Brownfields Revisited
by Bob Hallenbeck
Bob Hallenbeck is vice president of government affairs for the ECS Companies. The ECS Companies, headquartered in Exton, PA, are providers of integrated environmental risk management/SM solutions to business and industry worldwide through insurance, risk control services and claims administration.
Every city has them. They're eyesores: unpopular with community residents, a target for environmental groups, weighing on the shoulders of local governments as complex, difficult problems, with no apparent solution in sight. They are what is known, generically, as "brownfields."
Brownfields are industrial or commercial sites, contaminated in varying degrees by pollutants of all kinds, and often abandoned by owners who typically went out of business, leaving their contaminants behind for cities or counties to clean up or ignore. Mostly they've been ignored, as the costs of cleanup can appear prohibitive; the threat of additional expenditures occurring midway (from previously undetected contamination) can loom large; and there is little likelihood of any future profit. As a result, brownfields are essentially wastelands: dead lands no longer income-producing and too built-upon and polluted for even nature to reclaim. So there they sit-useless.
Or so it seemed until the United States Environmental Protection Agency (USEPA) started making funding available for the redemption, or remediation, of brownfields. Once that added encouragement kicked-in, along with new and relevant tax incentives to owners and purchasers of these sites, the potential of brownfields began to overcome public perceptions and assumptions about the risks of readying them for new uses. That shipyard, that old paint manufacturing site, that closed military base, could all be viewed with an eye to their inherent potential for redevelopment and re-use, instead of being seen as the skeletons of their former selves that they'd become.
The financial benefits of recycling brownfields are the most immediate incentives, and include an influx of new tax revenues from business and property taxes, and wage taxes. At the same time, the creation of new jobs offers stimulus to the local economy, while relieving unemployment's human and monetary drain. In addition, those areas in which brownfields are located are often blighted, even stigmatized, by their presence. When these wastelands are revitalized, the local and perhaps regional ramifications can be far-reaching: one positive action tends to be a catalyst for other positive actions.
Of course, once the potential of brownfields became evident, the true hazards surfaced in greater relief than ever before. What about the possibility of, say, finding an underground storage tank after cleanup begins? Or the potential for unforeseen subsurface soil contaminants and other toxic pollutants left at the site-or having "migrated" to it from adjoining properties? How about unknown but extensive on-site groundwater contamination? And finally, what if there's a likelihood of hazardous dust and fumes contaminating the air and immediate vicinity during a demolition that may be needed on-site? (Lead-based paint and asbestos are two commonly-encountered airborne hazards that can lead to lawsuits from the surrounding community.)
The list of dangers, both obvious and hidden, and the potential liabilities they represent to local governments, and to the long line of additional parties typically involved in a brownfields project, can prevent redevelopment from ever happening. The property owner or seller-perhaps the city or municipality, developers, legal firms, consultants, contractors, economic development agencies, financial institutions, and property buyers may conclude that the financial risks are too daunting and too unpredictable. Despite a more encouraging climate for a renaissance of reclamation, brownfields might have remained brownfields, were it not for one new dynamic: the rise and increasing sophistication of environmental insurance, in tandem with proven risk control techniques.
Relatively few local governments are aware of the fact that they can purchase millions of dollars' worth of environmental insurance to fully protect all aspects of a brownfields project-thus making it feasible and financially worthwhile for all concerned-with relatively low insurance premiums. Instead of insurance costs running between $600,000 and $700,000 or more, as many still imagine such premiums' pricetags to be, the actual cost for basic coverage, on average, is between $15,000 and $20,000. This level of cost makes environmental insurance truly feasible within the larger context of a brownfields project.
The reason that environmental insurance premiums are so reasonable for such massive projects is simple: hands-on experience in the field has taught insurers the ins and outs of risk management during redevelopment. The handful of companies now providing environmental coverages (general liability coverage typically contains an environmental exclusion) are able to evaluate a site and realistically assess the risks, while expertly managing them to prevent liabilities. This is in marked contrast to the situation that existed a little over a decade ago, when environmental risks were insured virtually "in the dark." In fact, many large insurers simply exited the environmental insurance business altogether, rather than continue to incur heavy losses stemming, frequently, from class action suits.
Into the void that was left by major insurers racing for the door stepped a few companies willing to employ environmental experts to study the real risks and find workable methods of reducing them-steps that successfully insuring potential environmental hazards requires. As a result, local governments can take advantage of a fairly recent development in environmental insurance expertise, one that can mean the difference between brownfields that have been redeveloped and put to productive, profitable use, and brownfields projects that expire before they begin-because the financial risks are deemed too great to move forward.
