Retail development in urban areas with high concentrations of millennials, empty nesters, and other influential consumers often means dealing with challenges associated with the prior land uses. During the past 20 years, the federal government and states have begun to amend the 1980s-era environmental regulation discouraging the development of previously used, potentially polluted sites.
At the same time, pollution insurance products have evolved to protect landowners and developers from the potential regulatory and civil liability associated with brownfield redevelopment.
For decades, the population migration to the suburbs, as well as the high cleanup costs and potential health concerns associated with urban brownfields, have been reasons enough for many developers to avoid such locations and instead focus on greenfield suburban development. Additionally, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 made brownfield redevelopment nearly impossible.
The U.S. Congress enacted CERCLA in 1980 due to the public's growing concern about abandoned hazardous waste sites, such as Love Canal in New York. The Act imposes strict liability on several categories of potentially responsible parties. Concerns about being saddled with CERCLA liability simply as a consequence of purchasing a previously contaminated site caused developers to shun brownfields and all but eliminated lenders' appetite to fund them.
By the 1990s, however, CERCLA's detrimental effect on brownfields and sprawl was recognized. In 1995, the U.S. Environmental Protection Agency initiated a formal Brownfields Program and began entering into contractual agreements with developers that provided assurance they would not face CERCLA liability if they abided by certain criteria.
The U.S. Congress codified many of the EPA's brownfield initiatives in the 2002 Small Business Liability Relief and Brownfields Revitalization Act. The Brownfields Act amended CERCLA to encourage companies to redevelop brownfields by protecting bona fide prospective purchasers, contiguous property owners, and innocent landowners from CERCLA liability.
It also provides tax incentives to brownfield developers, funding grants for assessment and cleanup, and money to state and local brownfield programs. The Brownfields Act enables a developer to achieve BFPP status without having to enter into a prospective purchaser agreement with the EPA. States and municipalities also enacted legislation encouraging the voluntary cleanup and reuse of brownfields.
Despite the liability protection afforded to developers by the Brownfields Act and state and local laws, companies looking to redevelop brownfields still face regulatory and tort liability. Moreover, developers still bear the vast majority of costs to remediate and clean up contaminated sites. Even after Phase I and Phase II Environmental Site Assessments and/or remediation of known contaminants, developers of brownfields risk uncovering previously unknown contamination while working on-site.
Navigating the Perils
Developers and owners cannot rely on traditional liability and property insurance policies to cover these unexpected costs. The potential liability and costs to remediate a developer's land and adjacent properties are not covered by traditional insurance policies.
Insurance carriers introduced the first “Sudden and Accidental” Pollution Exclusion in 1972 in response to the growing environmental tort and regulatory liability. Since 1972, insurers further restricted pollution coverage in their commercial general liability policies.
Today, a CGL policy is likely to include most, if not all, of the following: the standard “absolute” pollution exclusion; the more restrictive “total pollution exclusion;” a mold/silica exclusion; a lead exclusion; and an asbestos exclusion. Commercial Property Insurance policies - the insurance that generally covers damage to the insured company's own real estate and personal property - incorporate the same exclusions, but may afford a very small amount of insurance for cleanup of polluted land or water.
The market for pollution liability insurance has changed dramatically since 2000. The environmental liability insurance market is a $1.5 billion annual premium industry that has grown more than 20 percent each year over the past five years. The increased competition and capacity in the environmental marketplace has led to multiple carriers offering broader coverage terms and conditions.
In response to the need for protection against pollution risks, underwriters have developed a group of insurance products addressing the special needs of companies that are involved in the remediation of contaminated real estate. Pollution insurance is found in two types of policies: Pollution Legal Liability and Contractors Pollution Liability.
Pollution Legal Liability insurance protects property owners and developers from liability associated with pollution-related property damage, cleanup, and bodily injury. In today's environmental insurance market, PLL policies can be tailored to address the diverse needs of each property, as well as meet several requirements and objectives. These may include regulatory obligations, contract and lender requirements, landlord obligations, and business objectives.
Insurers offer PLL policies addressing the issues specific to brownfield remediation projects. Some risks arising from brownfield transactions include:
- overreliance on clean Phase I/II property assessments that are not guarantees against contamination;
- contaminants from known and unknown historical usage and operations or neighboring properties; and
- investigation and defense due to local and regional soil and groundwater contamination.
Other risks involve construction debris containing hazardous materials; dangerous chemical storage; lead, asbestos, polychlorinated biphenyl and radioactive material; and methane contamination from buried material.
If a brownfield transaction includes remediation activities, additional insurable risks include the possibility that contaminants could be released from the site during the remediation process through construction. This could cause third-party bodily injury, result in property damage, or require additional cleanup at the site or on the property of others.
Even if regulators approve an ineffective remediation plan, the owners could be liable. Another risk is the environmental contractor exacerbates the contamination by performing an incomplete remediation.
Savvy companies and their environmental attorneys use PLL insurance to either replace the indemnification and hold harmless agreement, or wrap around the indemnification. Modern PLL policies are flexible enough to provide coverage for existing contamination. Moreover, insurers will write policies to cover cost overruns on remediation activities and the risks associated with releases caused by cleanup activities at the site.
Owners and developers can find PLL coverage with a single insurer written for up to a 10-year term, with a maximum of $50 million in limits to address site legacy liability associated with a brownfield site. PLL insurance can play a crucial role in developing a contaminated property by limiting the pollution and regulatory risks faced by both developers and lenders.
In addition to property owners and developers, contractors face liability arising from their work at a brownfield site.
Some of the issues contractors encounter include the inadvertent disturbance of pre-existing contamination in the form of asbestos-containing materials; naturally occurring asbestos in subsurface soils; lead paint; and contaminated soils, surface, or groundwater. Contractors can also be sued or fined for accepting supposedly “clean” fill from unknown origins, only to learn later it was contaminated with petroleum or other hazardous substances.
These exposures can be mitigated by a comprehensive Contractors Pollution Liability policy. CPL provides coverage for third-party liability resulting from bodily injury, property damage, defense, and cleanup due to pollution caused by operations performed by or on behalf of the contractor. The coverage has been considerably broadened during the last few years to include emergency response costs, transportation, mold, site pollution for contractor yards, and professional liability.
During the past few years, CPL coverage has expanded to include emergency response costs to mitigate sudden pollution incidents, crisis management for pollution events to offer contractors additional public relations support, and professional liability coverage. Due to competition, the policy forms have vastly improved with minimum premiums for new policies falling well below $50,000 and easily obtained for under $20,000. Moreover, CPL claims-made policies have rapidly been replaced by occurrence forms, meaning the liability coverage purchased for a given year will be available to the contractor for its activities during that period of time, even if the property damage or bodily injury does not become known until years later.
The generational shift away from the suburbs and to the cities shows no sign of slowing. To build in these urban centers, owners, developers, and lenders must deal with the unusual challenges associated with brownfields. During the past 20 years, the federal government and states have begun to amend environmental regulation that discouraged the use of previously used, even potentially polluted, sites.
At the same time, a new insurance market was born and has evolved to protect landowners, developers, and contractors from the potential regulatory and civil liability associated with brownfield redevelopment. By involving an insurance professional knowledgeable in pollution law and insurance coverage early in the planning process, property owners, developers, and contractors can secure protection from pollution liability at a defined cost and reduce lenders' concerns about the effect of regulatory fines, delays, and legal liability on a brownfield project.