State-Sponsored Brownfields Insurance
For the overwhelming majority of brownfield sites in America — for which environmental risk insurance is either non-existent or cost prohibitive — The MGP Group is working with states that want to develop environmental insurance programs. These programs make comprehensive, cost-effective insurance available that will allow these sites to be brought back to useful, productive and full tax-paying life.
There is a growing interest among states to sponsor environmental insurance programs that are designed to promote and foster brownfields remediation and redevelopment. The goal is to enhance the availability and affordability of key environmental insurance products through a pre-negotiated insurance program with one or more qualified insurance companies. Target customers include property owners, developers, investors and local governments.
Three-Pronged Approach
The most successful state brownfields programs utilize a three-pronged approach to stimulate brownfields redevelopment:
- Funds for Environmental Site Assessments
- Funds for Environmental Remediation
- Access to Environmental Insurance
Each of these components plays a vital role in reducing the financial risks inherent in the acquisition, remediation and redevelopment of contaminated properties. Property tax incentives, typically administered at the municipal or county level, are also commonly used to encourage brownfields redevelopment.
Environmental insurance has become a recognized and proven tool to mitigate the risks of clean-up cost overruns as well as first and third party liabilities, and is often the only means available to remove impediments to the sale, financing and redevelopment of contaminated properties.
The Role of Environmental Insurance
Owners and occupiers of contaminated property (as well as individuals or entities that possess decision-making authority at such properties, such as developers) are subject to liability claims and litigation for bodily injury, property damage and clean-up costs from private parties and the government due to actual or alleged exposure to contaminants on, or migrating from, their property. This pollution liability risk is often cited as the primary reason why contaminated parcels are by-passed in favor of “greenfields” for redevelopment purposes.
Another major risk faced by redevelopers of contaminated property is the risk of clean-up cost overruns. Since estimating cleanup costs at a given site is an inexact science at best, redevelopment projects are likely to be stalled, or even bankrupted, in the event that cleanup costs significantly exceed the original estimates.
Access to private capital is essential to the success of brownfields redevelopment. Depending on the specific circumstances of a given project, government grants and loans (federal, state and local) may cover only a small percentage of the site assessment, remediation and redevelopment costs. Furthermore, these funding sources may be substantially reduced, or even eliminated, during tight budget cycles. Therefore, private capital sources are needed to augment these important state efforts and make the prospect of brownfields redevelopment a reality. However, lending institutions are reluctant to approve loans on properties that are, or may be, contaminated out of fear that the borrower is more likely to default on its loan due to unforeseen costs, and that the value of the property (i.e. the collateral) may be significantly impaired by unexpected contamination. Furthermore, lenders are even reluctant to take title to contaminated property through foreclosure out of fear that they will assume environmental liabilities through ownership. Consequently, private loans typically are not available for brownfields redevelopment.
The Benefits of State-Sponsored Environmental Insurance Programs
Although environmental insurance is an effective means to minimize the liability and financial risks inherent in contaminated site remediation and redevelopment, it may not be available or affordable for a given site. Factors such as project size, the nature of contamination and the environmental regulatory climate are taken into account by environmental risk underwriters. In addition, a degree of sophistication is required regarding the selection and customization of environmental insurance policies to avoid gaps in coverage. These issues are particularly acute in the brownfields arena where prospective insureds are usually less sophisticated than their large corporate counter-parts, and often lack bargaining power due to the relatively small size of their projects.
Several states have responded to this dilemma by developing specialized environmental insurance programs that essentially place prospective brownfield insureds on equal footing with large, sophisticated buyers of environmental insurance. These states have created a “win win” situation for the insurers and the insureds. State-sponsored insurance programs have the potential to generate a high volume of sites. Consequently, insurers can benefit from increased premium volume and the concept of “risk spreading,” a fundamental insurance principle that affects insurance pricing and availability. Insureds benefit through:
- Access to environmental insurance that may not otherwise be available
- Pre-negotiated insurance policies specifically designed for brownfields
- Broad coverage grants
- Premium discounts
- Lower deductibles and self-insured retentions
- Streamlined application and approval process
- State oversight of insurer practices and procedures
These benefits are not available to the average owner or developer of a brownfields property who is not part of a larger “pool” of properties.
Low Cost
States can develop and implement a comprehensive environmental insurance program for a relatively modest investment, that may be reduced through federal grants earmarked for qualified state environmental programs. Furthermore, the cost of ongoing program administration can potentially be funded in whole or in part out of program revenue from the selected insurance companies. In short, the myriad of benefits provided by a state-sponsored environmental insurance program far outweigh its one time design and implementation cost.
Conclusion
A comprehensive, state-sponsored environmental insurance program is a vital link to any state’s multi-faceted approach to brownfields redevelopment. This program can be uniquely structured to complement existing programs or can be designed to operate independently of such programs. The MGP group is currently the only independent (non-broker and non-insurance company) advisor providing states with guidance to implement a state-wide program of brownfields insurance.