New Life for Used Lands

Across Canada, “brownfield” lands sit abandoned or underused, plagued by expensive clean-up costs and the threat of environmental liability that may accompany future use. As a result, brownfield lands have been historically shunned as investment and development opportunities due to public stigma and difficulty in securing financing for contaminated land redevelopment.

Today, concern about urban sprawl, protecting open space and job creation is fueling a desire to clean up polluted properties and return them to good use again. All levels of government are driving this push to recycle land. Municipalities are seeking to increase tax revenues via brownfield redevelopment; provincial governments are limiting urban sprawl with legislation limiting Greenfield development; and federal governments are directing stimulus funds to brownfield sites.

Examples of such initiatives include Community Improvement Plans implemented by municipal governments across Canada. These plans attempted to encourage brownfield development using various incentives (i. e., tax incentives or clean-up cost subsidies). Most recently, the federal government has attempted to spur brownfield redevelopment with stimulus measures contained within Canada’s Economic Action Plan.

This is therefore an opportune time to look into some of the issues that arise in insuring brownfield land redevelopment.

THE HURDLES

Whenever purchasing property, a buyer is always prudent to seek assurances about a property’s condition. This is often achieved by undertaking environmental site assessments (i. e. investigations designed to identify and characterize environmental conditions at a site). However, even when strict due diligence is performed, there is always the chance of discovering a previously unidentified environmental condition (contamination). Such contamination could be due to an oversight in the environmental site assessment performed or could be the result of an unforeseen condition (i. e. migration of contamination from a neighbouring property).

The uncertainty associated with environmental characterization often leads to unanticipated complexities in even the most benign of purchase and sale transactions. In the case of brownfield lands, these complexities often preclude the possibility of land transfer, as owners are often unable to address the potential ongoing liabilities associated with redeveloping brownfield sites.

Specifically, brownfield redevelopment often results in industrial or commercial property being used for a more sensitive use (i. e. residential). In addition, brownfield sites often require sophisticated clean-up solutions, including risk assessment and highly engineered site controls (i. e. active sub-surface ventilation systems, groundwater pump and treatment systems). Based on their inability to insulate themselves adequately from these risks, brownfield owners often opt to leave their sites vacant and unused.

Even when the aforementioned hurdles are overcome, brownfield stakeholders must also deal with potential complications and liability associated with changes in clean-up standards. For example, Ontario is currently revisiting property use standards that have been in place for more than a decade. Anticipated to be finalized later this year, the new property standards will, for the most part, impose more onerous cleanup standards. Such changes can create uncertainty with respect to past clean-up efforts and impede development by discouraging prospective purchasers, developers, lenders and municipalities — the fear being that they might be held liable to fund future clean-up costs. Lastly, brownfield redevelopment is often stalled by transactional issues, including the transfer and assumption of environmental liability between purchaser and vendor, overly burdensome and unsophisticated environmental legislation and lack of adequate brownfield financing.

INSURING REDEVELOPMENT

Environmental insurance offers the opportunity to address or assist in managing all these hurdles. It offers a risk transfer strategy that handles potential environmental liability today, as well as in the future. It is an important tool that offers additional comfort and certainty to brownfield owners, redevelopers, investors, government entities and future land users.

The use and availability of environmental insurance has helped spur activities in property redevelopment in both Canada and the United States. As activity in this market has increased, the insurance industry has responded by developing new insurance programs to fill the vacuum that has stymied growth in the redevelopment of contaminated properties. Realizing the unique needs of participants in brownfield projects, insurers have responded by creating custom insurance packages uniquely designed to address these issues.

For instance, environmental insurance can protect landowners or purchasers against the clean-up costs and legal liabilities associated with environmental conditions that were not identified during the due diligence process. In addition, environmental insurance can be crafted to address the site-specific ongoing liabilities associated with a future use. Insurance can insulate a redeveloper from liabilities associated with failure of an engineered risk control measure (i. e. bodily injury claims, property damage claims or clean-up costs incurred to respond to the failed risk control measure). Lastly, environmental insurance can respond to changing regulatory requirements and standards by shielding owners and developers from unforeseen clean-up costs required to bring previously remediated properties into compliance with current or future legislation.

At one time, environmental insurance met with a lot of scepticism. The coverage was deemed too expensive and very limited. It was once considered a special luxury for regulated industries such as hazardous waste haulers. But a growing number of policies available in the market today are being used more frequently to facilitate real estate transaction — particularly the redevelopment of formerly used properties. Many developers would have ignored these properties in the past because of environmental liability concerns.

In its traditional role, environmental insurance provides a financial cushion if an environmental incident occurs. Today many stakeholders have come to learn that the cost of environmental insurance is more manageable than an unforeseen cleanup expense. Developers are beginning to incorporate environ mental insurance into their redevelopment costs. This ensures financial capital remains available for other development projects rather than being diverted to address unplanned environmental complications. Ultimately the financial protection afforded by an environmental policy may be the difference between completing a brownfield redevelopment and being forced to abandon a project.

In this way, environmental insurance serves as an important selling tool for attracting buyers, financing and tenants because it provides reassurance to all parties, by eliminating or reducing the uncertainty surrounding the property. Likewise, insurance can be used to assuage the surrounding communities’ fears about contamination, potential environmental incidents or the spread of contamination during construction.

WHAT’S AVAILABLE?

One of the most common environmental insurance programs used in brownfield redevelopment is a pollution and remediation legal liability policy. This policy provides coverage for on-site and off-site losses, remediation expense and legal defence expense under one policy for sudden and gradual pollution conditions at or from covered locations.

The pollution and remediation legal liability policy can also be combined with a remediation stop loss policy, which provides coverage in the event of cleanup project cost overruns. This coverage can be written for an individual site or for a portfolio of properties.

The true value of insurance is often only realized following a loss. This is not the case with environmental insurance for property redevelopment. In these situations, the value of the insurance is recognized at the beginning of a redevelopment project before any loss is suffered or any financial payout is made: the policy assists in overcoming the hurdles to development. It is for this reason that stakeholders involved in redevelopment activities are buying environmental insurance. For these entities, environmental policies are used strategically to allow redevelopment opportunities to move ahead successfully.