Comprehensive Environmental Insurance: Key to Successful Infill Redevelopment.

Market demand and demographics are spurring the redevelopment of infill properties in metropolitan areas across the country. However, many of these properties previously were used for manufacturing or heavy industrial processes and have resulting sailor groundwater contamination. Thus, they present unique challenges. Those involved in the acquisition and redevelopment of these sites -- commonly referred to as Brownfields -- use a range of tools to identify, limit and control the environmental risks they pose. These tools include structuring the transaction and drafting the agreements to identify the environmental liabilities and clearly allocating responsibility and risk between seller and buyer. Once it is clear who bears responsibility,' ensuring complete cleanup of the property, And, most important, implementing a comprehensive environmental insurance program to cover residual risks.

Proper, adequate insurance is a standard element of business. Yet, the history of insurance as a tool for management of environmental risk is checkered. Many property owners and developers have been involved in lengthy battles with insurers over claims made under Commercial General Liability (CGL) policies for damages resulting from environmental conditions. Further, the major insurance markets are constantly redrafting CGL policy language to narrow the coverage for environmental claims. Today, standard CGL policies include what is termed the "absolute pollution exclusion," which means exactly that -- no coverage for damages resulting from pollution conditions at the insured location.

What many businesspersons do not know is that 10 years ago specialty underwriters and smaller insurers began developing insurance targeted specifically for environmental risks. Unlike standard CGL policies, these environmental insurance policies were underwritten and priced to provide real coverage against a range of environmental risks. These policies have evolved greatly over the past decade and different forms of environmental insurance coverage are now available from a number of major carriers.

Each of the markets providing insurance for environmental risk has created different structures and forms of coverage. Regardless of how each insurer structures the coverage, they address two basic types of risks. First, the risk of increases in cleanup costs for the property. This type of coverage is typically referred to as Remediation Stop Loss (RSL) insurance. It provides coverage against the possibility of additional remediation costs above a defined amount, termed the "attachment point." The insurer will determine this point based on a thorough review of the cleanup cost estimate provided by the owner's environmental consultant. The attachment point typically will be set at a predetermined amount above the cost estimate to provide for a Self-Insured Retention (SIR). The SIR is the cleanup cost increase that the owner must pay before triggering insurance coverage. The insurer requires SIR so that the owner has no incentive to have the contractor do additional cleanup work, which benefits the owner but i s not required by regulators.

The limit of coverage for RSL coverage is negotiated with the insurer, but is usually not less than 100 percent above the estimated remediation cost. Policy terms typically run from 7 to 10 years. Most insurers are willing to negotiate extensions beyond the initial term if the cleanup has not been completed. The premiums for this insurance have changed as the insurance markets have developed loss histories. In general, one should expect to pay 10 percent of the estimated cleanup costs.

The second principal type of environmental insurance provides coverage for liability claims. Generally termed Real Estate Environmental Liability insurance, its coverage is more complex and the structure of the policies and coverage elements differ more widely among insurance providers. Primarily, these policies provide for monetary claims from third parties for property damage or bodily injury resulting from pollution conditions. Coverage typically is triggered after the lead environmental regulatory agency has issued some type of No Further Action (NFA) letter stating that cleanup has been satisfactorily completed. Some insurers will provide coverage prior loan NFA for unknown conditions or for a specific schedule of known conditions and it may be possible to obtain this type of coverage for off-site contamination. However, this is much more difficult. Most major insurance markets also provide coverage under the liability policy for additional cleanup costs (for either known or unknown conditions) that ari se after remediation is completed. This can arise if, for example, there is a change in cleanup requirements, or if additional contamination is discovered during construction. Liability policy terms vary, but most insurers will provide up to 10-year terms. Policies with 15-to 20-year terms have been written, but are now harder and more expensive to obtain.

There have been Brownfield transactions where liability insurance written on an occurrence basis has been a key part of the risk management program. However, this type of coverage is very difficult to underwrite and very expensive. Limits for environmental liability coverage generally range from $5 million to $20 million, although limits of up to $50 million have been written. Premiums for liability coverage are not based on any standard percentages of the limits of coverage or cost of the property. Rather, they are typically set after underwriters have reviewed each property and the specific risks remaining on the site. One point of guidance on pricing -- the cleaner the site after remediation, the lower the premium is likely to be.

Knowledgeable redevelopers of environmental properties rely on environmental insurance to limit and manage risks that might otherwise make redevelopment unfeasible. The information presented is based on actual experience, but is only a very basic overview of environmental insurance issues and coverage. The effective use of environmental insurance is very complex, and involves determining what coverage is needed, selecting an insurer, analyzing and presenting the risk, and negotiating policy language and terms. Businesspersons considering use of environmental insurance should find good advisors familiar with this type of insurance, and be prepared to spend a great deal of time with all parties to the transaction before a comprehensive, effective risk management program is finalized and coverage is bound.

Stuart L. Miner is a founder of LandBank, Inc., a Brownfield acquisition and redevelopment company. Timi Anyon Hallem is a partner at Luce, Forward, Hamilton & Scripps LLP.