Articles / Publications

Environmental Claims Journal, Vol. 13, No. 3, Spring 2001

INTRODUCTION

In the business of purchasing, cleaning up, and redeveloping brownfield sites (i.e., formerly productive commercial or industrial properties abandoned because of toxic waste potential and the consequent Superfund liability risk), there is no secret formula for success. In fact, most players in the brownfield game understand that it often is necessary to consider a significant number of potential deals before finding transactions that are economically feasible. The proliferation of new participants in the brownfield business further complicates the process. A successful transaction depends on a combination of ingredients, and the absence of any one of them often is a warning sign that the deal will be difficult to complete or will be financially disappointing if it is completed.

This article investigates the ingredients of a successful brownfield transaction, emphasizing aspects of the project that afford the parties involved the most control. The discussion also examines approaches that can maximize the opportunity for success when not all parts of the transaction are ideal.

FACTORS THAT CONTRIBUTE TO A SUCCESSFUL BROWNFIELD TRANSACTION

There are five major ingredients to a successful brownfield deal: (1) a good subject property; (2) appropriate and comprehensive characterization of environmental conditions; (3) economically viable and practical reuse and remedial action plans; (4) carefully drafted purchase, remediation, construction, and development contracts; and (5) an effective risk-management program. The first of these factors is not subject to much modification; property is what it is. The other characteristics of a successful transaction are subject to the control of the parties involved and, in most cases, can be improved.

Sometimes the cost of modifying or improving a factor is so significant that it may exceed the budget for a workable deal. In other cases, significant improvements are possible with only minor increases in the overall cost. Appropriate characterization of a site's environmental condition may increase the cost of a deal past its economic break-even point. Remedial action plans, however, may be improved with little or no increase in the cost of the project, especially when they are integrated with future use plans. In most brownfield deals, the greatest improvements can be achieved by designing better contracts and implementing better risk-management programs. The cost of creating enhanced contracts and risk-management programs often can be accomplished wihtout significant increases in costs.

Good Properties

Searching for and qualifying good properties fo remediation and redevelopment is hard work and requires a systematic approach. To some extent, it is a matter of numbers: looking at more properties is likely to improve the chances of finding an appropriate candidate for cleanup of historical contamination and reuse. The problem is that investigation of candidate sites is an expensive and time-consuming process that effectiveley diverts the people involved from actually working on viable sites. Automating this process or transferring it to other parties will reduce the cost of qualifying a smaller number of porperties for more detailed investigation. The best search systems use third parties to find and prequalify at least some of the sites. Even when this approach works well, however, the brownfield firm typically investigates more than 100 sites to find one that is worth remediating.

The characteristics of a good property are simple to state but very difficult to determine in the real world. Obviously, the property must have enough market value to justify the purchase, remediation, and redevelopment. Additionally, the location must be served by transportation, have long-term prospects of retaining its value, and be in a community that will support the planned reuse fo the site. If conversion from industrial to commercial or residential use is comtemplated, the new use must be compatible with the future of the neighboring properties, or the proposed deal must be extensive enough to ensure that the conversion will create a neighborhood trend.

Another factor to consider is the nature of the environmental problems that affect the property. First, the site's known environmental problems must be capable of being remediated at a cost that falls within the economic parameters of the deal. If there is a range of remediation costs, the upper limit must not exceed the budget. The nature of the contaminants will suggest a likely time period for the completion of remediation acitivities. If that period is uncertain, the expected return on investment should be assessed using the worst-case scenario timeframe. Further, any project financing costs that are dependent on a specific completion date must anticipate the longest delay possible for the given remediation (including delays in regulatory approvals required to document completion of the remedial action plan).

In addition to considering what is known about contamination of the site, it is important to assess the possible impact of widespread contamination that might involve the site. For example, if the groundwater has been identified as a problem, the site may have contributed to the contamination of the aquifer. It often is difficult to isolate a porperty from such regional contamination problems, and the cost of investigating them may make it uneconomical to redevelop a property that otherwise would be a reasonable candidate. It also is difficult to manage the risks associated with environmental conditions involving several potentially responsible parties (PRPs). In addition to the cleanup programs initiated by regulation, cross-claims by jointly repsonsible parties make it difficult to assess fully the magnitude of the problem.