Coverage is now available to insure every party and every aspect of a redevelopment project. This instantly removes the myriad doubts and question marks that can stall-out an attempt at contaminated land transfer and reclamation. Insurance exists to cover all potential liabilities-environmental risks borne by contractors, developers, subcontractors, financial institutions, and even future buyers-that are found within a redevelopment project. This means that the insurer can step in front of local government and offer protection and accountability to all these groups, as well as to concerned community members who may fear that the value of their property may drop in the wake of a disturbance of contaminated land. The insurer can, for instance, meet with community members and assure them that in the unlikely event of an unforeseen environmental incident, their claim will be investigated and handled promptly. They'll also receive quick compensation for their loss, allowing the cleanup to resume without a lengthy delay. This intermediary role can provide a level of community comfort with a cleanup de-contamination project that might otherwise be absent-given the skepticism with which government-initiated actions are sometimes greeted.
Insurance also exists to cover all costs above a designated amount for the cleanup operation. If the estimated decontamination expense is $600,000, and the actual expenses run over that amount, eventually topping, say, $2 million, that unexpected cost-which could drive a project under-can be covered.
Let's look at some actual brownfields projects to demonstrate how environmental insurance can facilitate successful redevelopment. In Pittsburgh, Pennsylvania, an area pocked by steel mills abandoned in the '30s, '40s, and '50s, the 15-acre site of a former paint manufacturing concern was being evaluated by an interested real estate developer. The developer's first potential tenant was a motorcycle retail sales outlet. The motorcycle company was interested in the site because of its close proximity to distribution channels (a river, a highway, and railroad tracks were all nearby) and its nearness to the downtown area, making it a prime location for customers.
But the site contained a lot of contamination from solvents, petroleum, and other paint products. It also held one additional hazard: close to the Ohio River, environmental concerns thus extended not only to the land but also to the river, with the possibility of costly water pollution occurring during a cleanup effort.
Local government was eager to have the site redeveloped and asked an environmental insurance firm to meet with the real estate developer to discuss ways of insuring the property transfer (the site was then owned by the city). Because of its considerable contamination, and substantial anticipated remediation costs, the city was selling the site cheaply-for approximately $250,000 -- though it was worth, because of its prime location, between $2 and $3 million.
The insurer ultimately provided a commercial property redevelopment policy that included $4 million worth of coverage for pollution liability, remediation liability and legal defense expense. The cost per $1 million dollars of insurance was between $15,000 and $20,000, with a discount for multiple millions of coverage leading to a total cost of between $50,000 and $60,000. In addition, the developer also purchased a remediation stop loss policy that provided coverage in the event that cleanup costs exceeded the original estimate of $600,000. The cost of $1 million in cost-overrun coverage was, again, between $50,000 to $60,000.
At the same time, potential liabilities were contained by the insurer through such risk control techniques as assessments and follow-up inspections of the site; recommendations for trained and experienced clean up contractors; guidelines for new construction (a safe distance from the river); and, eventually, education of on-site personnel-so they'll report any unusual evidence of residual contamination at the property. The latter is designed to minimize risk over the long-term, and includes an annual OSHA-type inspection.
Another example of the efficacy of environmental insurance in ensuring the feasibility of redevelopment projects is the successful property transfer of the old Philadelphia Naval Shipyard to Kvaerner, the Norwegian shipbuilding company. Kvaerner saw in Philadelphia's Delaware River shipyard an existing shipbuilding infrastructure of cranes and docks, as well as water deep enough to float very large cargo-hauling ships, with access to the ocean nearby-in other words, all of the basic elements that the company needed to build ships. In addition, there was an experienced workforce in the surrounding South Philadelphia community: former employees of the Naval Shipyard.
But the site was contaminated with petroleum products, diesel fuel spills, oil leaks, and general chemical pollution which reasonably should have been cleaned up by the Navy. But the military had neither the money nor the personnel to get rid of the contamination. And the unremoved pollutants, while not extremely toxic, still presented enough of a concern to Kvaerner that the company then stepped away to reconsider. At this point, both city and state government sought ways to save the deal, since revitalization of the shipyard was too vital to the area's economy to let the opportunity simply slip away. They decided to form an organization known as the Philadelphia Seaport Development Company that would do everything possible to salvage Kvaerner's interest in owning the site.
The Development Company ultimately purchased environmental insurance for the cleanup and redevelopment of the shipyard to cover every potential liability. The insurer was also called in to meet with community groups concerned about the possibility of toxic fumes and the contamination of their drinking water during the process of redevelopment. Those fears were addressed and the community was assured that any claims would be handled swiftly, but that every risk control measure was being utilized-before, during, and after the site renewal.
The Philadelphia Naval Shipyard project will ultimately create 3,000 new jobs and provide a return many times larger than the investment in environmental insurance that finally made it a done deal.
Increasingly, environmental insurance and other innovative risk transfer mechanisms are playing a key role in returning land to productive community use. Through the integration of insurance, risk control and claims management services, there is greater assurance that potential environmental risks will be reduced and controlled.
Managing environmental liabilities is a challenge. Wise environmental risk management offers the rewards of reduced financial losses from unexpected occurrences, lower insurance costs and a reduction of unexpected expenses. While there is no fail proof plan to meet the challenge, there has to be a commitment to a comprehensive approach -- a commitment to making integrated environmental risk management part of the project or process.