Insurance exit strategies: the use of tools increasingly available to manage the risk of developing contaminated real estate include a guaranteed-price cleanup and environmental insurance, which pays for unforeseen liability and cost overruns

Risk & Insurance, April 1, 2004 by Bill Stoneman

A 29-acre parcel in Kenosha, Wis., was hardly ripe for redevelopment when a plant that manufactured brass fixtures since the late 19th century closed in 1999. With residue of more than a century of metalworking in the ground and an uncertain cleanup cost, the land might have sat idle indefinitely. Real estate investors tend to steer clear of contaminated sites, fearing that they'll be sued by state or federal environmental officials in connection with the mess or that if they attempt to clean up the site, the job will spin out of control.

But the factory buildings were removed last year, contaminated soil is being cleaned and city officials are talking with investors about commercial development on half of the land and new housing on the other half.

Behind this activity--and the prospect of a more satisfactory outcome than is so often associated with old industrial sites--are the use of tools increasingly available to manage the risk of developing contaminated real estate: a guaranteed-price cleanup and environmental insurance, which pays for unforeseen liability and cost overruns.

With these and other tools at their disposal, a relatively small group of private real estate developers and municipal leaders, along with people in businesses that support them, say the conventional wisdom of the past 20 years--that reusing contaminated sites is too risky for both developers and corporate owners of the sites--deserves another look. Indeed, significant changes in state and federal laws and regulations, improved cleanup techniques and financiial incentives from nearly all levels of government go a long way toward mitigating the risk of redeveloping polluted land. At the same time, cleaning polluted places reduces the risk of injury resulting from contaminations remaining in soil and groundwater.

As risky as real estate development is under any circumstance, redevelopment of contaminated land has been viewed as particularly so since the early 1980s, when state and federal Superfund laws were adopted. These laws generally hold that all past and present owners of contaminated property can be forced to foot the bill for site remediation, even when problems are discovered years after ownership changes hands. Not wanting to be held responsible for something that happened long before they arrived on the scene, developers decided that it was easier and safer to build on farmland and forests farther away from community centers. And to the extent that old industrial sites occasionally interested them, corporate owners were usually very reluctant to sell to them. Owners reasoned that human exposure to toxins they once discharged was far more likely after redevelopment, when people begin using property again, than when they kept a tall fence around the land in question. Compounding the legal risk, developers feared that the cost of a cleanup could be difficult to pin down.

Thus arose the term brownfield, which is used to mean property that sits idle due to known or suspected contamination.

Moving on Two Tacks

The picture began improving as early as l0 years ago, albeit slowly, when states began adopting more flexible rules for cleaning polluted sites. Two tacks in particular opened the door to work at old factory sites, railroad yards, power plants, oil refineries and other hard-to-clean places. One by one, states began creating special programs under which they effectively promised not to sue parties that volunteer to clean contaminated sites to standards set by the state. And states increasingly pegged those standards to the future use of a property.

"They allow you to leave pollution in place as long as you have protective measures in place for human health and the environment," says Daniele Cervino, general counsel with Environmental Waste Management Associates, an environmental consulting company in Parsippany, N.J. In practical terms, that means that commercial and industrial development may not need the same level of cleanup that a residential project requires. And it may not be necessary to remove all contamination from a site if it is consolidated and contained, perhaps beneath a paved parking lot.

The legal landscape was further improved with adoption in January 2002 of amendments to the federal Superfund law. The new law absolves purchasers of contaminated property of responsibility for the contamination if they conduct an appropriate investigation of the site beforehand, says Brooke Furio, a brownfields specialist with the U.S. Environmental Protection Agency in Chicago.

In addition, the law bars the EPA from launching enforcement actions on properties enrolled in state voluntary cleanup programs, he says. Together, these measures should vastly improve certainty in the development process, Furio says.

Offering Guarantees

Though the mechanics of state voluntary cleanup programs differ significantly, their introduction, changes in the federal law and improvements in cleanup techniques and technology have generally given the insurance industry the confidence to accept more risk associated with brownfields projects. And with an active insurance market, environmental engineering firms have moved to guarantee the price of their work.