Massachusetts, Wisconsin, and other States are implementing innovative programs to promote the use of environmental insurance to clean up contaminated properties that would otherwise remain unused. Other States can generate significant benefits for their citizens by following and expanding upon these models.
The redevelopment of "Brownfields"—defined under federal law as property where "redevelopment or reuse may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant"—yields important public benefits. Brownfield redevelopment protects public health by eliminating environmental hazards, improves land use patterns by reducing sprawl, and brings badly needed capital and jobs to economically depressed areas.
In the past decade, states have instituted a wide range of regulatory reforms and incentive measures to encourage Brownfield revitalization. During this period, state officials have shown an increasing awareness of the critical role that effective risk management tools play in Brownfield redevelopment. Their efforts to give Brownfield redevelopers better access to these tools—and particularly to environmental insurance coverage—have paid impressive environmental and financial dividends. Even greater benefits can be realized by other states that are willing to review, learn from, and expand on these efforts.
The State Role in Promoting—Brownfield Redevelopment
The U.S. Environmental Protection Agency (EPA) has estimated that that the nation has between 500,000 and 1 million Brownfield sites. Acting under authority of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA, also known as the "Superfund Act"), the EPA takes the lead in cleaning up a relatively small number of high priority sites. During the quarter-century since CERCLA was enacted, the EPA has listed fewer than 2,000 sites on the National Priorities List (NPL) of sites that pose particularly severe threats to public health and the environment. (The Agency recently announced plans to commemorate the completion of remedial construction at 1,000 NPL sites in ceremonies to be held at the Macalloy Corporation site in South Carolina on November 20, 2006.)
The EPA continues to add sites to the NPL and to concentrate its administrative and financial resources on assuring proper remediation of these sites. However, Congress has never given EPA the authority or the resources that it would need to take a lead role at all sites where the public interest requires remediation. Accordingly, state and local programs have formed an essential component of the nation's response to Brownfield issues, and there is no reason to expect the state and local role to diminish.
State and Local Successes
State and local Brownfield programs date from the mid-1990s. The EPA has encouraged these programs by implementing federal administrative reforms and distributing federal grants. At first, EPA efforts in this area focused on grants of seed money for Brownfield inventories and contamination assessments. More recently, the EPA has added grants for Brownfield-related job training and the capitalization of revolving loan funds and cleanup. Projects that showcase the benefits of these programs can be found in communities across the country. Following are some examples.
In Cambridge, Massachusetts, state and local incentives were instrumental to the Kendall Square Redevelopment Project, which used cutting edge remediation technologies to prepare a heavily contaminated 12-acre site, the former location of a natural gas plant, for the construction of two high-rise office buildings, including the award winning headquarters of a biotechnology company.
In the Meadowlands area of New Jersey, a combination of innovative state financial incentives helped persuade Cherokee Investment Partners, LLC, the world's largest and most experienced Brownfield redevelopment firm, to initiate a massive mixed-use redevelopment project on 1,335 acres containing multiple landfill sites and widespread industrial contamination.
In Kansas City, Missouri, state loans and tax incentives helped to catalyze the redevelopment of a 22-acre industrial site, contaminated with arsenic, asbestos, lead, and petroleum-based wastes, which has been transformed into a business park with more than 240,000 square feet of high-quality commercial space.
In Portland, Oregon, state and local investment and coordination contributed to the redevelopment of a 321-unit apartment complex on the site of 6-acre rail yard site contaminated with crude oil and arsenic, lead, and aromatic hydrocarbons.
A May 2006 report by the U.S. Conference of Mayors underscores the value of Brownfield redevelopment to America's cities. The report, which summarizes the results of a survey of U.S. cities, describes successful redevelopment efforts at 1,409 Brownfield sites, comprising nearly 11,000 acres, in 154 cities. A partial report on jobs created by these projects—covering just 72 cities due to some survey respondents' lack of access to employment data—found that 22,000 construction jobs and more than 61,000 permanent jobs had been generated by Brownfield projects. A partial report on tax receipts found that Brownfield projects in just 64 cities had brought in $233 million in new revenues.
State Brownfield Programs
State-level Brownfield programs vary widely. States, with EPA encouragement, have tailored their Brownfield programs to their own particular land use patterns and histories, budget constraints, governmental institutions, and laws. Experience across this wide range of programs has shown that environmental risks at Brownfield sites, and resulting increases in the effective cost of development capital, can stop Brownfield projects that promise significant net benefits to the public from getting off the ground. Participants in Brownfield redevelopment projects—including property owners (public and private), developers, and contractors—must grapple with risks that their counterparts involved in projects on undeveloped sites gladly avoid. Most importantly, participants in Brownfield projects must contend with risks that cleanup costs will exceed estimates and that unforeseen pollution-related harms to people, adjoining properties, or the wider environment will give rise to unanticipated liabilities.
