Environmental Liability Insurance
In the late 1990’s, as Brownfield redevelopment programs began to take hold, one issue that continuously reoccurred was the potential liabilities from unknown environmental conditions and the inability to accurately predict clean up costs.
In the early part of the 2000’s, pollution liability insurance was developed to provide protection to buyers, sellers and lenders. Several types were offered, which are briefly described below.
Clean up Cost Cap Insurance
The Cleanup Cost Cap policy responds to and manages the economic risk when a remediation project on a Brownfield site exceeds the costs projected in the corrective action plan.
When evaluating the decision to invest time and money into remediation of a contaminated property, the Cost Cap Program eliminates the grey area normally associated with unknown costs and liability while providing a safety net for property owners, responsible parties, and lenders to move forward profitably.
The Cost Cap Program covers remediation cost overruns for:
- Actual contamination and costs greater than estimated.
- Off-site or Third Party cleanup costs incurred in the remediation of pollutants that originated from the subject site.
- Change orders required by a government authority or regulatory group or changes to existing laws.
- New found contamination and subsequent cleanup costs, not previously known, but discovered during the execution of the corrective action plan.
This policy provides coverage above the estimated or expected cost to cleanup a property with a buffer or self-insured retention of approximately 10-25%. This policy also indemnifies the responsible parties for cleanup costs until regulatory sign-off occurs (by government agency) or a no further action required status.
Pollution in-place Insurance
This policy protects property owners from situations where contaminates have been left in place (in agreement with the regulators) and later on the regulatory agency determines that the cleanup levels should be lower (sometime referred to as “re-opener”). This policy provides coverage even though the property/building has been characterized with a low-level amount of contamination. The policy can be implemented only after the government-regulatory agency has given a no cleanup directive. If the laws change or the regulators come back and require the contaminants be removed or treated, the pollution in-place insurance policy will respond. This policy will respond to building, soil, groundwater and air issues.
Post Remediation Pollution Liability
This policy can be implemented subsequent to regulatory sign-off or the no further action required status (after a successful remediation effort).
This policy will provide Pollution Liability coverage for the subject site (First-Party), as well as any Third Party lawsuits from adjacent or downgradient property owners that allege that their site is contaminated because of pollution that emanated from the subject site (your property).
The Post Remediation Pollution Liability policy provides indemnity to all parties including buyer, seller and lending institution. The indemnity issue seems to always become a problem when there is a transfer of title. The buyer and lender are concerned that a third party will allege bodily injury or property damage (at sometime in the future) as a result of contamination that originated and then migrated from your property. The indemnity issue also seems to have a direct effect on the price of the property.
The Post Remediation policy will also cover a change in the state laws or regulatory directives that become stricter. For example, MTBE, which was not tested for during many of the early investigation projects, is now a regulated compound. Regulators could require remediation.
Secured Creditor/Bankers Environmental Risk
The Secured Creditor/Bankers Environmental Risk Property Insurance Program protects lenders against loss due to a borrower defaulting on a commercial real estate loan that is secured by an insured property, leasehold or fixed assets.
If there is a default on the loan caused by a pollution condition on the insured property, the policy will indemnify the lender for the outstanding loan balance. Additionally, the policy will provide coverage for the lender against third-party claims for bodily injury, property damage or cleanup costs resulting from pollution conditions on the property. Because risk protection is provided to both lender and borrower, transactions can be completed confidently and efficiently. This type of insurance is very beneficial to Brownfield site transactions because it protects the lender to some degree from unknown environmental problems.
Several companies provide these insurance products. A couple examples are listed below: