Working Together to Find Solutions

By Jeff Hubbard

This article is the second in a two-part series on opportunities for improvement in the environmental insurance marketplace. Read part one.

Small town America wants jobs, growth and prosperity. Everyone does. When brownfield redevelopers, industry and the environmental insurance marketplace cooperate, these goals can be realized. We must find solutions to the insurance industry’s issues instead of just accepting a growing lack of affordable coverage.

One issue is the environmental insurance marketplace’s ability to “wrap around” the existing regulatory framework and programs within each state. Regulatory environments, where cleanup and redevelopment is based on risk, have been created. The environmental insurance industry must embrace this.

Granted, it is difficult for an environmental insurance carrier to say, “Yes, I know there is contamination at the site, but we can live with the risk based on the regulatory framework.” However, this risk can be underwritten based on the history of the regulatory agency.

A perfect example of this is the Texas Municipal Setting Designation. This process allows for a significantly lower cleanup standard for groundwater when the municipality agrees that the groundwater is not to be used for drinking water. However, to achieve this designation, the entity must subject itself to public notice and a public hearing, and most carriers are unwilling to provide insurance prior to the notice and hearing period.

Of course, this is where the risk is perceived to be the greatest by the client. The reality of this process is that claims rarely, if ever, arise from this process. Instead, the community is thrilled that a blighted property is being cleaned up and constructively reused. Thus, the developer is seen as a “white knight.” The last thing the community wants to do is derail this process.

The key here is that the environmental insurance carrier must be willing and able to understand and accept the regulatory process as a positive and not a negative.
 
Embracing the States
I am reminded of a small town in central Arkansas where a textile mill shut down some 30 years ago. It still sits idle today. No jobs are being created as the facility continues to fall into disrepair. The owner succumbed to bankruptcy years ago. The community is ready for an infusion of new jobs.

The state has created a regulatory framework (through Arkansas brownfield laws and the brownfield revolving loan fund) that allows private industry to address the cleanup issues. However, in today’s world of Sarbanes-Oxley, no company will take the risk at a site like this without the ability to insure the third party liabilities as they move through the cleanup and associated regulatory process.

Environmental insurers must embrace the protections afforded by the state programs, such as protection from third-party clean-up claims or absolution from cleanup of identified pre-existing conditions. Insurance companies need to accept the fact that the regulatory frameworks in many states re-duce the risk of loss in the long term.

The industry now has a significant amount of experience with the application of state voluntary cleanup programs and innocent landowner protections. Insurance carriers can use this experience to find a comfort level with the regulatory process. Particularly for smaller remediation projects, these programs must be considered in the underwriting process to create viable solutions to make these deals work.

Environmental insurance has come a long way in 25 years. But just as the remediation and redevelopment industry evolves, so must we in the insurance community. The key is working together to create solutions to benefit the redevelopment stakeholders and the insurance companies. BFN

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