders Offering Choice of Phase I or Secured Creditor Coverage

Table 27 Number of Secured Creditor Policies Sold

Table 28 Importance of Factors Accounting for Increased Brownfields

Insurance Market Activity, Rank-Ordered by Mean

Table 29 Changes in Insurance Products in the Last Three Years

Table 30 Types of Projects for which Policies May Not be Cost Effective

Table 31 Types of Clients for which Portfolio Policies Have Been Sold or Designed

Table 32 Characterizations of Insurance Industry/Public Sector Interactions

Table 33 Percent of Policies Highly Tailored to Fit Client Needs

The legal department of one insurance carrier prepared the following statement and requested that it be inserted into the report. It applies, however, to all companies who provided data for this document.

• The insurance company makes no representation or warranty as to the accuracy of the coverage evaluations contained herein and this publication should not be relied upon for the purchase of insurance.
• Many policies have amendments other than those represented here which significantly change the insurance provided.
• Each claim is evaluated pursuant to the express terms and conditions contained in the policy issued to the insured and in relation to the facts and circumstances surrounding the claim.
• The insurance company reserves the right to change the terms and conditions of its standard forms and endorsements at any time without notice to any reader of this publication.

The development of environmental insurance (EI) in the last four years has reshaped the risk and reward mix associated with redeveloping brownfield properties in the United States. These properties, defined as "abandoned, idled or underutilized industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived contamination," increasingly benefit from new coverages and terms for insurance that facilitate cleanup and reuse. The 1996 Environmental Protection Agency (EPA) publication, Potential Insurance Products for Brownfields Cleanup and Redevelopment, provided the first overview of this emerging brownfields tool.

Northern Kentucky University intended to update that report under a cooperative agreement with EPA. However, the categories of coverage, conditions under which insurance is available, and new flexibility to be found in the EI sector have changed to such an extent that direct comparison to the findings of the 1996 study was not possible. The information about the EI industry reported here reflects conditions and patterns of change reported by five insurance carriers and four brokers between late 1998 and mid 1999. Data were collected using written questionnaires and telephone interviews.

Insurance products permit economic risks associated with brownfields to be quantified. This makes investment decision-making easier for developers and other equity investors at the same time as it provides lenders with the certainty that eases investors' access to debt capital. EI offers an alternative to indemnification agreements, the traditional approach used to allocate and minimize liability exposures among parties involved with brownfield transactions. However, insurance must be understood as only one instrument in a risk management strategy that should also take into account indemnification and risk retention.

Although other coverages are available to environmental service industry contractors, three broad categories of coverage are of greatest relevance to brownfield owners and redevelopers:

• Cleanup Cost Cap (CCC) policies protect against cost overruns above the estimated cost of a planned cleanup on a brownfield site that occur because of regulatory requirement changes and/or discovery of contaminants not identified when the cleanup was designed.

• Pollution Liability (PL) policies provide protection for (a) the costs of third party claims for site remediation, property damage, and bodily injury arising from a pollution condition; (b) the costs of remediating pre-existing or newly released contamination on the insured's property and other expenses related to a pollution problem on the property; and (c) legal defense expenses.

• Secured Creditor (SC)polices provide reimbursement to financiers for loan payments in the case that a borrower defaults and compensation to the lender for collateral value loss caused by a pollution condition. Although the policies are designed to protect lenders, they are important from the viewpoint of redevelopers in that they make lenders more willing to provide capital.

While an array of protections is now available, not all policy coverages noted above may be offered to a redeveloper seeking insurance. If a coverage represents too great a risk to an insurer, the provider may decline to offer particular coverages to an applicant or may offer them at an unaffordable price.

Insurance industry representatives report an increased demand for EI in the past few years due to factors including a highly active real estate market and the refinement of EI products. While it is difficult to specify trends in the industry as a whole in the absence of an industry-wide data base, changes in EI noted by individual carriers and brokers reflect the following improvements in the products:

• Increased Policy Dollar Limits. Maximum limits have increased considerably. Five years ago, a $4 million limit on a PL policy was a rarity. Today, policies with limits of $200 million may be provided by a single carrier.
• Longer Policy Periods. The standard policy period used to be only one year. Today, a policy can be written for ten to fifteen years or even longer in some cases.
• More Flexible Coverages. Insurers are more willing to tailor their policies to individual business needs by waiving exclusions and adding coverages to address unique features of redevelopment project risks.
• Broader Coverages. The scope of policy protections has expanded. For example, CCC policies now cover contaminants that were not noted in a remediation plan. Examples of coverages in PL policies that were not available three to four years ago include onsite remediation coverage for the insured, protection for damages arising from known prior pollution conditions, property value diminution protection for the insured, and coverage for contractual liability and business interruptions due to environmental problems.
• Less Extensive Site Assessment Requirements. Insurers today tend to rely on existing site data and rarely charge a separate fee for their own engineering assessments.
• Lower Costs. There was a general consensus among respondents that the costs of brownfields insurance have fallen. Some, however, noted that the costs of CCC policies may rise in the future as insurers begin paying more claims and find they have loss ratios that mandate premium increases.

The prices of individual policies vary greatly. Many considerations influence the cost of a policy such as the extent and nature of contamination; the adequacy of the environmental site characterization performed; the intended land use; the maximum dollar limit, time limit, and deductible included in the policy; and other factors based on decisions made by the purchaser. For example, deciding to proceed with a cleanup before obtaining state regulatory agency approval generally results in higher costs for a CCC policy, since the coverage presents a greater risk to the insurer in terms of possible requirements for cleanup beyond the remediation plan.