States have devised a range of measures to assist participants in Brownfield projects in managing these risks. In Massachusetts, New Hampshire, and Wisconsin, for example, Brownfield programs provide funding for early efforts to quantify the scope of contamination. State-supported site assessments allow project participants to develop more reliable estimates of cleanup costs and potential liabilities. In California and Ohio, among other states, statutory reforms have limited state-law liabilities for private parties who comply with state requirements in cleaning up property contaminated by others. In addition, a growing number of states have sought to assist project participants in managing unavoidable environmental risks by acting to improve the availability of environmental insurance.
Environmental Insurance Products
During the 1980s, the supply of environmental coverage under general liability policies contracted then virtually disappeared, as insurers reacted to waves of unanticipated claims generated by the changes in liability standards. (Broad liability standards established in CERCLA and similar state cleanup statutes accounted for many of these unanticipated claims.) Since the 1990s, however, a vital and competitive market has developed for environmental coverage suited to the risk management needs of Brownfield projects.
Pollution legal liability (PLL) policies provide protection for, among other things, costs resulting from unknown preexisting pollution conditions and new releases of contamination. Coverage can extend to first-party claims as well as to third-party claims (brought by governments or by neighbors or other private parties). PLL can also provide protection against changing legal standards and for off-site liabilities—arising, for example, at disposal sites to where excavated soils and other wastes are sent.
Cleanup cost cap (CCC) policies protect against cost overruns that arise in the performance of a planned cleanup, including overruns resulting from the discovery of unexpected levels or types of contamination. Under these policies, the insurer sometimes pays costs, or a specified percentage of costs, above a "self-insured retention" for which the insured retains responsibility.
Finite risk programs combine a mechanism for pre-funding expected cleanup costs with environmental insurance, usually a combination of CCC and PLL coverages. Under these programs, the insured pays the net present value of expected cleanup costs plus a risk transfer premium to protect against cost increases into an account managed by the insurer. Often, these policies are structured to identify preselected remediation contractors, as well as site owners and other interested parties, as named insureds. If the actual costs of completing the cleanup exceed the original estimate, the insurer and contractor pay prescribed portions of the overrun, before the owner pays anything. (The combination of insurance coverage and contractor indemnification provides solid protection against cost overruns, which are infrequent due to the effective incentives to control costs. Indeed, in the author's experience, which extends to more than 100 finite risk programs, the original owners have not once been required to pay anything beyond the original estimate and risk premium.) If, as is generally the case, actual cleanup costs are kept below the original estimate, the balance of the original cleanup account is distributed to the contractor and owner(s) under an agreed upon formula.
These new forms of environmental insurance have been central to the success of significant Brownfield redevelopment projects at sites across the country. As a result, legislators and administrative officials in a growing number of states have acted to make public support available for environmental insurance at Brownfield sites.
State Environmental Insurance Programs
State efforts to improve access to environmental insurance have focused on risk management needs of small and mid-size projects. PLL and CCC policies are manuscripted, "surplus lines" policies rather than standard-issue, off-the-shelf products. Coverage is often tailored to site-specific risks and risk management needs. The costs of policy-specific drafting, revision, and underwriting—which redevelopers and investors pay both directly, as professional fees, and indirectly, as the administrative component of insurance premiums—can make insurance coverage prohibitively expensive at small and mid-size Brownfield sites.
Pre-Negotiated Policies in Massachusetts and Wisconsin
Since 1999, Massachusetts has enhanced the availability of insurance for Brownfield projects through its Brownfield Redevelopment Access to Capital (BRAC) Program. The program, which is managed by a quasi-public corporation known as MassBusiness, allows Brownfield redevelopers to purchase CCC and PLL environmental insurance from a preselected insurer on prenegotiated terms and at state-subsidized rates. The preselection of insurers, combined with the negotiation of standard terms and rates, lowers transaction costs and premiums by allowing insureds and the insurer to avoid the cost and delay of separately manuscripting each policy. The state subsidy—50 percent of qualifying premiums, up to a maximum of $50,000 ($150,000 for public entities and nonprofits)—further lowers obstacles, particularly for small-scale projects.
The results of the Massachusetts program have been extremely impressive, as documented in a recent study of state Brownfield insurance programs by Kirsten R. Yount of the University of Louisville and Peter B. Meyer Northern Kentucky University. (Links to this EPA-sponsored study, which was published in 2004 and supplemented in 2006, may be found at http://www.epa.gov/brownfields/pubs/insurance.) At one large, abandoned manufacturing site, a BRAC policy catalyzed a cleanup that had been on hold for years due to disagreements concerning the allocation of costs among responsible parties. Cleanup and redevelopment of another abandoned site has facilitated redevelopment expected to generate 2,000 new jobs and $1 million per year in tax revenues. All told, the Massachusetts program has paid out nearly $5 million in premium subsidies for 258 projects. The policies have provided more than $930 million in coverage for projects expected to generate more than $2 billion in total investment and nearly 26,000 new jobs.
Wisconsin has also decided to offer prenegotiated, volume-discounted coverage to Brownfield redevelopers under the Wisconsin Brownfield Insurance Program (WBIP). WBIP is designed to augment an insurance program, in place since 2001, under which the state itself has purchased coverage against risks that additional groundwater remediation will be needed at sites where developers have been granted liability releases after meeting requirements specified in Wisconsin's Voluntary Cleanup Program (VCP). In April 2005, following 18 months of study and evaluation, Wisconsin chose AIG Environmental as the exclusive provider of WBIP coverage. Although Wisconsin officials have stated that they expect WBIP coverage to be available soon, the precise terms of the standardized coverage had not yet been announced when this article was published.
Tax Credits in New York and Indiana
New York has taken a different approach to assisting with the management of environmental risk. The state's Brownfields Cleanup Act, which was enacted in 2003, created a series of Brownfield tax credits, including one that allows partial recovery of environmental insurance premiums. Taxpayers that fully implement cleanup agreements with state regulators can recover 50 percent of their environmental insurance premiums, up to a limit of $35,000.
Indiana has used its tax code to implement a more modest reduction in insurance costs. It provides a tax credit limited to the amount of state taxes paid on premiums for Brownfield insurance.
Efforts in Other States
Administrative officials and legislators in other states have also begun to consider possible state support for environmental insurance programs. The above-cited EPA-sponsored study indicates that Brownfield insurance initiatives are under active consideration by officials in Delaware, Idaho, Indiana, New Jersey, Ohio, Pennsylvania, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, and Wyoming.
The Road Ahead
Brownfield redevelopment projects produce significant public benefits that are not reflected in the risk-reward calculations of private participants. Most Brownfield redevelopment to date has occurred at sites where expected post-cleanup commercial value exceeds the expected cost of cleanup by a comfortable margin. As work at these sites is completed, continuing progress will increasingly depend on targeted public support for projects that hold the promise of significant public benefits but fall just short of viability based on a purely private assessment of risks and rewards. State-sponsored measures to increase the availability and lower the cost of environmental insurance represent one effective means of bringing private incentives into line with the public interest.
Existing state environmental insurance programs present a range of policy options to policy makers in states that have not yet implemented such programs. States can lower transaction costs and secure volume discounts by negotiating standard policies with environmental insurers. In addition, states can subsidize insurance premiums through direct expenditures or targeted tax credits. Other forms of tax-based support are also possible. For example, states that want to guard against reduction in existing revenue streams might consider allowing redevelopers to offset environmental insurance costs through tax reductions that could only be taken from new sales or property taxes attributable to the redeveloped property.
Choosing among these options can present a challenge. Design and initiation of a successful program requires an informed understanding of the role of environmental insurance in Brownfield cleanups and careful analysis of state needs and capabilities. Fortunately, as described in Exhibit 1, states can apply for EPA grant money to assist with this analytic groundwork.
EXHIBIT 1 EPA Funding for State Insurance Programs
The Small Business Liability Relief and Brownfields Revitalization Act of 2002 created two potential sources of federal funding for state Brownfield insurance programs.
The Act amended Section 104(k)(6) of CERCLA to authorize EPA grants to state and local governmental entities and nonprofit organizations for Brownfields training, research, and technical assistance. EPA guidelines for these technical assistance grants provide that projects designed to provide "[f]inancing tools for Brownfields cleanup and redevelopment" are eligible for funding.
The Act also amended Section 128(a) of CERCLA to authorize grants for the enhancement of state and tribal response programs. Permissible uses of these grants include the purchase of "environmental insurance or develop[ment of] a risk-sharing pool, indemnity pool, or insurance mechanism to provide financing for response actions under a state or tribal response program." The EPA's most recent guidance under this section specifies that "[f]unding for environmental insurance mechanisms" is one of the priorities that should guide the Agency's regional officials in allocating funds among states and tribes. (California has used Section 128(a) grant money to support its efforts to establish an environmental insurance program.)
When this article was published, Congress had not yet enacted Brownfields grant appropriations for fiscal year 2007. However, appropriations bills had been reported out of Committee in both the House and Senate would keep EPA's Brownfields funding at the same level as fiscal 2006, when Congress appropriated $163.2 million for EPA-administered Brownfield grant programs.
Efforts to transform the nation's Brownfields from environmental and economic wastelands to productive community assets are still at an early stage. Carefully crafted environmental insurance programs at the state level can make an important contribution to future progress.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.