Environmental Insurance: The Newest Tool in Brownfields Development

"We can turn brownfields into fields of opportunity. Brownfields can be cleaned up, they can be made safe, and they can once again become powerful engines for job creation and growth. "

-- Andrew Cuomo
Secretary of Housing and Urban Development

A new tool is available to promote the cleanup and redevelopment of brownfields: environmental insurance (EI). A report released by HUD's Office of Policy Development and Research examines EI's potential to stimulate increased redevelopment of such sites. Environmental Insurance for Brownfields Redevelopment: A Feasibility Study also looks at the extent to which the public sector can target this insurance toward particular areas.

The authors found that EI can reduce the risk and liabilities associated with brownfield redevelopment by limiting exposure to cleanup costs. EI helps quantify risk, which makes lending institutions more likely to invest in redevelopment. The authors also found that local economic conditions may positively affect the ability of EI to promote redevelopment. For example, in weak real estate markets, even minor reductions in risk can enhance the marketability of brownfield sites.

According to the report, private-sector demand for EI is growing rapidly, often due to speculative redevelopment by venture capital pools that use the insurance for risk management and loss prevention. Conversely, the report states that public-sector demand for EI is virtually nonexistent. While most of the city officials interviewed were actively pursuing brownfields redevelopment, most were either unfamiliar with EI or skeptical that it could help them. Public-sector purchasing procedures, especially multiple bid requirements, often created insurmountable obstacles for insurance providers as they tailored coverage to meet a city's brownfield redevelopment needs.

The report identifies an emerging mix of five EI products that may be useful to cities and others in the public sector who are involved in brownfield redevelopment. Each of the products reduces risk in different ways:

• Professional liability insurance covers errors and omissions by public agen cies or private firms that manage or deal with contaminated land.

• Owner/operator liability insurance covers the firms or agencies working on the site.

• Cleanup cost-cap or stop-loss insurance places an upper limit on the cleanup costs for site redevelopers.

• Legal defense insurance covers lawsuits associated with liability claims.

• Re-opener or regulatory action insurance covers costs associated with any future government actions that require further site cleanup.

The authors recommend that local development agencies encourage the redevelopment of small sites by pooling potential projects that an EI policy could cover. Agencies could encourage land owners to buy the group coverage to make their sites more marketable or public agencies could purchase EI coverage for the pools and make it available to site redevelopers.

The report also recommends that additional research occur before the Federal Government takes an official position on EI. This research should show whether EI provides access to project capital that would not otherwise be available. It should also examine if the differences between central city and suburban sites have implications for insurance coverage. New research should determine how the role of EI could change with the strength of the local real estate market.

Order Environmental Insurance for Brownfields Redevelopment: A Feasibility Study from HUD USER for $5. Order form.