Despite the overall improvements in the policies noted above, significant problems remain with EI as a tool for brownfields cleanup and redevelopment:

• Although the flexible, highly tailored nature of EI renders the products valuable, it also creates the need for experts to negotiate the policies. Redevelopers without extensive EI experience need to acquire the assistance of skilled underwriters, brokers, and/or lawyers to guide them in comprehending and selecting coverage suited to their specific projects.
• Available insurance products, especially CCC policies, generally are not cost-effective for small-scale projects (e.g., dry cleaners, photo developing labs, auto plating shops). While such sites constitute the majority of brownfields nationwide, the fixed costs of underwriting still limit the availability of affordable coverage for small brownfields (with cleanups under roughly $250,000).
• EI coverages do not adequately serve the needs of public entities that own brownfields and/or seek to facilitate the redevelopment of privately owned sites. The development of portfolio policies, arrangement of bulk purchases of EI, and/or creation of governmental self-insured pools that provide environmental coverages could reduce the cost of insurance and prove valuable, especially for redevelopment of smaller sites. Insurance representatives identified barriers to developing products useful to governments, highlighting (a) the lack of public officials' knowledge of insurance products; (b) the absence of interest in insurance due to governmental self-insurance and special liability protections available to governments; and (c) insurance representative frustrations stemming from dealing with multiple departments and coping with sluggish decision-making processes. While respondents indicated a preference for dealing with private parties, all indicated that it is feasible to develop insurance programs that could serve public needs. A number of options exist for public sector involvement with EI programs that need to be explored.

In summary, the environmental insurance market is maturing and the value of its products for brownfield redevelopment efforts is expanding. Brownfield developers with large projects appear to be increasingly well-served. However, small developers and the many public redevelopment programs trying to regenerate abandoned and underutilized sites still require help in identifying and acquiring the most useful and cost-effective insurance products.

2.0

Introduction and Methodology

In the last decade, a great deal of attention has turned to the redevelopment of brownfield sites, defined by the EPA as "abandoned, idled or underutilized industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived contamination." The sites not only pose a threat to public health and the environment; failure to put them to productive use deprives cities and towns of tax revenues and employment opportunities that are desperately needed.

In 1995, EPA launched its "Brownfields Economic Redevelopment Initiative," a program based on the premise that cleaning contaminated properties must go hand-in-hand with bringing economic vitality back to communities. The Initiative involves a number of measures to encourage revitalization efforts. Most notably, the Agency has implemented federal tax incentives for cleanup; built partnerships with other government bodies and the private sector to find ways to facilitate redevelopments; clarified many liability issues surrounding brownfields; and funded some 375 brownfield projects including site assessment pilots, cleanup and revolving loan pilots, and job training pilots.

These and other federal efforts have corresponded with and encouraged state and local attention on innovative ways to assist brownfields regeneration. Over forty states now have Voluntary Cleanup Programs (VCPs) involving cooperative arrangements between property owners and state environmental agencies to prepare sites for reuse. In addition, financing tools have become available in many cities and states, including grants for site assessment and cleanup, tax credits and abatements, and low-interest loan programs targeted specifically to brownfields.

As public officials have accelerated their efforts to promote reuse projects, developers increasingly have come to appreciate the opportunities for profits the properties offer because the sites can often be purchased at discounted prices and have the benefits of established infrastructures, advantageous locations, and a trainable workforce. In fact, a number of private companies have been formed for the sole purpose of brownfields investment and have generated returns on investment that have attracted venture capitalists.

These companies, perhaps more than any other entities, have come to rely on the risk management tool that is the focus of this report -- insurance geared specifically to brownfields. They have driven the development of the insurance industry in many ways, through the different types of environmental project liability risks to which they introduced the insurers as they searched for coverage and risk reduction.

In the last five years, EI policies have evolved rapidly and now better serve the needs of redevelopers. The rate of change has been extremely high. Despite these changes -- or perhaps because of the very speed of change -- many private and public actors hold beliefs concerning the products that they formed several years ago, i.e., that the policies are too expensive, require excessive site assessments, and do not provide necessary protections.

The purpose of this study is to bring brownfield stakeholders up to date on the types of insurance now available and the potential value of the coverages for redevelopment efforts. It is not an in-depth technical analysis of the insurance industry and the workings of the EI marketplace; the intention is to provide information and discuss distinctions that are critically necessary for those working to revitalize brownfields. Without a grasp of some of the details discussed here, potential insurance purchasers will fail to understand the coverage options available and are thus not likely to gain the economic benefits that they could from their insurance purchases.

The focus is on insurance products appropriate for purchase by public and private stakeholders involved in brownfield real estate transactions and redevelopments. Other insurance products designed for contractors such as lawyers, site assessors, brownfield remediation firms, and general contractors are not discussed in any depth.

The research for this report was conducted by Northern Kentucky University under a cooperative agreement with EPA. The report was intended to update a 1996 EPA publication, Potential Insurance Products for Brownfields Cleanup and Redevelopment. However, the new coverages and flexibility in the EI sector are such that direct comparison to the patterns described in the 1996 study was not possible. This non-comparability can be interpreted as a measure of the extent to which the EI market has rapidly matured.