Appropriate and Comprehensive Environmental Characterization

Appropriate environmental characterization is critical to the success of a brownfield property transaction. A competent environmental consultant should conduct a study to identify and assess environmental problems. The work should be carried out in a systematic manner to make certain that no areas of contamination are missed, and the results should be summarized in a comprehensive report. This assessment report should either verify the absence of serious environmental problems or clearly identify their existence and specify the necessary steps for full assessment and/or remediation. The best environmental assessment is not necessarily the most extensive one, because examination of areas that are not contaminated adds little value to the information. A judiciously prepared report will identify areas that require cleanup and provide an assessment of the expected effect of the remedial action plan without chasing useless information to scientific dead-ends.

The methodology used to conduct the environmental assessment should be one that minimizes the chance of missing a problem that will have a significant impact on the project. The assessment should evaluate the nature of the pollution conditions and identify contaminants that are expected to be difficult to remediate through the application of conventional technologies. The assessment also should verify that there are no migrations of hazardous materials from the site and that the site is not affected by plumes of contaminants originating from offsite sources. If either condition is present, it should be well documented, and all plumes should be clearly mapped.

Appropriate characterization of known environmental conditions also involves estimating the anticipated time and expense that will be required to complete the remediation in compliance with regulatory standards. When alternative remediation measures involve differences in cost and required completion time, they should be discussed in detail so that the most effective alternative can be selected that fits within the project's economic and development plans.

Economically Viable and Practical Reuse and Remedial Action Plans

Because the cleanup required for a given property depends on the future use of the site, determining future use therefore is an integral part of developing the remedial action plan. The removal of contaminants more likely will be required when residential use is planned than when commercial development. In the case of commercial properties, it is common to leave contaminants in place and use containment and capping mechanisms. For porperties that are to remain industrial, the cleanup need only achieve background industrial levels rather than the higher standards for commercial and residential uses.

Future use plans identify the entitlements required for the development of the site. Because the granting of zoning changes, traffic access permits, building permits, and other entitlements that are commonly associated with brownfield transactions may take several months, it is wise to start the application process as early as possible.

The remedial action plan should address all identified contaminants of concern. The value of a thorough environmental characterization becomes obvious in the preparation of the plan for cleanup activities. Even with the best characterization, however, there is a chance that something will be overlooked. Sampling techniques and measurements are not 100 percent accurate, and the remedial action plan should include measures to address unexpected discoveries of additional contaminants or concentrations that were not expected when the cleanup began.

Environmental regulators must approve the remedial action plan. The process of preparing the plan, submitting it for review, and obtaining the necessary approval can take several months. Often this approval process is incomplete when the real estate transaction is being negotiated and may still be pending when it closes. If this is the case, the pollution conditions must be such that the remedial alternatives are relatively obvious and approval of the regulators is a virtual certainty. The more uncerain the approval of the regulators, the greater the risk that the project will be delayed or will otherwise become economically unviable. An insurance program that will pay the cost of cleanup - even if a different remediation plan must be used or unknown contaminants are discovered - can mitigate this risk. The use of insurance and other risk-management techniques to facilitate brownfield transactions are explored later in this article.

A comprehensive future use plan, prepared by an experienced professional, is an element of a good deal that often is missing. Many people assume that such plan is nothing more than a real estate feasibility study that identifies a "highest and best use" for the site. Although the best use of the site is considered in a future use analysis, it is only one factor in determining what will be done with the contaminated property once remediation has been completed. In many cases, the best use involves leasing rather than selling the site. Leasing may be indicated, for example, for long-term cleanup activities, such as pump-and-treat remediation of groundwater, or if the current owner feels that it is necessary to prevent future changes in use that would require additional remediation. Leasing the property can result in very different transaction than would occur if the property were sold. Real estate firms advising the parties may have different interests than the seller, who typically should be most concerned about liability from historic pollution. A good future use plan will consider all the possible options, even if there is no financial benefit to the real estate firms representing the buyer or the seller.

