Q:
Why are Brownfield properties important?
A:
In the
Q:
What are the environmental concerns associated with Brownfields?
A:
There are generally two major concerns associated with a Brownfield
property. First, under the
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA
– or “Superfund”), the current owner of a contaminated property may be
held liable and responsible for the cost to clean up the location.
This also becomes a concern for a potential buyer because his/her usual
strategy is to purchase a Brownfield inexpensively, clean up the property,
redevelop the location, and ultimately sell the property for a profit.
For this reason the cost of the cleanup is a crucial variable in the
investment decision and has a major impact on the projected profitability of the
real estate venture. In addition,
when the redeveloper becomes the seller of the property he/she often must
provide the prospective buyer with assurance that the property is no longer
contaminated. Often these issues can
become critical during the real estate transaction.
The
second concern is the third party’s environmental liability resulting from
ownership of a property or the operation of a facility. These potential
exposures can also become issues in the real estate transaction and often
require assurances by the seller that no third party claims exist.
Q:
Does the environmental insurance market have solutions available that may
help facilitate Brownfield Redevelopment?
A:
Yes. The environmental
insurance industry has several types of insurance products that can assist with
the redevelopment of contaminated property; policies that respond to all phases
from the original testing and planning through final construction.
However, the two most often used solutions are generally known as
“Cleanup Cost Cap (CCC)” and “Pollution Legal Liability (PLL)” policies.
A CCC policy acts as a financial tool that allows a company to limit the
costs related to the cleanup of “known issues” on a contaminated property.
A PLL policy is intended to protect the owner/developer from
“unknown” liability issues that may arise during the cleanup and
construction phases of a project.
Q:
Why would environmental cleanups exceed original cost estimates?
A:
Environmental cleanups have a history of exceeding projected cost
estimates. Cost overruns can occur
due to several reasons, which include, but are not limited to, the unforeseen
performance failure of the selected technology, the identification of additional
contamination, the increase of cleanup requirements by regulators, and the
underestimation of time for project completion.
Q:
How does the CCC Program work?
A:
A typical cleanup requires a Remedial Action Plan (RAP) that details the
delineation of the contamination (as provided in a Phase II Report) being
remediated, the methods to be used to complete the cleanup, and the cost
estimates for the project. The
remediation contractor that oversees the project provides a RAP.
The actual cost detailed in the RAP is a known liability, and therefore
must be retained by the insured. The
risk transfer layer provided by the CCC policy responds to cost overruns in
excess of the known liability and a negotiated buffer layer.
This buffer layer is often 10% of the total cleanup cost.
In addition, a finite risk mechanism can be incorporated into the program
to fund for known third party liabilities.
Q:
What are the benefits of a CCC?
A:
A CCC can eliminate future unexpected expenses associated with cost
overruns from cleanups of contaminated properties.
This benefits real estate investors and developers by allowing them to
develop firm cost estimates for cleanups. This,
in turn, helps them to more accurately evaluate their total investment costs and
ultimately their expected profitability.
Q:
Can a CCC cover multiple locations?
A:
Aggregate coverage can be crafted for a single site or multiple sites
under one policy form.
Q:
What limits of liability are available in the environmental insurance
marketplace?
A:
Marsh has structured CCC programs with $800,000,000 in limits for a
single site, and over $800,000,000 in limits for multiple site cleanups.
Q:
What is the maximum policy term available in the marketplace?
A:
The maximum policy term (duration) available in the marketplace is 30
years. However, these policies are generally purchased with 5- to 10-year terms.
Q:
How much do these programs generally cost?
A:
The typical cost of a CCC is between 5 – 8% of the estimated cleanup
cost for a limit of insurance equal to the estimated cleanup cost. The program
usually includes a 5 - 10% buffer (deductible).
Q:
What types of coverages are available in a PLL?
A:
The primary intent of a PLL is to respond to claims for third party
bodily injury & property damage resulting from pollution conditions, or
first party environmental cleanup costs and legal defense expenses that result
from pollution conditions that are “unknown” and “unexpected” at the
beginning of a project. A PLL policy can also incorporate coverages for the
transportation and disposal of waste, first party business interruption, and
diminution of value.
Q:
What are the benefits of a PLL?
A:
During a remediation project, a PLL policy can protect against
“unknown” issues that become “known” after the project has started.
After a remediation project is complete, a PLL can protect a property owner from
future environmental liabilities resulting from historic or on-going operations.
For this reason, a PLL can often help facilitate the closing of a real
estate transaction because the policy offers assurance to the potential buyer
from the seller that environmental liabilities have been addressed.
Q:
Can a PLL cover multiple locations?
A:
Aggregate coverage can be crafted for a single site or multiple sites
under one policy form.
Q:
What limits are available in the environmental insurance marketplace?
A:
Marsh has structured PLL programs with limits as high as $800,000,000 per
occurrence or $800,000,000 aggregate.
Q:
How much do these programs generally cost?
A:
The cost for a PLL program varies based upon the number of locations, the
nature of the potential exposures, the limits, and deductibles.
However, premiums have decreased over the past several years.
Q:
Can a CCC and a PLL program be combined?
A:
Yes, it is quite common to combine the CCC and PLL programs into one
manuscripted coverage form to provide coverage for the “known” and
“unknown” issues associated with a site or multiple sites.
Q:
Who are the major insurance
carriers?