Redevelopment Regulations. and Risks PG 18. July March 2-4, Solutions for Air, Water, Waste and Remediation

Transcription

1 July 2014 Solutions for Air, Water, Waste and Remediation > DEGRADING CAHs > H2O REUSE TRENDS > IFAT REVIEW > NEW AIR REG PG 26 PG 30 PG 34 PG 36 Regulations and Risks PG 18 Register Today & Save $200! March 2-4,

2 COVER STORY Navigating Regulations and Risks of Brownfield One factor that can often be overlooked is the importance of a good insurance policy before having to deal with brownfield or other remediation issues. >> BY MICAH J. M. KNAPP, ESQUIRE, PRODUCER, THE GRAHAM COMPANY AND JOHN J. HEFT, MS, CRIS, SENIOR VICE PRESIDENT, DIRECTOR OF REAL ESTATE PRACTICE, NEW DAY UNDERWRITING MANAGERS A s the Great Recession slowly recedes, the trend toward gentrification and redevelopment of once gritty urban neighborhoods and disused plots of decayed heavy industry will pick up pace. Prior to the recession, at the very beginning of the millennium, Congress and various state legislatures passed sweeping legislation most prominently the Small Business Liability Relief and Brownfields Revitalization Act (the Brownfields Act ) intended to ease the financial, regulatory and liability burdens of brownfield redevelopment. While the Brownfields Act has lowered barriers to redevelopment and lessened a purchaser s exposure to liability associated with pre-existing environmental 18 Pollution Engineering JULY 2014

3 and once rural areas, resulting in low density, environmentally damaging and inefficient sprawl. Luckily, the last decade witnessed concurrent growth in insurance products covering environmental pollution property damage and liability risks. Those products fill the gap in general liability policies that emerged after the introduction of ubiquitous pollution exclusions in the early 1970s and the strengthening of those exclusions through the 1980s. As environmental pollution law became more settled and the risks more readily circumscribed, the costs and terms of pollution coverage have stabilized. Brownfield owners and developers who purchase carefully tailored pollution insurance will not face the specter of unknown environmental liability and should find easier access to financing. contamination, developers still face the risk of unexpected environmental contamination and resulting remediation and liability. Those remaining risks affect not only a company s decision to redevelop brownfields, but also a bank s willingness to finance such projects. They serve as obstacles to smart, environmentally friendly growth through urban renewal, land recycling and increased density. And because they complicate and increase the cost of brownfield redevelopment, these factors indirectly aid development in exurbs How Did Environmental Law Effect Brownfield Growth The term brownfield refers to real property, the expansion, redevelopment or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant or contaminant. [1] Potential civil liability and regulatory penalties aside, there have always been reasons enough for real estate investors and developers to not purchase polluted and discarded brownfields. But brownfield redevelopment was made nearly impossible as a direct result of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CER- CLA or Superfund). Congress enacted CERCLA in 1980 in response to the public s growing awareness of and concern about abandoned hazardous waste sites such as Love Canal, N.Y. CERCLA includes a broad liability scheme that imposes strict liability on several categories of potentially responsible parties. Under CERCLA, those potentially responsible parties are jointly and severally liable for the entirety of the cleanup cost unless they can prove divisibility of the harm done. This means that each potentially responsible party may be held liable for the entirety of the site s remediation costs. And a current owner of contaminated land is responsible for the property s cleanup under CERCLA, based solely on its ownership status, even if the owner did not contribute to the contamination. [2] While lenders are generally exempted from CERCLA liability, they can become a potentially responsible party if they participate in management of a liable owner or operator. [3] Concerns about being saddled with CERCLA s strict liability simply as a consequence of purchasing a previously contaminated site caused developers to shun brownfields and all but eliminated lenders appetites to fund the acquisition or development of land potentially falling within the CERCLA scheme. Congress enacted CER- CLA to discourage pollution and fund environmental JULY