Future use plans also incorporate the necessary elements of community involvement to ensure that an otherwise attractive deal is not derailed by a lack of understanding or outright opposition from neighborhood groups. Concepts presentations are made to the local organizations that can influence decisions regarding the purchase, cleanup, and redevelopment of the site. Community input is taken into account, and the plans are adapted to meet as many of the local needs as possible. The positive aspects of the project in terms of improvements to the neighborhood, new tax revenues, and additional job opportunities are presented at meetings with the interested parties. Support from the community also can positively influence the regulators, zoning commissions, and building code boards whose approval must be obtained for various aspects of the site's remediation and redevelopment.

Carefully Drafted Purchase, Remediation, and Development Contracts

Every brownfield transaction is formally shaped by the contracts that facilitate the various parts of the deal. Typically, there is a purchase agreement, a contract for remediation of identified contaminants, a consent order (or some other formal agreement with regulators regarding the required cleanup), contracts for the development of new site improvements, and a loan agreement for the funds needed to purchase, remediate, and redevelop the site. There also may be several other contracts between various interested parties, depending on the nature of the site and the complexity of the transaction. In some cases, there may be six or more major documents that address various aspects of the transaction. It is not uncommon for these contracts to run more than a hundred pages each, and they also may incorporate volumes of additional materials by reference. Because several different parties prepare these documents, inconsistencies in the definition of terms and requirements frequently occur. These inconsistencies can make deals more difficult to structure, or, in the worst cases, can create significant unnecessary liabilities, especially if issues arise during or after completion of construction projects.

The following discussion of individual contracts addresses some of important points that should be kept in mind during preparation of the documents in a transaction. All the contracts will be improved if the parties involved in the preparation of each contract are aware of the basic features of the other contracts that make up the deal.

The Purchase and Sale Agreement

The purchase and sale agreement - the document that formally transfers the targeted real estate from the seller to the purchaser - should clearly state the agreement to convey the title from one party to the other. If the title transfer is conditioned on any other events, they should be specified. Title limitations by deed restrictions, use restrictions, or engineering control requirements also should be noted.

The agreement should state the purchase price and any contingencies that could affect it (e.g. discovery of unknown conditions or rental income reaching milestones). When escrowed funds are specified in the agreement, the terms for their release should be clear and unambiguous.

The agreement should describe known pollution conditions in detail, which typically is done by including references to environmental assessment reports. In addition, the parties should be in agreement as to who is responsible for remediating known contamination. Often, the regulatory agency responsible for oversight of the remediation grants a no-further-action letter and/or a covenant not to sue upon completion of the work.

If the purchaser agress to remediate the site, the purchase agreement must contain various releases that apply to the prior obligations of the seller. Releases granted by the purchaser include (1) the obligation to remediate the site, including all costs; (2) liability arising out of future remediation, development, and construction activities; (3) liability arising from future leases or sales of the property; and (4) obligations under a consent order, where applicable.

Each release must be accompanied by warranties and representations on the part of the seller and the purchase. The seller should represent to the purchaser that: (1) all information the seller posesses regarding environmental conditions at the site has been disclosed; (2) the consent order or remedial action plan includes all required remediation; and (3) no third-party claims have been made as a result of alleged migrations of pollutants from the subject property. Representations to the seller should state that the purchaser: (1) is familiar with industrial properties of the type involved; (2) has reviewed all pertinent environmental regulations applicalbe to the current and future uses of the property; (3) has examined and understands the environmental reports that characterize the pollution conditions at the site; (4) has been provided with copies of all documentation related to third-party claims and regulatory requirements arising out of historic pollution at the site; and (5) is taking the property "as is," with no other recourse for additional discoveries during remediation or redevelopment.

Sometimes a due diligence period is allowed for the purchaser to perform additional tests that will define extent of existing pollution conditions more clearly. In such cases, the agreement should specify the extent of testing that will be permitted. It also should limit the reports that result from the additional testing to the minimum that are required for an accurate assessment of the site's suitability for the planned future development. The agreement also should require that all personnel entering the site on behalf of the prospective purchaser have appropriate insurance against liability arising from their activities. Environmental consultants' insurance should include contractors' pollution liability coverage for liability caused by contamination resulting from testing activities or professional errors as well as omissions insurance for any mistakes that may be made in the characterization of environmental conditions.

