Two principal insurance vehicles - remediation cost-cap and pollution legal liability (PLL) - are used on many remediation and brownfields projects. Cost-cap policies limit financial losses when clean-up costs exceed projections, and PLLs address unknown pre-existing contamination, contamination from ongoing operations or liability for third-party pollution damage claims. These policies often provide the final stone in the arch that completes a major real estate deal.
'For the lender, cleanup cost cap insurance protects the financial condition of the borrower and therefore the value of the lender's collateral,' wrote Janet Moylin of AIG Insurance in a recent edition of Brownfield News. 'For the owner of the site, cleanup costs are fixed for budgetary purposes or for the purpose of attracting a buyer. The government has assurance that if the cost exceeds the budgeted amount, a risk transfer mechanism provides funds to complete remedial activities. The new owner is protected against a financial loss.'
'[In the 1980s], cost-cap insurance products were not that useful. They were not adaptable, and in many cases the premiums were so high that it wasn't worth taking a risk,' said Michael Barbara, a managing consultant for Marsh USA, a brokerage that is part of Marsh & McLennan Companies Inc. (New York). Some underwriters also took a bath in the early days because they lacked the expertise to evaluate risks associated with environmental clean-ups. 'Many insurers simply did not do their homework and consequently incurred some very heavy losses,' wrote Jenny Beeh in Brownfield News.
Today, after hiring top talent from the environmental industry, ECS Underwriting, AIG Insurance, Kemper Insurance and several other underwriters have become much more sophisticated. 'Each policy is individually crafted [for a specific project],' said Barbara, who is former chief technical officer for MacLaren Hart, now MacLaren Hart/Jones. 'Premiums are based on the degree of risk and the degree of coverage. The underwriters look at how the project relates to the size of the contractor, his expertise, his track record, and even in some cases, the particular people who will be working on a project.'
Barbara described one project for which insurance was a key dealmaker: 'The owner of a former steel mill in New Jersey was looking to divest. There was some difficulty in communicating the degree of risk and indemnification to a potential owner. The consultant on the project formed a limited liability corporation and bought out the liability... working with an insurance company to provide a cost cap that would protect the LLC.'
Currently, insurance policies are most commonly bought by large companies working on large projects. 'That's where the marketplace is now,' said Barbara. 'But as the products become more commonly understood, you'll see them more widespread.'
'Environmental insurance provides a source of financial recovery that extensive engineering and evaluation will never provide,' wrote Moylin. But one remediation executive cautions that collecting for a project cost overrun is not always easy.
'If you poll people in the industry, more times than not... if you get into a major exceedance, let's say $1 million or over, the insurance company will expend a whole lot of effort not to pay you upfront,' said Mark Lewis, manager of remediation and construction sales for Clean Earth. 'Things aren't warm and fuzzy when something goes down for $1 million or $2 million.'
Lewis said that an insurer put 'a lot of pressure' on Clean Earth not to execute a claim for a $1 million overrun on a Long Island clean-up project. '[Clean Earth] expended a lot of money internally here to get them to pay on the policy.' The insurer paid 'after a little while,' said Lewis, but he called the delay a wake-up call: 'To get them to pay out on a $2 million policy, you better be ready for a war. You may get paid, but it may be a year later. If we're talking about property redevelopment, that is way too long. Developers put things together on a shoestring schedule.'