Data collection involved several steps. In the winter of 1998, a preliminary questionnaire was distributed to representatives of eight insurance industry companies. Telephone interviews with these individuals were then conducted to obtain more detailed information about their EI products. In the spring of 1999, a second questionnaire based on the interviews was sent to representatives of nine companies and additional follow-up telephone calls were made to clarify their responses. A draft version of the tables on which this report is based was then sent to respondents to check for accuracy. Finally, a draft of the report itself was distributed to respondents for their comments on data analysis and interpretation of findings. For the most part, the tables presented and discussed are taken from the second questionnaire; analysis is supplemented with interview data.

The identities of the participating companies have been cloaked in the tables to allow respondents greater freedom to provide proprietary information. When reading the report, it is important to keep in mind that companies listed as A, B, C, D, E are the country's major brownfields insurance carriers or agents representing carriers while companies F, G, H, I are insurance brokers. The difference here is that a carrier (sometimes referred to as a provider) is an insurance company that offers insurance products in the sense that it actually "carries" or assumes the financial risk associated with the insurance coverage. A broker works with a client desiring insurance, investigates the relevant coverages available from different carriers, and negotiates with carriers to obtain the best coverage for the client.

This report is organized to guide a brownfields stakeholder interested in examining the potential value of EI, but insurance is only one element in the risk management process. Chapter 3.0 thus reviews the special risks associated with brownfield projects and discusses various ways they may be addressed. It begins with a review of the risks, moves through a brief description of legislative and regulatory responses to them, and then turns to the role of insurance relative to indemnification for potential losses. Chapter 4.0 provides detailed descriptions of the three major classes of insurance relevant to brownfield redevelopers -- Cleanup Cost Cap, Pollution Liability, and Secured Creditor coverages. Finally, Chapter 5.0 examines changes in the EI marketplace and in the products available. Selected limitations of EI are discussed relative to the insurance needs of small-scale projects and government involvement with insurance for brownfield sites. The report closes with notes on the complexities of the EI market and the need for specialized knowledge for efficient and effective insurance purchases.

3.0

The Risks of Brownfields Redevelopment

and Risk Management Options

This chapter discusses the legislative and regulatory roots of the financial risks associated with brownfield redevelopments. While there is evidence that non-environmental, market factors often pose the most critical constraints on reuse of previously used and potentially contaminated sites, environmental liabilities can be a serious deterrent (Urban Institute 1998). The focus here is, first, on how liability is defined and has been addressed by federal and state legislation and programs. The relationship between insurance and indemnification is then examined.

3.1 Overview of Brownfields Liability Risks

Much of the concern about the exceptional risks associated with redeveloping brownfields originated with the 1980 Comprehensive Environmental Response, Liability, and Compensation Act (CERCLA) and with similar state laws that followed. The Act consists of two basic components, intended to bring about the remediation of existing contamination. ⁽¹⁾ First, a fund was established to assure cleanup of National Priority List (NPL) sites or properties that pose the greatest threat to human health and the environment. (Hence, CERCLA is also referred to as "Superfund.") Second, CERCLA established a liability scheme with respect to contaminated lands; the courts have found that the Act imposes "retroactive, strict, and joint and several liability" for the costs of cleaning up hazardous substances and for any damage done by the pollution.

Retroactive liability refers to the rule that responsible parties are liable regardless of whether or not their hazardous substances were disposed of before the enactment of CERCLA. Strict liability means that owners and operators may be held liable for environmental cleanup without regard for negligence or fault (that is, even if they did not create the pollution or were abiding by the law at the time they did create it). Joint and several liability applies to situations where more than one potentially responsible party exists. CERCLA creates three general classes of responsible parties: generators of the hazardous substances found at the site, owners and operators of the site, and transporters who have the authority to select the site for disposal. The courts have held that any of the three classes of parties may be held liable for the entire cost of site cleanup, unless it can be shown that the harm is "divisible" (for example, where there are two or more physically separate areas of contamination). In short, any one party can be assigned the full responsibility by the government for contaminants created by several parties, even if the damage was done before the party owned or occupied the site. A party held liable, in turn, may seek contributions from other potentially responsible parties.

CERCLA does offer liability protection in the "innocent landowner defense." To successfully claim this protection, owners must prove that they (a) bought the property after the pollution was placed on the property; (b) did not know and had no reason to know that the site was contaminated when they bought it; and (c) exercised "due diligence" before purchasing the property, i.e., they conducted all appropriate inquiry that was consistent with "good commercial and customary practice." Environmental site assessments thus have become a standardized component of commercial and industrial real estate transactions as purchasers seek to limit their liability and determine the cost of treating contamination on the property they are buying.

Reluctance to redevelop brownfields has been due not only to the liability fears of property owners, but to those of their financiers as well. Although CERCLA originally contained a secured creditor exemption that provided legal liability protection for entities holding security interests in polluted sites, the courts subsequently weakened the protection, ruling that a lender could lose its liability exemption if it foreclosed and/or had the capacity to influence a borrower's treatment of hazardous waste. Although federal and state environmental agencies rarely pursued lenders for cleanup expenses, private parties sometimes did. Consequently, lenders institutionalized their own due-diligence investigations of properties used to secure loans. In 1996, CERCLA was amended by the Asset Conservation, Lender Liability, and Deposit Insurance Protection Act (or Lender Liability Law). The Act clarified the actions lenders could take to avoid liability as owners if they foreclosed and provided detailed guidance on how they could be involved in a borrower's activities without participating in management. Two primary concerns about loaning on brownfields still remain, however. First, a borrower's ability to repay a loan may be jeopardized if unexpected and expensive cleanup costs should occur. Second, lenders fear that if they do have to foreclose, environmental problems might lower the value of their collateral.

