If it Ain’t Broke, Don’t Fix it

By Jeff Hubbard

Here in Texas, we have a saying: “If it ain’t broke, don’t fix it.” In the environmental insurance marketplace, this has been good advice to follow over the last five years. The environmental insurance markets have been instrumental in bringing vitality to the brownfield marketplace through their innovation and creativity. Unfortunately some of the innovation and creativity has resulted in insured losses for insurance carriers, and now they seem to be retreating from a number of the coverage grants that made the brownfield business easier and more enticing.

It Ain’t Broke

The environmental insurance marketplace’s ability to offer long-term policies (10 years or longer) is paramount to the success of the brownfield redevelopment industry. The introduction and continued offering of these policies was a great step. Environmental insurance policies need to mirror the life of the transaction as closely as possible so that the developer not only has adequate protection from loss, but can impart this coverage to a new owner after development. It is essential that the marketplace continue to offer long-term policies, not just for pre-existing conditions, but for new conditions as well, so that lenders, developers and future owners can feel confident that their assets are protected.

The introduction and continued offering of remediation stop loss coverage is also essential to a vibrant brownfield market. Let’s face it, most of the easy sites are gone, “cherry picked” in the early days of brownfield development. This means that as an industry, we are left with tougher sites that are more complex and riskier to clean up. The most effective way to address the risk of runaway cleanup costs is remediation stop loss coverage.

Clearly there are other ways to try and address this risk, such as guaranteed or fixed price remediation contracts, but these contracts are typically tied to a scope of work or soil volume, so “guaranteed” does not always mean “guaranteed.”  Insurance, whether procured by the developer or the contractor, can provide the broadest protection from cost overruns. 
 
It Needs to Be Fixed

There are two pressing issues for the environmental insurance marketplace that must be addressed by the insurance industry and brownfield development stakeholders:

• Affordable remediation stop loss coverage for smaller projects ($2 million in cleanup cost and below).
• A greater acceptance of third party risks based on the regulatory environment and new state-created programs.

These are very difficult issues to address because they involve taking on greater risks, which makes it incumbent on industry to assist in developing the solutions. Small cleanup projects have created significant losses for very little premium for insurance carriers. However, as an industry we can look at these losses and develop an understanding of their causes so that we can create an affordable alternative.

For instance, “dig and haul” remediation projects have led the way in remediation stop loss coverage losses. The possible answer to this dilemma may be to create a portfolio remediation stop loss program that would reach across all of the development projects or all of a contractor’s remediation projects, thus spreading the risk over multiple projects.

A second option would be to work in conjunction with individual state voluntary cleanup programs to aggregate all cleanups that are part of these programs, and then allow the state to purchase a remediation stop loss limit over all voluntary cleanups within that state and recover the costs by imposing a fee as part of the VCP entry costs. 

These are not perfect answers, but the point is that as an industry we must seek and propose solutions to this gap instead of simply accepting the lack of affordable insurance coverage. There are many small cleanup project opportunities across the country, so it is in everyone’s best interest to think and propose solutions to this issue. BFN

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