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With a trend toward urban revitalization on the rise and many cities lacking the space for fresh development, brownfield sites have become increasingly popular to develop despite the risks involved with their cleanup. Those risks, though, are being outweighed by the financial gains of developing valuable property in premier urban locations, said legislative counsel Kent Jeffreys. Further, federal and state laws have evolved to make developing brownfields more attractive to investors. Experts say the evolution of environmental insurance also has made redeveloping brownfield sites less precarious, thereby encouraging more developers to enter the market. Experts also said policy terms for brownfield redevelopment are shrinking.

Copyright Crain Communications, Incorporated Dec 3, 2007

With a trend toward urban revitalization on the rise and many cities lacking the space for fresh development, brownfield sites have become increasingly popular to develop despite the risks involved with their cleanup.

"People are moving back into cities and the only properties left are the contaminated sites no one wanted to develop," said Robert Colangelo, chief executive officer of the National Brownfield Assns. in Chicago. "Ten years ago, people weren't even touching these. Now, they're economically viable."

Brownfield redevelopment involves converting contaminated, typically abandoned land that often was used for industrial purposes. It involves risks such as cost overruns when remediation is more expensive than anticipated, third-party bodily injury if someone is exposed to the site's contaminants and experiences health complications, and liability if cleanup standards become more stringent following remediation and a property is held to the higher standard.

Those risks, though, are being outweighed by the financial gains of developing valuable property in premier urban locations, said Kent Jeffreys, legislative counsel in Washington for the International Council of Shopping Centers, a global trade association based in New York.

Further, federal and state laws have evolved to make developing brownfields more attractive to investors. In 2001, the federal Small Business Liability Act was signed into law. It provides financial assistance for brownfield revitalization and enhances state response programs.

Additionally, in the past 10 yean more than 40 states have implemented a voluntary brownfield cleanup program, and 50,000 brownfield sites have been developed or have been primed for development by meeting those programs' standards, according to information from the U.S. Environmental Protection Agency.

As a result, once risk-averse developers have become more open to brownfield projects, said Tom Murphy, a senior fellow at the Urban Land Institute in Washington.

"Brownfields have gone from being liabilities to real opportunities," Mr. Murphy said.

Experts say the evolution of environmental insurance also has made redeveloping brownfield sites less precarious, thereby encouraging more developers to enter the market.

"Though there are risks, most of the environmental risks can be effectively managed through environmental insurance products," said David Bennink, managing director of Aon Environmental Services Group in New York.

Pollution legal liability and remediation cost cap coverage remain the dominant forms of insurance utilized by brownfield site developers, experts say.

"The products out there are not exotic," said David Oldow, vp of XL Environmental Inc., a division of XL Capital Ltd., in Exton, Pa. "They are pretty much mainstream."

Ken Cornell, executive vp at JCH Environmental Insurance Brokers in New York, said pollution legal liability insurance is essentially "catchall" coverage, insuring against third-party claims related to pollution and potential liability for site cleanup. Cost cap policies cover cost overruns related to site cleanup projects.

But even those two products are changing, experts say.

Rick Craig, a national environmental practice leader in San Francisco with Beecher Carlson, an Atlanta-based insurance brokerage and risk management consulting firm, said cost cap coverage is becoming more difficult to place.

He said insurers often end up paying out substantial sums because predicting the exact amount of contamination and cost of cleaning it up is difficult. He estimated three to four companies currently offer the coverage.

"The carriers have lost a lot of money because it is so difficult to get an environmental engineer's cost estimate and agree upon it," Mr. Craig said. "For most-if not all-carriers, at least over time, this has been a losing proposition."

XL still often cost cap or stop-loss coverage, but now offers it in conjunction with its guaranteed, fixedprice remediation program in which the property owner passes along some of its risk to the contractor cleaning up a given site and the contractor takes insurance for the remainder of the risk, thus spreading the risk between the owner and contractor.

"Before, we would write the policy to the owner, and the insurance company didn't have any control over the contractor," Mr. Oldow said. "Now, we have a direct relationship to their work."

Steve Manz, a Detroit-based vp in the Marsh Inc.'s environmental practice, said environmental firms and contractors are increasingly going a step beyond guaranteed, fixed-price remediation programs and assuming full financial and legal responsibilities for known and unknown liabilities attached to remediation. They do this by using their assets or corporate balance sheet to back the guarantee should their insurance products be exhausted.

Policy terms, limits shrinking

Experts also said policy terms for brownfield redevelopment are shrinking.

Mr. Craig said it's difficult to get policy terms for longer than 10 years. A so-called blended finite-risk policy incorporating both pollution liability and cost cap insurance elements is the most likely way to extend a policy beyond 10 years, according to Mr. Manz.

Blended finite-risk policies transfer a property owner's financial risks stemming from environmental liabilities to an insurer. The policyholder pays the insurer the entire current value of the projected cleanup costs upon obtaining the insurance, along with a risk premium for timing, excess costs and liability coverage. The policies average 15 to 20 years maximum, although they used to be available for 30 years, Mr. Manz said.

Just as policy terms are shrinking, so are available limits, Mr. Craig said. Ten years ago, insurers were willing to offer $200 million in limits, but today they're offering $50 million in limits, he said.

Joe Boren, chairman and chief executive officer of AIG Environmental in New York, said the maximum limits his company will write for cost cap insurance is $25 million. For pollution legal liability, it will write $50 million, he said. He said AIG also will build a cost cap policy by writing the primary coverage and then having another company add on additional coverage.

Even so, experts say with the exception of cost cap coverage, plenty of insurers are willing to provide some coverage and tailor their products to meet customers' specific needs. They said as both insurers and developers continue to get comfortable with process of insuring brownfield development, the market will continue to grow and evolve.

"We're seeing wider acceptance of environmental insurance to better facilitate the transfer of these assets and address the environmental stigma," Aon's Mr. Bennink said.