Environmental risk management has come a long way in the two decades since the passage of CERCLA. The evolution of EI can only be understood and appreciated within the context of other types of efforts to manage the risks and uncertainties associated with brownfield redevelopment efforts. The remainder of this section examines three critical developments in recent years. First, the types of environmental site assessments as they have come to be standardized are reviewed. Accepted norms for these assessments have emerged from attempts to specify the level of site investigations required by the environmental due-diligence requirements of various laws and regulations. Next, the federal government policies and practices that offer liability protection for brownfield stakeholders are briefly discussed. The section closes with discussion of the types of state-level policies and programs that may provide liability relief. Without an understanding of these public sector developments, a potential insurance purchaser may over-buy or fail to acquire coverage for risks not now relieved by modifications in public laws or enforcement processes.

3.11 Types of Environmental Site Assessments

Environmental engineers, largely in response to the needs of lenders, have developed different types or "phases" of assessments to determine if a site is contaminated and how serious the contamination is, so that remediation plans can be developed. The basic assessments have been standardized by professional associations of engineers such as the American Society for Testing and Materials (ASTM). ⁽²⁾

The lowest level of assessment (referred to here as a Less-Than-Phase-I assessment) consists of database searches and transaction screens intended to identify possible contamination problems on properties stemming from current and historical uses of a site and surrounding properties. Sources for the database searches may include inventories of federal EPA NPL sites, state-agency equivalents of NPL inventories, local hazardous materials disposal and landfill facilities maps, and local fire insurance maps indicating that the property or nearby properties have been used for high-risk purposes. Transaction screens are questionnaires completed by property owners and purchasers to investigate previous or current use. Indications that further investigations are needed are triggered by reports of previously conducted remediations, the presence of underground storage tanks, and the operation of an environmentally risky business on the site or on adjacent properties. Risky businesses include a wide variety of enterprises such as landfills, chemical manufacturers, gasoline stations, motor repair shops, dry cleaners, printing shops, photo developing labs, metal working shops, paint stores, and many other operations.

The next level of investigation consists of Phase I assessments. These entail database searches and transaction screens, but also involve more detailed research of records on past uses of a property and a site visit to see if there are any visible problems (which might include distressed vegetation, fifty-gallon drums on site, unidentifiable piping, and the like). Indications of a potential problem prompt a Phase II assessment, which involves taking a series of soil and/or water samples and conducting laboratory analyses of them to establish the presence of contamination. Phase III assessments entail further sampling and analysis to quantify the amount of contaminants and determine their spatial patterns so that a remediation plan can be developed. Alternative methods of remediation can then be designed and priced.

3.12 Federal Policies Offering Liability Protection

An important component of EPA's brownfields effort has entailed taking steps to assure prospective purchasers, lenders, and property owners that, under certain conditions, they do not need to be concerned with federal CERCLA liability. In recent years, the Agency has announced a variety of guidances that remove uncertainties associated with brownfield properties. For example, EPA has offered liability protection for owners of properties that have groundwater polluted by runoff from another site, increased its willingness to consider anticipated future land uses in selecting cleanup remedies, expanded the circumstances under which the Agency will enter into "Prospective Purchaser Agreements" protecting new buyers from liability for prior contamination, and indicated willingness to share information the agency has about a specific site and any plans it may have for federal action on the property. ⁽³⁾

Some of these policy developments are more relevant to large brownfield projects than they are to small-scale projects. For example, federal Prospective Purchaser Agreements are given sparingly. To be eligible, an EPA action on the property must have been taken or be anticipated and the redevelopment must have substantial benefits including cleanup and other community benefits such as job creation.

Three points are critical to keep in mind. First, a determined federal effort is underway to facilitate brownfields redevelopment. Second, the US EPA does not become involved with most brownfield projects; owners are much more likely to deal with state environmental agencies and laws. Third, the federal guidelines, such as those described above, tend to serve as models for state policies and programs, which are the most relevant to brownfield projects. In fact, the greater flexibility emerging at the federal level has not been merely reflected, but has been expanded in state responses to brownfields.

3.13 State Policies and Programs Offering Liability Protection

Liability assurances related to past or current pollution may well be available from individual states. ⁽⁴⁾ Three common approaches are described here. The first entails Prospective Purchaser Agreements, also known in some states as Buyer-Seller Agreements, that divide responsibility for contamination on a property. For example, the seller may be responsible for all pollution discovered prior to a sale while the buyer assumes responsibility for any environmental problems that arise or are discovered after the date of the property transfer. In some states, other inducements for state participation are involved, such as eligibility for mitigation loans and grants. In most instances, participants are charged fees for the costs of overseeing agreement preparations and cleanups.

Second, "Covenants Not to Sue" (CNS) provided by a state may be implemented as part of formal agreements involving both buyers and sellers, or may be arranged between one party and the state alone. They offer assurances that, in return for meeting specified standards for cleanup, the state will not sue for further cleanup on the site. Thus, either the seller has a property that has been cleaned and has a CNS, which enhances its property value, or a prospective purchaser may, through negotiation with the state, determine the cleanup needed to attain a CNS and have less uncertainty about expected development costs prior to finalizing a transaction. The requirements for demonstrating a completed cleanup can vary significantly from state to state; they may be linked to intended use and, depending on the extent of cleanup completed, may involve deed notices or restrictions based on contaminants remaining on site.