4 COVER STORY Luckily, the last decade witnessed concurrent growth in insurance products covering environmental pollution property damage and liability risks. repairs, yet the regulation bore two related but unintended consequences: 1.) CERCLA discouraged redevelopment of brownfields, and 2.) CERCLA sped the proliferation of suburban sprawl to virgin land without potentially problematic past usages. By the 1990 s, CERCLA s effect on brownfields and sprawl were widely recognized as a problem. In 1995, the EPA initiated a formal Brownfields Program. Additionally, the agency began entering contractual agreements with developers that provided a developer assurance it would not face CERCLA liability if the developer abided by certain criteria. In these prospective purchaser agreements and prospective lease agreements, the EPA provides the prospective developer with CERCLA liability relief in exchange for payment and/or cleanup work. [4] While the EPA issued formal policies governing prospective purchaser agreements, the agreements themselves had to be negotiated with the EPA. The ad hoc nature of EPA s prospective purchaser agreements failed to remove the uncertainty experienced by prospective developers and their lenders. The Brownfield Act and State Laws Congress codified many of the EPA s brownfield initiatives in the 2002 Brownfield Act. The Brownfield Act amended CERCLA to encourage companies to redevelop brownfields by protecting bona fide prospective purchasers (BFPP), contiguous property owners and innocent landowners from CERCLA liability and by providing tax incentives to brownfield developers, funding grants for assessment and cleanup and funding state and local brownfield programs. The Brownfield Act enables a developer to achieve BFPP status without having to enter into a prospective purchaser agreement with the EPA. Under the Brownfield Act, BFPP protection is available to a person or entity whose CERCLA liability would otherwise be based solely upon the person s ownership or operation of a facility. A BFPP must satisfy eight criteria concerning the remediation of the site and their investigation into the previous uses of the site and, upon discovery of contamination, must not impede the response action. [5] States and municipalities, too, enacted legislation encouraging the voluntary cleanup and reuse of brownfields. Using Philadelphia and Pennsylvania as examples, the Commonwealth s Land Recycling Program provides incentives in the form of grants and loans to businesses that redevelop brownfields, sets forth uniform cleanup standards and provides relief from liability under state environmental laws. [6] Philadelphia encourages brownfield redevelopment by granting developers of qualified projects a 100 percent tax abatement for 10 years, and the city s Department of Commerce assists brownfield developers in obtaining the benefits available under federal and state brownfield programs. [7] Remaining Environmental Liability and Costs Despite the liability protection afforded developers by the Brownfield Act and state and local laws, companies looking to redevelop brownfields still face regulatory 22 Pollution Engineering JULY 2014

5 and tort liability. Moreover, it is still the developers who bear the vast majority of the costs to remediate and clean contaminated sites. Even after Phase I and Phase II Environmental Site Assessments and/or remediation of known contaminants, developers of brownfields risk encountering additional, previously unknown contamination while working on-site. Developers and owners looking to their traditional liability and property insurance policies to cover such unexpected costs will be disappointed because the potential liability and costs to remediate a developer s land and adjacent properties are not covered by traditional insurance policies. Prior to 1972, Commercial General Liability (CGL) insurance policies did not exclude bodily injury and property damage due to pollution or environmental contamination. Carriers introduced the first Sudden and Accidental pollution exclusion in 1972 in response to the growing environmental tort and regulatory liability. And since 1972, insurers further restricted pollution coverage in their CGL policies. Today, a CGL policy is likely to include most, if not all of the following: the standard absolute pollution exclusion, the more restrictive total pollution exclusion, a mold/silica exclusion, a lead exclusion, and an asbestos exclusion. Commercial property insurance policies the insurance that generally covers damage to the insured company s own real and personal property incorporate the same exclusions but may afford a very small amount of insurance for cleanup of polluted land or water. Role of Pollution Policies in Brownfield Although there has been a market for environmental liability insurance since 1979, for years, coverage was very narrow, limits were low and premiums were relatively high. The market for pollution liability insurance dramatically changed since the turn of the century. The environmental liability insurance market today is a $1.5 billion annual premium industry that has annually grown over 20 percent for the past five years. The increased competition and capacity in the environmental marketplace have led to a plethora of carriers offering coverage terms and conditions that are broader than ever. In response to the need for protection against pollution risks, underwriters have developed a group of insurance products that address the special needs of persons that are involved in the remediation of contaminated real estate. Pollution insurance is found in two types of policies: pollution legal liability policies for property owners and operators, and contractors pollution liability policies to cover builders and contactors liability arising from pollution-related property damage and injury. Pollution Legal Liability Insurance Pollution legal liability (PLL) insurance protects property owners and developers from liability associated with pollution-related property damage, cleanup and bodily injury. In today s environmental insurance market, PLL policies can be tailored to address the diverse needs of each property; they can also be structured to meet a variety of requirements and objectives, including, but not limited to, regulatory obligations, contract requirements, lender requirements, landlord obligations and business objectives. Insurers offer PLL policies that address the issues specific to brownfield remediation projects. The risks that arise from brownfield transactions may include, but are not limited to, the following: Over reliance on clean Phase I/II property assessments that are not guarantees against contamination. Contaminants from known and unknown historical usage/operations or neighboring properties. Investigation and defense due to local and regional soil and groundwater contamination. Construction debris containing hazardous materials JULY

6 COVER STORY (e.g. paint cans, tars, etc.). Hazardous chemical storage (laboratory chemicals, dry cleaning solvents, pesticides or herbicides used indoors or outdoors, etc.). Inadequate containment at loading/unloading areas. Inadequate containment for hazardous materials, waste or process areas. Lead, asbestos, PCBs or radioactive material. Methane contamination from buried tree stumps and construction debris. Midnight dumping on vacant land parcels. Past landfills, lagoons and other solid waste disposal areas. Past or present use of septic systems for disposal of wastes. Spillage, stained soils, discolored surface water or oily sheens. Surface water runoff. Underground or aboveground storage tanks or piping unknowingly leaking. Devaluation of real estate asset due to buyer s uncertainty concerning possible contaminants. Easements (rail/roadways, pipelines) on the property with potential environmental implications. Damage to natural resources. If the brownfield transaction includes remediation activities, additional insurable risks include the following: The risk that contaminants will be released from the site during the remediation process by construction activities. This could cause third party bodily injury or property damage, or it could require additional cleanup at the site or on the property of others. The risk that the remediation plan, which was approved by regulators and/or selected by the owner (in a voluntary cleanup) will not be effective. Incomplete remediation performed by the environmental contractor causing the exacerbation of contamination. The risk that additional remediation activities will be required by the identification of previously undiscovered contamination or by newly established cleanup standards. The risk that hazardous materials being removed from the site for treatment or disposal will be released while 24 Pollution Engineering JULY 2014

