Posted on 10.16.15
Environmental Liability Insurance for Owners, Developers, Lenders and Contractors
Source: http://renewalredevelopment.com, September 2015
By: Patrick Mahoney, Great American Insurance Group
Property owners, developers and contractors can all proceed with projects and engage the process with coverage that pinpoints point of need.
Redevelopment of a brownfield property, whether it be for a high-profile stadium or a small apartment complex, requires the coordination of efforts between property owners, developers, lenders, govern-mental regulators, contractors and the general public.
Each of these parties has its own personal economic and environmental interest in the betterment of the brownfield. At the same time, each of these players brings to the table his or her own concerns, biases and risk tolerance. These factors may be influenced by prior experiences or simply based upon the fear of the unknown; their perception is their reality and negative perceptions can kill redevelopment deals.
Potential roadblocks introduced by the interested parties are many and valid—lenders concerned they may inadvertently absorb a contaminated property onto their balance sheet; an owner worried about the dreaded regulatory reopener notification; regulators concerned about the idea of families moving onto a site with potential exposure pathways; the general public worried that all the best intentions couldn’t foresee that the engineering controls used to mitigate contaminants just weren’t good enough to prevent an illness from developing 10 years down the road.
So how can the parties to the brownfield redevelopment help bridge the gap with those necessary participants who are less assured of the project’s soundness and ultimate success? One possible solution to help remove roadblocks is the use of an environmental insurance product.
The environmental liability insurance marketplace has created policies to address these development interests and exposures including premises-focused and contractor project specific environmental liability policies. Environmental insurance is not a panacea, it is important to have realistic expectations of what environmental insurance may or may not be able to do for a given site.
Just as the parties mentioned above have concerns, biases and risk tolerances, so do environmental insurance carriers. Underwriting brownfield properties is a complicated process and coverage afforded under such policies will be dependent upon the availability and satisfactory review of site development plans, environ-mental site assessments and regulatory correspondence.
Each of these parties has its own personal economic and environmental interest in the betterment of the brownfield. At the same time, each of these players brings to the table his or her own concerns, biases and risk tolerance. These factors may be influenced by prior experiences or simply based upon the fear of the unknown; their perception is their reality and negative perceptions can kill redevelopment deals.
Potential roadblocks introduced by the interested parties are many and valid—lenders concerned they may inadvertently absorb a contaminated property onto their balance sheet; an owner worried about the dreaded regulatory reopener notification; regulators concerned about the idea of families moving onto a site with potential exposure pathways; the general public worried that all the best intentions couldn’t foresee that the engineering controls used to mitigate contaminants just weren’t good enough to prevent an illness from developing 10 years down the road.
So how can the parties to the brownfield redevelopment help bridge the gap with those necessary participants who are less assured of the project’s soundness and ultimate success? One possible solution to help remove roadblocks is the use of an environmental insurance product.
The environmental liability insurance marketplace has created policies to address these development interests and exposures including premises-focused and contractor project specific environmental liability policies. Environmental insurance is not a panacea, it is important to have realistic expectations of what environmental insurance may or may not be able to do for a given site.
Just as the parties mentioned above have concerns, biases and risk tolerances, so do environmental insurance carriers. Underwriting brownfield properties is a complicated process and coverage afforded under such policies will be dependent upon the availability and satisfactory review of site development plans, environ-mental site assessments and regulatory correspondence.
Contracting Services Project Specific Policies
Owners and developers of brownfield properties are concerned about the timing and budget of a project.The contractor’s exacerbation of an existing environmental condition may result in a delay of the construction and significantly increase the developmental costs. These costs could include not only remedial efforts but also regulatory fines, penalties and design changes. A contracting services project-specific policy is a viable insurance product created to address these concerns.
These policies can be structured in many ways but one that is popular with brownfield projects is an Owner Controlled Insurance Program or OCIP.  An OCIP structure typically allows project owners the ability to provide a single policy covering pollution liability not only themselves but also all contractors and subcontractors of any tier working on the project. This can help to alleviate concerns subcontractors may have taking jobs on contaminated properties and at the same time provide owners with the comfort of knowing that each contractor has the proper environmental insurance coverage and limits that best suits their specific project’s needs.
Contracting services policies usually contain coverage parts, written on an occurrence basis, which include coverage for the following as a result of a pollution condition originating during the construction project: third party bodily injury or property damage, clean-up costs, emergency response costs, non-owned disposal sites, transportation and legal expenses related to a pollution condition caused by or related to the construction work.
Potential claim scenarios that may play out on a brownfield project include:
Owners and developers of brownfield properties are concerned about the timing and budget of a project.The contractor’s exacerbation of an existing environmental condition may result in a delay of the construction and significantly increase the developmental costs. These costs could include not only remedial efforts but also regulatory fines, penalties and design changes. A contracting services project-specific policy is a viable insurance product created to address these concerns.
These policies can be structured in many ways but one that is popular with brownfield projects is an Owner Controlled Insurance Program or OCIP.  An OCIP structure typically allows project owners the ability to provide a single policy covering pollution liability not only themselves but also all contractors and subcontractors of any tier working on the project. This can help to alleviate concerns subcontractors may have taking jobs on contaminated properties and at the same time provide owners with the comfort of knowing that each contractor has the proper environmental insurance coverage and limits that best suits their specific project’s needs.