Finally, a "No Further Action" (NFA) letter indicates that the state regulatory agency determined that no further environmental cleanup was deemed necessary at the time the letter was issued. In terms of liability protection, both a NFA letter and a CNS are limited in that they always include a "re-opener clause" indicating the right of the agency to re-open a cleanup if circumstances at the site change (such as a modification of property use) or if revisions of environmental regulations mandate cleanup levels that are more stringent than those employed in a remediation. The assurances, however, do define the property as a low state-enforcement priority and therefore lessen the likelihood of future government actions at the site.

3.2 Insurance in Relation to Indemnification

EI must be understood as only one method of risk management. A carefully developed risk management strategy takes into account the options of retention of risk, purchase of insurance, and indemnification (Neuman 1999). Indemnification involves a contractual agreement, usually between the seller and buyer of a property. It is a commitment by one party (the indemnitor) to protect the other (the indemnitee) from cleanup costs and third party claims. Indemnification is the traditional and most common approach taken to minimizing liability exposures and is the legal mechanism used in the buyer-seller agreements that have been instituted by a number of states. Such an agreement, however, may have disadvantages for both parties:

• The indemnitee may find that the indemnitor does not have the financial resources to fulfill the commitments made.
• The indemnitee may have to incur the costs of investigating the indemnitor's financial capacities to estimate the ability of the latter to pay for future claims.
• The indemnitee may have to undergo lengthy and costly litigation to obtain the financial commitments promised -- and the courts ultimately may find in favor of the indemnitor if an agreement is not carefully crafted.
• Since private and public entities must report contingent environmental liabilities to rating organizations, including indemnified properties, any such agreement could negatively impact the indemnitor's financial statements and credit ratings.
• In the absence of a liability limitation or cap, the indemnitor may render its organization vulnerable to catastrophic loss; liability losses may exceed the financial worth of an organization and lead to bankruptcy.
• Neither party is fully covered from liability risk by an 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 impose legal defense costs on both parties.

• Because many indemnifications are complex, the time it takes to craft the contracts may jeopardize transactions requiring completion within a limited time frame.

Relative to indemnification, the purchase of an insurance policy has several advantages including the following:

• Because financially sound insurance carriers are considered more likely to provide payment than many indemnitors, the guarantee is worth more to the indemnitee.
• Insurance coverage also includes the costs of legal defense fees, whereas many indemnifications do not.
• Insurance underwriters usually have more knowledge about relevant risk exposures than lawyers who draft indemnification agreements, so more protection may be available for all parties.
• Purchase of insurance eliminates contingent liability so that an indemnitor's financial statements and credit ratings are not jeopardized.
• Insurance allows quantification of environmental risks and thus may raise property values. When contamination is known or suspected, the price of a property generally is reduced by the estimated cleanup and liability costs. The more uncertain the costs, the greater the discount taken on the value. By reducing the uncertainty, insurance may raise the selling price of the property by more than the cost of the premium.

This discussion is not meant to demonstrate the unqualified superiority of insurance over indemnification and risk retention approaches to risk management. In many cases, an optimal combination is desirable (e.g., indemnification backed by an insurance policy). There are limits to, and disadvantages of, insurance relative to its alternatives:

• Coverage may not be attainable; a risk may be judged by a carrier to be too great or uncertain to assume.
• The insured still runs the risk that an insurance carrier may become insolvent or may contest and refuse to pay what the insured considers to be a legitimate claim.
• Insurance costs money. The price of insurance must cover the insurer's prospective losses, operating costs, and profits, so insurance may be too expensive relative to the value it adds to a transaction.

Perhaps the primary value of insurance in brownfield projects, however, is that some transactions cannot proceed without it. Risk retention and indemnification may be perceived as unacceptable options because of the financial vulnerabilities they create for organizations. Conflicts may well arise over who should indemnify whom. Buyers and sellers often reach an impasse over differing estimates of remediation costs and/or the liability exposures created by known or suspected contamination.

As one broker noted, people usually evaluate insurance costs in terms of the amount of protection provided per dollars spent. In the case of a brownfield redevelopment, the important question often is, How great is the expense incurred for insurance coverage relative to the costs or lost profit opportunities associated with losing the transaction altogether? The remainder of this report provides information on current insurance coverages available that can help brownfields stakeholders decide when insurance can help move a redevelopment project forward.

The utility of EI products for brownfield remediation and redevelopment efforts is determined by the types of insurance coverages available, the policy dollar limits on claims, the policy time limits, the site assessment requirements, and the costs of the policies. This chapter describes these factors for three basic types of products that can be purchased separately and are most relevant to brownfield redevelopers -- Cleanup Cost Cap, Pollution Liability, and Secured Creditor policies. ⁽⁵⁾ Other policies designed for environmental service industry contractors that are not as relevant to redevelopers are then briefly discussed.

