Marriage Insurance

By Jeffery Hubbard

The marriage of public and private interests to develop the Orchard-Whitney site simply begins with the courting and winning of a developer’s heart. As with any marriage, this relationship will have its ups and downs, potentially brought on by cleanup cost overruns, third party litigation, and possibly unrealized profit expectations. Fortunately, this marriage can be protected through insurance and newly emerging environmental risk management techniques.

Available environmental insurance solutions can be used to enhance the courtship process and create “marriage insurance” for the brownfield redevelopment. I will explain the various methods of employing these products and how they can benefit the public and private sector to create a redevelopment showpiece for the City of Rochester and the developer.

Perfume and Lipstick

One of the biggest struggles with the Orchard-Whitney site is attracting a developer that not only has the funds to create and implement a successful redevelopment plan, but also one that is visionary enough to look past a blighted, crumbling building with environmental issues in an emerging neighborhood to see the potential.

Environmental insurance, in the form of remediation stop loss and environmental impairment liability insurance, can be the “perfume and lipstick” that helps developers look past the environmental issues to see the profit and site potential.

Remediation stop loss insurance turns the remediation costs from an uncertainty in the redevelopment process to little more than another piece of the construction process with similar cost certainties, which is essential to attracting a developer to a heavily contaminated site like this. It can protect both the developer and the city from spiraling remediation costs sending the project into financial jeopardy. Out-of-control remediation expenses are a significant threat to the redevelopment of sites like this one. Many times, as costs spiral out of control, redevelopment slows, creating conflict between the developer, city officials and the community.

Remediation stop loss insurance creates a backstop for remediation cost “surprises” to help eliminate this potential for conflict. By transferring this risk to the insurance company, the developer can not only create a pool of funds to pay for remediation cost overruns, but also provide greater certainty to the project profitability. The City of Rochester gains a greater degree of confidence that redevelopment will not be derailed by environmental cleanup costs.

Environmental impairment liability insurance helps create a comfort that third party claims will not bog down the development process or open the developer to long term liabilities. It also provides a level of reassurance that after redevelopment is complete, new buyers will not “discount” the property due to the potential of future third-party environmental claims.

Many times the buyer/developer will pay the premiums to the insurance carrier with this cost being offset by contributions from the seller or governmental entity, tax abatements, U.S. EPA grants, and state-specific brownfield redevelopment grants. Contributions from historical general liability policies may also be available.

While tax abatements and grants are relatively straightforward to pursue, getting contributions from historical general liability carriers can be very complex and requires a viable responsible party to be involved in the redevelopment process. Historical general liability recoveries require a knowledge of the historical insurance carriers, the limits, and any impairment to those limits. This can only be determined with the assistance of the responsible party that owned the property — apparently not an option for Orchard-Whitney, given the non-responsive owners.

Eliminating these uncertainties can help attract the right developer, with the right vision to satisfy the needs of both the public and private sector. By offering financial incentives to the developer to offset the cost of these products, Rochester can entice a broader spectrum of developers.

Liability Transfers

The ultimate application of “marriage insurance” for the City of Rochester and the developer of the Orchard-Whitney site comes in the form of environmental liability transfer or “exit strategy,” as it is sometimes referred. The application of an environmental liability transfer in this instance shifts the responsibility and ultimate liability for cleanup of the site to a third-party contractor, effectively eliminating this risk for both the developer and the city.

This concept is not perfect for every situation, particularly when thinking about small cleanups, but should be given consideration in brownfield redevelopment situations where the issues are complex, the costs are greater than $3 million and no party in the transaction has the experience, expertise or desire to manage a remediation project.

Of course, when the concept of liability transfer or exit strategy is applied, the developer and the seller are often not aware of all of the insurance details that “backstop” the contractor’s indemnity because, in the end, whether the insurance company pays the contractor’s cost overruns or not, it is the contractor’s promise to indemnify that makes a liability transfer program work.

Regardless of what the remediation costs ultimately end up at for this project, the buyer, the seller and the city can proceed with their vision of a brighter future for the city and its citizens — all because of the creative application of environmental risk management and environmental risk transfer techniques. BFN

Jeffrey Hubbard is senior vice president, environmental, at Jardine Lloyd Thompson LLC in Dallas.

Read Rochester’s Poster Child, the case study this article is based on, and other expert advice on the Orchard-Whitney site from the varying perspectives of the Brownfield News editorial board:
DEVELOPER’S DEPARTMENT Can you find a good apple in this orchard?
TECHNICAL DEPARTMENT What a personality!
INSURANCE DEPARTMENT Perfume and lipstick to help developers see past flaws
ACCOUNTING DEPARTMENT Financial reporting considerations not a deterrent
COMMUNITY DEPARTMENT A good place for all of us to live in
OWNER’S DEPARTMENT A potential for renaissance
U.S. EPA DEPARTMENT The classic brownfield story line

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