7 being transported to or after deposit at the treatment or disposal facility. Although environmental liabilities are often shifted from owners through indemnification or hold harmless agreements contained within purchase and sale agreements, such provisions are often limited in scope and duration and are poorly drafted. Savvy companies and their environmental attorneys utilize PLL insurance to either replace the indemnification/hold harmless agreement or to wrap-around the indemnification. Several insurers have the ability to amend cleanup or remediation triggers in their policies to wrap around the indemnification language by scheduling the purchase and sale agreement as an insured contact onto the insurance policy. Modern PLL policies are flexible enough to provide certain coverages for existing contamination. Owners and developers can find PLL coverage with a single insurer written for up to a 10-year term and with up to $50 million in limits to address site legacy liability associated with a brownfield site. PLL insurance can play an important role in developing contaminated property by limiting the pollution and regulatory risks faced by developers and lenders. Contractors Pollution Liability Property owners and developers are not the only parties involved in a brownfield redevelopment project that must deal with the specter of environmental liability and regulation. Contractors, too, face liability arising from their work at a brownfield site. Some of the issues contractors face include the inadvertent disturbance of pre-existing contamination/product in the form of asbestos-containing materials, naturally-occurring asbestos in subsurface soils/geology, lead paint and contaminated soils, surface or groundwater. Contractors can also be sued or fined for accepting supposedly clean fill from unknown origins, only to learn later that it was contaminated with petroleum or other hazardous substances. These exposures can be mitigated via a comprehensive contractors pollution liability (CPL) policy. CPL provides coverage for third-party liability resulting from bodily injury, property damage, defense and cleanup as a result of pollution conditions (sudden/accidental and gradual) caused by contracting operations performed by or on behalf of the contractor. The coverage has been considerably broadened over the last few years to include emergency response costs, transportation, non-owned disposal site liability, mold, site pollution for contractor yards and professional liability. Over the past few years, CPL coverage has expanded to include emergency response costs to mitigate sudden pollution incidents, crisis management for pollution events to offer contractors additional image and public relations support and professional liability coverage. Due to competition, the policy forms have vastly improved with minimum premiums for new policies falling well below $50,000 and easily obtained under $20,000. Moreover, CPL claims-made policies have rapidly been replaced by occurrence forms, meaning that the liability coverage purchased for a given year will be available to the contractor for its activities during that period of time, even if the property damage or bodily injury does not become known until years later. Conclusion The generational shift away from suburbanization and toward urban renewal shows no sign of slowing. To build in cities, towns and inner ring suburbs, buyers and builders must deal with the unique challenges associated with past use and pollutions. Over the last 20 years, the federal government and states have begun to amend environmental regulation that inadvertently discouraged the use of previously used, even potentially polluted, sites. At the same time, a new insurance market was born and has evolved to protect landowners, developers and contractors from the potential regulatory and civil liability associated with brownfield redevelopment. By involving an insurance professional knowledgeable in pollution law and insurance coverage early in the planning process, property owners, developers and contractors can secure protection from pollution liability at a defined cost and can reduce lenders concerns about the effect of regulatory fines, delays and legal liability on a brownfield project. Micah J. M. Knapp is a coverage attorney and insurance broker at The Graham Company in Philadelphia, where he negotiates and places coverage for commercial clients with complex insurance needs. Micah may be reached at mknapp@grahamco.com. John J. Heft, MS, CRIS is a senior vice president and the director of the real estate practice at New Day Underwriting Managers, where he specializes in construction-related professional liability and environmental liability insurance. John may be reached at john.heft@newdayunderwriting.com. REFERENCES: U.S.C. 9601(39) 2. U.S. Environmental Protection Agency. Office of Site Remediation Enforcement / Office of Enforcement and Compliance Assurance. Revitalizing Contaminated Sites: Addressing Liability Concerns. EPA Pub. No. 330-F (March 2011), 2 3. CERCLA 101(20)(E)-(G) 4. Revitalizing Contaminated Sites, Strickland, Fenton D. Brownfields Remediated? Indiana Law Review 38 (2005): 795. Print 6. Land Recycling Program. PA Department of Environmental Protection. Web. 03 Mar < recycling_program/20541> 7. Addressing Environmental Concerns Brownfield Assistance. City of Philadelphia Department of Commerce. Web. 15 Feb phila.gov/commerce/comm/lvl_2/mbat_env_concerns.htm JULY