Due to the diversity of coverages available and rapid change in the insurance industry, several cautionary notes at the outset are necessary. The summary descriptions in the tables on EI products can be highly misleading unless the following considerations are taken into account:

• Depending on the characteristics of their brownfield projects, certain coverages may not be offered to redevelopers. If a coverage represents too great a risk to an insurer, the provider may decline to offer it to an applicant. For example, insurance protection against third party bodily injury due to contamination is common, but an insurance carrier declined to provide a policy that included this coverage in a situation in which well-water used for drinking had been contaminated because the company felt claims were highly likely.
• The policies are constantly changing, especially the newer products discussed here -- cleanup cost cap and secured creditor policies. This report provides only a snapshot of the coverages at this particular point in time.
• Many EI policies are highly tailored, unlike standardized coverages with which most people are familiar (e.g., automobile insurance). Carriers often include "endorsements" that waive exclusions and offer coverages additional to those included in a standard policy. Insurance purchasers are thus able to craft policy provisions suited to their brownfield project needs.
• The costs of individual policies vary greatly. Premiums for any one type of policy may range from $10,000 to $100 million. The ballpark estimates provided here by carriers and brokers only give a sense of the range of costs.
• Even the ballpark cost estimates are unstable. Rates have fallen in recent years because the market has become more competitive due to the entry of new carriers. Some in the industry predict a rise in costs in the future due to industry consolidation. Also, costs for the newer policies and coverages may rise as claims are paid and carriers find they have loss ratios that mandate premium increases.
• Throughout the report, definitions of various policy terms are provided. These definitions, however, generalize across the very specific -- and legally binding -- terms that are included in actual insurance policies. Policy definitions may vary among different insurance companies and among EI products offered by the same company. They thus must be examined with great care in the selection and purchase of coverages.
• Finally, note that the data in the tables that follow exhibit a common pattern. Brokers (respondents F through I) report much more flexibility than carriers (respondents A through E) in their descriptions of types of coverage, maximum dollar coverages, and length of policy terms available. The insurance carriers' answers are more conservative primarily because they do not want to present an overly optimistic picture of what an individual client may be able to purchase, even though, for particular clients and under special conditions, exceptionally high time and dollar limits may be available. The brokers, on the other hand, reported estimates based on policies they had actually negotiated, some of which were highly exceptional. The carriers' answers are thus a better indication of what is generally available.

4.1 Cleanup Cost Cap Policies

The first type of policy, referred to in this report as "Cleanup Cost Cap" (CCC), is also called Cost Overrun or Remediation Stop Loss insurance. As the name suggests, the policy protects against cost overruns above the estimated cost of a planned cleanup at a brownfield site. The premium for the policy is based on a percentage of the estimated cleanup cost. The insurer pays for the excess costs above a self-insured retention (SIR) or "buffer" to be paid by the insured. ⁽⁶⁾ Thus, for example, on a planned $2 million remediation with a $200,000 SIR, the policy "attaches" (starts paying for costs) after $2.2 million -- the original cost plus the $200,000 -- has been spent by the insured party.

The coverages generally offered with the policy are presented in Table 1. Respondents were asked to indicate whether the protections were offered as standard coverage, as policy endorsements (exclusion waivers or additional coverages) or were offered with a different policy. In this Table, as in others describing coverages throughout this report, the carriers were asked about the different ways in which coverages were offered by their own company, while the brokers were asked how the coverages were most often offered by the various carriers with whom they deal. Recall that the companies labeled A, B, C, D, and E are insurance carriers; F, G, H, and I are brokers. (This distinction is denoted by a heavy line in the tables separating the two.)

The Table indicates that a common core of coverages are offered in the policies across the industry. The exception is legal defense costs, and these costs would not normally be incurred by a developer who is simply trying to clean up a site to meet regulatory requirements.

Note: Brokers were asked how the coverages are most often offered.

Codes: S Offered as Standard CCC policy coverage X Not currently offered

E Offered as CCC policy Endorsement V Coverages are highly Variable

D Offered with Different policy

All carriers indicated that unexpected cleanup costs include those resulting from orders by a regulatory agency and those stemming from discovery of contaminants at concentrations actionable under federal or state laws. The completeness of coverage depends, however, on what is considered to be a "cost" in the CCC policy, and there is disagreement on that across the insurance carriers. Table 2 demonstrates that only one insurer considers both pre-cleanup site assessment costs and post-cleanup monitoring costs to be part of the cleanup; Carriers A, C, and E agree on the meaning of the term with a definition that comes closest to common usage; site assessment costs are presumed to be completed when applications for insurance are submitted and are thus excluded, but monitoring after remediation is considered part of the cleanup process and is included. Carrier D, however, is exceptional in not covering monitoring expenses that may persist after a cleanup is completed.

Policy coverages also vary in the dollar amounts available and the length of the coverage period, two dimensions that are critical to determining if CCC can help make a contribution to the financial feasibility of a brownfield project. Variation in individual policies are reflected in the dollar limit ranges presented in Table 3, from a low of $100,000 to a high of $1 billion. The latter figure, however, is clearly exceptionally high; while the $1 billion dollar limit refers to an actually policy sold, in all likelihood, the broker used more than one carrier to underwrite the policy.

Codes: K Thousand B Billion

M Million V Varies too widely to estimate  

Cleanup times, in fact, vary widely depending on the remediation needed. Some projects may permit site utilization and redevelopment while long-term remedies are in progress. Gradual remediation of soil contamination on site, for example, may be more cost-effective than removal of many cubic yards of soil to hazardous waste landfills, but the process takes more time. As one broker explained, projects with long-term mitigation operations or post-mitigation monitoring may require policy terms that may be difficult to obtain from some carriers:

In many cleanups, you remove contaminated soil, but you also install a series of injection and pumping wells to pump material out. And this pump-and-treat process may continue for years. Beyond that, you may have a requirement to do long-term monitoring...And sometimes those are problematic. It may take three years for a cleanup, ten years of pump and treat, and another ten years of monitoring and it's unlikely that you can get a 23 year policy.

One source of variation in the cost of coverage is, of course, the risk accepted by the insurers. Carriers limit their risks by requiring information about site conditions as part of insurance applications. As Table 4 indicates, however, four of the five carriers are willing to provide non-binding quotes for some CCC policies with only limited site condition information and are especially inclined to do so for portfolio policies or policies that insure more than one site.