The purchase and sale agreement should clearly allocate liability among the parties. Areas that should be addressed include liability for the ceanup of historic pollution, liability for third-party claims arising from past and prospective releases of historic contamination, liability for releases caused by remediation and future development and construction activites, and liability under consent orders or other government documents that require remediation or other activities related to the subject property.

Indemnification provisions should indicate which parties are responsible for various contingencies, and they should state the maximum amount of liability and time period for which the indemnity applies, if there are such limitations. The scope of the indemnity provisions often is the result of relative bargaining strength of the parties; however, the circumstances requiring indemnification should be reasonable. The lawyers drafting the indemnification provisions should be aware of the parties' insurance so that they can incorporate the policies' coverage protections into the purchase and sale agreement. It may be possible to eliminate indemnity requirements when environmental insurance is used to support the parties' promises with respect to remediation and third-party claims resulting from past or prospective releases of contaminants at the site.

The agreement should specify the types and amounts of insurance that are required of the parites to ensure that environmental and other liability issues are addressed properly. It also should state the term during which the insurance must be in effect, including the number of years of coverage required for multi-year insurance policies. Among the types of insurance normally required are general liability, automobile liability, workers' compensation, pollution legal liability, contractors' pollution liability, remediation cost cap, and professional services errors and omissions. Insurance limits can range from $1 million for smaller projects to more than $100 million for larger ones. Policy terms of ten years are common, but they vary depending on the circumstances of the transaction.

The agreement sometimes includes a requirement that the purchaser provide a performance bond guaranteeing that it will perform all necessary remediation of the property. The agreement also may stipulate that the bond must guarantee other promises of the purchaser contained in the present agreement as well as in other agreements that facilitate the transaction. This can be a problem when the obligations of the purchaser are relatively broad, when the site cleanup must meet standards required for a no-further-action letter, or when the cleanup activities are not sufficiently specific to allow underwriting of their potential cost. The bond market has been unwilling to issue surety agreements for these broad obligations, and requiring their inclusion in the purchase and sale agreement may make the transaction impossible. All bond requirements therefore should be reviewed carefully to make certain that the required instruments can be obtained. If possible, bond requirements should be offset or eliminated by a promise to provide environmental insurance that can guarantee the purchaser's obligations to complete remediation of the site.

The Remediation Services Contract

The contract between a site owner and a remediation contractor is an important element of a successful brownfield transaction and often is an integral part of the purchase and sale agreement. If the required remediation is to be completed by the purchaser, the contract for the transfer of the real estate may incorporate the remediation services contract by reference. This is more likely to be the case when the cleanup is being done on a guaranteed maximum costs basis.

The price given in the remediation contract may be formulated according to a number of different criteria, such as time and materials. Remediation contracts based on time and materials are common when the overall scope of the work is not clearly established. Such uncertainty occurs when the characterization of the environmental conditions is incomplete or when there is no assurance that the planned remedial action will produce the desired results. Other projects use time and materials contracts because they are thought to be more equitable to the site owner as well as to the remediation contractor; neither side profits from a windfall, even when far less work is required for regulatory approval of the cleanup work.

Fixed-cost remediation contracts are common when a firm that is related to, or in a joint venture with, the purchaser conducts the cleanup. It is most common to couple the guaranteed maximum cost contract with the purchase of remediation cost overrun or cost cap insurance. This makes the contractor/purchaser responsible only for the expected cost of remediation and the deductible, or "buffer," on the cost cap policy. If there is concern that remediation funds may not be available, the expected costs can be escrowed or an insurance company can hold the funds and pay for the cleanup work as it is completed. These techniques are discussed in greater detail in the risk-managment segment of this article.

Whether it is based on time and materials or fixed cost, the remediation contract should contain certain provisions that will prevent it from interfering with the successful completion of the deal. In addition to remediation price, the contract should address compensation, including any incentives, and the schedule for payments.