Contracting services policies usually contain coverage parts, written on an occurrence basis, which include coverage for the following as a result of a pollution condition originating during the construction project: third party bodily injury or property damage, clean-up costs, emergency response costs, non-owned disposal sites, transportation and legal expenses related to a pollution condition caused by or related to the construction work.
Potential claim scenarios that may play out on a brownfield project include:
- The exacerbation by the contractor of known or unknown pollution conditions within soils or groundwater;
- The failure to properly install engineering controls like vapor barriers;
- The migration of dust or silt; and
- The release of hazardous materials onto the project site from construction machinery.
Additionally, once the development is completed, contractors and site owners may have to contend with pollution conditions arising out of construction defects that do not result in pollution conditions until after project completion. Some examples of the environmental issues seen during the completed operations period include the development of mold, vapors arising from installed materials and pollution releases from process piping.
The duration of the completed operations period recommended for a project varies depending upon the final development’s usage, the owner’s risk tolerance, and statutes of limitations and repose for the site’s jurisdiction. Many insurance carriers are able to offer completed operations period terms of 10 to 15 years.
Premises Policies
As mentioned earlier, brownfield properties involve many parties having an economic and environmental interest in redevelopment. By definition, brownfields are sites known to have real or perceived environmental contamination either from former on-site operations or from surrounding properties. One of the avenues available for brownfield property owners to protect themselves and to satisfy lender and regulatory requirements is the premises environmental liability policy.
In contrast to the contracting services policy, the premises policy coverage is not limited to pollution condi-tions caused or exacerbated by the project’s construction. In fact, coverage on premises policies is available, on a claims-made basis, for pollution conditions at the site stemming from prior site operations, through the develop-ment and onto the final property usage.  Coverage is pro-vided for both gradual and sudden and accidental events.
While most insurance carriers are currently not offering clean-up coverage for those pollution conditions that are known or likely to be discovered during brownfield development, typical policies will usually include third-party bodily injury and property damage, non-owned disposal site and transportation coverage during development.
To address reopener concerns, clean-up coverage usually becomes an available coverage after a specified milestone is reached such as the issuance of a no further action letter, a certificate of occupancy or upon completion of building demolition and sub-surface construction work. Additional coverage enhancements available also include business interruption, diminution in value and public relations expenses.
More often now than in the past, lenders on brownfield properties are requiring their borrowers to purchase pollution liability coverage. Most carriers are able to provide coverage within the premises policy for lenders of the property, thus providing the coverage the lender is seeking while also providing coverage to the borrower.
Premises Policies
As mentioned earlier, brownfield properties involve many parties having an economic and environmental interest in redevelopment. By definition, brownfields are sites known to have real or perceived environmental contamination either from former on-site operations or from surrounding properties. One of the avenues available for brownfield property owners to protect themselves and to satisfy lender and regulatory requirements is the premises environmental liability policy.
In contrast to the contracting services policy, the premises policy coverage is not limited to pollution condi-tions caused or exacerbated by the project’s construction. In fact, coverage on premises policies is available, on a claims-made basis, for pollution conditions at the site stemming from prior site operations, through the develop-ment and onto the final property usage.  Coverage is pro-vided for both gradual and sudden and accidental events.
While most insurance carriers are currently not offering clean-up coverage for those pollution conditions that are known or likely to be discovered during brownfield development, typical policies will usually include third-party bodily injury and property damage, non-owned disposal site and transportation coverage during development.
To address reopener concerns, clean-up coverage usually becomes an available coverage after a specified milestone is reached such as the issuance of a no further action letter, a certificate of occupancy or upon completion of building demolition and sub-surface construction work. Additional coverage enhancements available also include business interruption, diminution in value and public relations expenses.
More often now than in the past, lenders on brownfield properties are requiring their borrowers to purchase pollution liability coverage. Most carriers are able to provide coverage within the premises policy for lenders of the property, thus providing the coverage the lender is seeking while also providing coverage to the borrower.
Additionally, some carriers can offer broader pollution liability coverage specifically tailored for lenders. Insurance carriers offering such coverage usually underwrite to both the financial condition of the borrower as well as to the environmental exposures of the property. Policies specifically written just for the lender may have policy terms available to match the length of the loan, up to a total of 13 years in some cases.
A few examples of environmental issues typically contemplated by a premises environmental liability policy covering a brownfield property include:
A few examples of environmental issues typically contemplated by a premises environmental liability policy covering a brownfield property include:
- indoor vapor intrusion arising from pollutants in groundwater resulting in third-party bodily injury claims;
- re-openers of previously closed clean-up actions by local, state or federal regulators;
- third-party bodily injury or property damage stemming from known or unknown pollution conditions;
- mold and legionella within the new building(s); Â and
- illicit abandonment of pollutants.
Mitigating the concerns
The insurance marketplace has developed environmental liability policies that can be structured to address many of the concerns encountered with the development of a brownfield property. These policies range in coverage for the pre-existing site conditions, through the development period and into the finished operations.
During each step of these phases, the various parties will have interests and concerns with the economic and environmental aspects of the property. Through the policy types mentioned, these parties can work to have their concerns mitigated and their interests protected by an insurance program.
Integral to the successful development of an insurance program is the cooperation of the various parties and the ability for the insurance carrier to underwrite all of the relevant and detailed information available for the brownfield property and planned development.