The actual issuance of a CCC policy is a different matter. Prior to writing a policy, insurers usually require a remediation plan and cost estimates based on a Phase III site assessment. These assessments provide information on the type and extent of contamination found and thus permit development of alternative cleanup plans. The cost estimate for the agreed-upon remediation approach determines the baseline for the CCC protection. The insured pays for the Phase III assessment on which the CCC policy is based and the thoroughness of the assessment is one factor that determines the cost of the insurance; the more complete the assessment, the lower the likelihood that unanticipated remediation expenses will be encountered, and the lower the cost of the policy.

Developers sometimes assume that all carriers require site assessments that are more extensive than those that would be completed in the absence of EI and that carriers require that additional assessment procedures be performed to confirm those already conducted. While this belief is based on actual practices in the insurance industry several years ago, Table 5 demonstrates that the vast majority of applications for CCC insurance are now accepted simply on the basis of assessments completed in the course of project planning.

Code: ID Insufficient data available to provide percentage

Another important consideration is whether a carrier will approve a remediation plan estimate provided by an environmental engineer or, in addition, will require that a cleanup plan be pre-approved by an environmental agency. Table 6 shows substantial differences across the four carriers providing data on this question. As a rule, coverage for a cleanup that has not been approved by a state agency will tend to be more expensive since it presents a higher risk to the insurer in terms of possible mandates for cleanup beyond the remediation plan. This suggests that developers face a tradeoff between the costs of delaying the mitigation work until state approvals are in hand (which can take several weeks or months, depending on the state) or the higher insurance costs associated with starting work and buying coverage before obtaining final regulatory agency approval. ⁽⁷⁾

Code: ID Insufficient data available to provide percentage  

 The bottom line is the price of CCC policies relative to other project costs. The range of reported costs appears in Table 7. Premiums may be as low as under 1% of the estimated cleanup costs or as high as 25%. SIRs range from 0% to a high of 100% of these estimated costs. The "variable" and "no responses" codes in the Table reflect concerns about proprietary information. More importantly, they reflect insistence on emphasizing the variability among individual policies. (This was especially the case with Carrier A.)

Codes: V Varies too widely to estimate

-- No response

The relative importance of the different factors determining the price of a CCC policy is difficult to determine, as the variables are weighed differently across projects and providers. However, the interviews with company representatives indicate that the following considerations influence the cost of the policies:

• The ways in which the policy is written including:
• the dollar and time limits on the policy and the deductible/SIR selected (the higher the SIR, the lower the premium); and,
• the meaning of a completed remediation under the policy (e.g., if the policy continues until a state agency provides a No Further Action Letter, the cost will be higher as variables such as additional regulatory requirements may come into play).
• The estimated cleanup costs, which are determined by:
• the extent and nature of the contamination and complexity of the cleanup;
• the reliability of the cleanup technology employed;
• the intended future land use (which affects the applicable cleanup standard); and,
• the duration of the remediation period, including on-going monitoring.
• The certainty and reliability of pre-application engineering work which involves:
• the adequacy of site characterization and qualifications of the Phase III assessors;
• the qualifications of the remediation contractors; and,
• approval of the remediation plan by a government agency.
• The method of purchase, whether individual site or portfolio, where portfolio coverage spreads the risk for the insurer across several brownfield sites and allows lower per-site insurance premiums. When multiple sites are insured, the policy limits can be written on an aggregate basis so that cleanup costs below an estimate at one site can compensate for cost overruns at another site. Alternatively, separate limits for each site can be set, but this option is more expensive.
• Known existence of competitive quotes from other insurers or bids submitted in an advertised competitive solicitation.

At present, the actuarial data base that individual companies use to price CCC coverages is small, due to the newness of the policies; not that many have been sold. While most carriers developed the products as highly specialized, experimental policies in the early nineties, they only began to offer them as a "standard" product beginning in 1996. With respect to CCC policies for individual sites, only two carriers provided figures on the number of policies they had sold since a standard product was offered: one indicated 30 had been sold and the other reported 12. Of the five brokers, two reported selling under 10 individual-site policies, another indicated 12, and the two largest brokers claimed 50 and 80 policies sold. The approximate numbers of portfolio policies sold were noted as 0, 3, and 50 by carriers who answered and 0, 0, 10, and 15 by responding brokers.

This is clearly still a thin market, with minimal claims experience on which to develop rate models. Adding the policies reported by all companies results in a total of 282 individual and portfolio CCC products sold nationally since 1996 (a figure that double-counts, since the brokers sold policies underwritten by the carriers). Note, however, that some of the portfolio policies covered 100 or more sites. A narrow focus on the number of policies sold, therefore, does not provide adequate indication of the site-based experience that informs current CCC protection provision.

Two relevant points flow from these observations. First, as emphasized earlier, the price of individual policies are based on unique site conditions and are highly variable. Second, the prices of CCC policies are likely to change as insurers begin paying more claims.

4.2 Pollution Liability Policies

The second basic category of insurance policies highly relevant to brownfield redevelopers is referred to here as Pollution Liability (PL). ⁽⁸⁾ The coverages included under this label have been given various policy names by different companies including Pollution Legal Liability, Pollution and Remediation Legal Liability, Brownfields Restoration, Environmental Response Compensation and Liability, Commercial Property Redevelopment, Real Estate Pollution, Real Estate Environmental Liability, and other labels. Note that some insurance carriers have more than one PL policy relevant to brownfield redevelopers. While limited forms of PL products have been in existence for over twenty years, the scope of coverages in the policies developed in the last three to four years has been greatly expanded. These changes are discussed further in Section 5.2.

