Risk Management: Part Four of the “Brokers and Brownfields” series

In brownfield real estate transactions, there are several key steps to managing and mitigating business risks. A strong risk management process for the sale or purchase of these sites includes the due diligence process, contract negotiation, environmental indemnities, and environmental insurance, as outlined in greater detail below.

Due Diligence

The due diligence period is the time to review available documentation to identify known and potential risks and to develop a plan to mitigate. Risks in brownfield transactions include the type and pervasiveness of environmental contamination, the potential for overrun in remediation or demolition estimates, the ongoing maintenance and monitoring needs, the dynamics of the real estate market, the regulatory agencies involved, and the expected difficulty in obtaining new zoning or new parcel delineations. Planning for protection against the unknown is just as important as addressing the known risks.

Contract Negotiation

Each site has its own unique set of risk factors that are important to keep at the forefront of the contract negotiation, as there is potential to customize the contract terms and environmental insurance creatively to reach a “win-win” situation for both the buyer and seller.

Environmental Indemnities

Environmental indemnities usually focus on the transfer of risks and liabilities resulting from clean-up costs and third-party claims. Environmental liability transfers can be structured to indemnify the seller against known and unknown environmental conditions, both on- and off-site, and other contamination issues regardless of who was in ownership at the time.

The indemnifying party (often the buyer in Brownfield transactions) will promise to bear the costs for damages or losses from stated environmental liabilities, and these indemnifications can be negotiated to include “carve-outs” or limits for certain terms. Indemnifications will protect against third-party claims or from claims from the indemnifier but cannot prevent the indemnified from direct liability to the government for remediation costs. However, the indemnified could pursue reimbursement from the indemnifier for expenses they were forced to cover per a government order.

Indemnifications require thought and documentation of the site condition at sale and should be carefully crafted to outline the specific types of costs included, any indemnification financial limits, notice requirements, and time limits.

Representations and warranties

Brownfield purchases are usually structured as “As-Is” purchases to free the seller (in most instances) from having liability for full disclosure to avoid the potential for breach of contract if there was missing information. Superfund sites may have different requirements around disclosure.

Environmental Insurance

Pollution Legal Liability (PLL) Insurance

Often referred to as Pollution Legal Liability (PLL) insurance, environmental insurance can be structured to cover the policy owner for many different situations. For sellers, it can protect them from third-party liabilities after the sale or from new cleanup requirements in future legislation. For buyers, PLL can help protect from third-party liability, cleanup costs from unknown preexisting environmental conditions, and the risks of waste materials transported during cleanup.

Insurance agencies will require thorough documentation for the site, such as environmental studies and any No Further Action (or equivalent) approvals by regulatory agencies to help them define the known conditions onsite. PLL insurance can be assigned to a future buyer as the primary insured or can be edited to allow for multiple additional insured parties. The main difference between the two statuses is that only the primary insured can make a direct insurance claim, so additional insured parties must work through the primary insured when they have a claim.

As with any insurance, the deductible (sometimes referred to as the “self-insured amount” or the “departure amount”) and the time frame of the policy will have a large impact on the premium; one should always look carefully at the effective date as well. It is critical to communicate with your insurance representative any time there is something for which you may submit a claim, as these are time-sensitive and may require pre-authorization of the work.

Pollution and Remediation Coverage

Known conditions or Recognized Environmental Conditions (RECs) from Phase I environmental site assessments are typically excluded to make the policy more cost-effective. If there is good Phase II data with a map of the known contamination, often the policy can be customized to cover the known contaminant in unknown locations or depths.

Policy claims are usually only covered if there is a government or third-party claim, because the insurance policies are not intended to fund remediation that the buyer planned to perform. Common exclusions to policies include asbestos, mold, business interruption, criminal fines/penalties, knowingly wrongful acts, non-disclosed known pollution conditions, and nuclear or radioactive waste.

Unfortunately for those performing the remediation, cost cap policies are largely a thing of the past and are either unavailable or prohibitively expensive.

Failure of Indemnity Policy

Failure of Indemnity insurance policies can protect the party who is offered indemnification. If an indemnifier fails to meet their environmental remediation obligations, consequences to the planned development and schedules can be significant. This insurance covers known pollution conditions for the recipient of an indemnity for a certain term and can cover clean-up costs for known conditions without subrogation costs for cases where the indemnity fails and liability falls back on the previous owner.

Financial Assurance for Closure Post Closure (CPC) Policy

Financial assurance requirements can be met through insurance policies without tying up capital via traditional means of posting a surety bond or Letter of Credit.

It would be nearly impossible to cover all the nuances and customizable solutions available for risk management in Brownfield transactions, but it is important to know that there are options for every budget and risk appetite. Experienced individuals at each step of the risk management process are a great resource to help properly cover liability exposures.