PL policies provide protection for costs that result from a pollution condition that can be pre-existing (either unknown contamination or known contamination disclosed at the time the policy is written) or current (releases that occur during the policy period). The risks covered may be categorized into three basic components. The first consists of protection for the costs of third party claims arising from a pollution condition. The second provides protection for first party cleanup costs and other expenses related to a pollution problem. The final component involves legal defense costs associated with the first two components. Each of these elements requires a brief explanation:

• Third party claims refer to assertions, such as lawsuits, alleging legal responsibility for damage; third parties may include private parties and government entities enforcing environmental regulations. The damages may occur onsite (on the property designated in an insurance policy) or offsite (on locations beyond the boundaries of the insured property such as nearby parcels where pollution has migrated, disposal sites, and properties damaged during transportation of contaminants). Claims may be made for (a) bodily injury (sickness, disease, mental anguish, or death resulting from a pollution condition); (b) property damage caused by contaminants (physical injury to property and, in some policies, diminution of property value); (c) offsite remediations; and (d) other expenses related to a pollution condition such as business interruptions during a cleanup.
• First party cleanup cost coverages entail protection for the insured against the expense of onsite remediation and related expenses such business interruptions and property value diminution resulting from pollution. Remediations may be for pre-existing but newly discovered contaminants that were not addressed in an initial planned cleanup and for cleanup of pollution arising from ongoing operations. Also included is what many refer to as "re-opener" coverage. This coverage insures for the costs of additional remediation ordered by environmental regulators or compelled by law after a cleanup has been completed and a state agency has provided an assurance such as a "No Further Action" letter. As noted, such assurances generally indicate that further remediation was not required at the time the assurance was written. However, they always include a statement that reserves the right of the agency to re-open a cleanup if circumstances at the site change (such as a modification of property use) or if changes in environmental regulations mandate cleanup levels that are more stringent than those employed in the initial remediation.
• Legal defense costs may be associated with the first two elements. These expenses can be substantial, even if the insured is not a major contributor of contamination on a site, in part because of the imposition of joint and several liability and in part because of the complex mix of federal, state, and local regulatory oversight that applies to any one property. The policies generally indicate that the carrier has both the right and the duty to defend the insured. The costs of such defense are included in the policy dollar limits.

The coverages included in various PL policies are enumerated in Table 8 that begins on the following page. The Table reveals variation among carriers in terms of which coverages they offer and how they are offered -- some protections are provided as policy endorsements while others are offered as standard policy components. It is important to note in this regard that a coverage provided as an endorsement does not necessarily cost more than the same coverage provided as part of a standard policy. In examining the Table, note that the data presented may include coverages of more than one relevant PL policy available from a single carrier.

While not indicated on Table 8, variation also exists among carriers with respect to contaminant types and sources covered. Some policies specifically exclude lead paint, asbestos, radioactive matter, and naturally occurring radioactive materials (such as radon). Others exclude underground storage tanks. In all instances, whatever their standard policies, the companies may be willing to negotiate an endorsement (in this instance, a waiver of an exclusion) to provide needed protection.

Note: Brokers were asked how the coverages are most often offered.

Codes: S Offered as Standard PL policy coverage X Not currently offered

E Offered as PL policy Endorsement -- No response

D Offered with Different policy

In the actual standard policies carriers offer, coverages may not be described at the level of detail given here. While some companies do provide "menus" of specific protections offered, others describe coverages quite broadly. For example, they simply indicate coverage for bodily injury and property damage without separately listing onsite/offsite or pre-existing/current pollution conditions. The policies, in fact, may appear to be fairly simple. As discussed in Section 5.4 on the need for expertise in purchasing coverage, both approaches can be problematic; while the menu presentation can be confusing, broad descriptions of protections may not clarify specific protections that are included or excluded.

Another caveat regarding the policies warrants reiteration here; not all of the coverages listed in Table 8 are extended to all clients because of the risk they pose to insurers or because the cause of a problem may be difficult to prove. Examples include first party property value diminution resulting from a pollution condition. The difficulty in offering this protection lies in determining the actual cause of the damage suffered. Property values may drop for many reasons, including new forms of economic activity in an area that are seen as undesirable, a general decline in the local real estate market, and so on. If some aspect of the social or economic environment changes at the same time as new contamination is discovered at a site, it is almost impossible to separate how much of the value change is due to the pollution and how much is attributable to other factors.

Table 9 shows variation in the meanings of acceptable "remediation costs" in PL policies. The fact that one carrier omits site assessment and another excludes monitoring illustrates another dimension of the complexity of PL policies -- the importance of carefully understanding policy-specific terminology. It is interesting to compare Table 9 with Table 2, which describes the meanings of remediation costs in CCC policies. The meanings are consistent across the two types of policies for three of the five insurance carriers. Two insurers, however, do not include site assessment costs in their CCC policies, but do include them in PL coverages.  

PL policy dollar limits are presented in Table 10. While the minimum available from all sources is $1 million, a substantial range in the maximum limit is apparent, showing different insurers' willingness and capacity to assume risk on any one site. Large limits may also reflect the fact that a broker used more than one carrier to underwrite a policy. The limit reported by broker G represents an actual policy sold, but as the carriers indicate, this figure references an exceptional case.