The contract for remediation services must contain the contractor's commitment to complete all of the required work. This obligation typically takes the form of a series of agreements that include some or all of the following:

1. Agreement to carry out the remedial action plan as specified until the granting of a no-further-action letter or other evidence of regulatory approval and finality.
2. Agreement to perform activities related to the consent order or other formal agreement between the site owner and the appropriate environmental regulators.
3. Agreement to perform the necessary engineering work to facilitate the remediation of the identified contaminants (to the extent that such work is not already done).
4. Agreement to negotiate the terms of the consent order with regulators to provide the documentation of completed work so as to obtain closure.
5. Agreement to be responsible for the transportation and management of hazardous material removed from the site for treatment, storage, or disposal.
6. Agreement to cmoplete the scope of work specified in the remedial action plan and to meet milestones that will ensure that all required cleanup activities are finished in accordance with the agreed-on schedule.
7. Agreement to be responsible for the activities of any subcontractors hired to perform work at the site.
8. Agreement to maintain required insurance that provides protection to the site owner and other parties against releases of pollutants or exacerbation of existing conditions caused by the activities of the contractor.

The contract for remediation services also should include the seller's cevenants guaranteeing the contractor's access to the site and to all information related to historic pollution. It should provide for the transfer of all permits and licenses required to implement and complete the site work.

Documents that may be incorporated in the remediation contract by reference include (1) the consent order; (2) a description of known pollution conditions (typically, several environmental reports that address site chraracterization studies); (3) the site work action plan or scope of work; and (4) copies of existing deed restrictions.

The contractor should agree in the contract to provide various types of insurance required to protect the parties from liability arising from the contractor's activities on the property. Insurance typically required in the remediation contract includes general liability automobile liability, workers' compensation, contractors' pollution liability, and incidental errors and omissions. As mentioned above, it is also common to require remediation cost overrun insurance when the remediation is being done under a guaranteed maximum price contract.

Performance and payment bonds typically are required of contractors performing remediation services on a contaminated property. The payment bond ensues that the contrator will pay all subcontractors hired to in conjunction with remediation of the site. Subcontracted work can include drilling monitoring wells and taking soil samples, abatement of asbestos, construction of specialized containment and capping systems, and laboratory testing of soil and water samples from the site. A performance bond guarantees that the contractor will provide the remediation services specified in the contract. If the contractor fails to complete all required work, the surety company providing the bond may hire a substitute contractor to finish the remediation or pay the face amount of the bond as a penalty.

The remediation contract should include an indemnity provision that favors the site owner. The indemnity provision should be reasonable vis-à-vis the control that the parties have over the various risk elements associated with the project. It also should recognize the existence of environmental and other liability insurance required to address identified risks.

The Consent Order

Although referred to as an "agreement" between the regulatory agency with control over site activities and the property owner and/or other PRPs involved with the historic contamination of the site, the consent order generally is not subject to much negotiation. The consent order usually is drafted by staff attorneys working for the state or federal agency responsible for oversight of the remediation. It specifies the contaminants of concern and prescribes the necessary remediation to bring the site into compliance with environmental laws and regulations. The permitted remediation approaches are described in sufficient detail to allow the contractor to develop a remedial action plan. Typically, the consent order also specifies the concentrations of the identified contaminants that will be allowed to remain at the site at the conclusion of remedial activities. The consent order includes a description of the engineering controls and ongoing maintenance and testing that will be used at the site. The testing involves monitoring of site conditions to make certain that target cleanup levels have been achieved and that the site remains at those levels.

The site owner's input in drafting the consent order, if any is allowed, should focus on ensuring that the remediation approach specified in the order coincides with the plans for the property's future use. If deed restrictions are acceptable to the site owner and subsequent purchasers, they can be included in the consent order. In most cases, the provisions, conditions, and defined terms in the consent order are established by law or precedent, and the site owner or other interested parties usually cannot modify them. Therefore, whenever possible, the defined terms in the consent order should be incorporated into other contracts and agreements that facilitate the transaction so that the meaning of the terms will be consistent among all the documents. Because the language allowed in the other documents, such as insurance policies written for the transaction, may be restricted, they should include references to key defined terms in their provisions.

Other Contracts

Brownfield projects often involve associated contracts, such as loan agreements and contracts for engineering services, site development, and construction of new improvements to be made following the sale and remediation. These contracts should conform to the elements of the key contracts discussed above. They should be consisent with respect to defined terms and should not contain provisions that differ from or that create conflicts with the agreements and conditions stipulated in any of the other contracts. All contracts pertaining to the brownfied transaction should be drafted by, or at least reviewed by, one person who is responsible for makin sure that, as much as possible, there is conformity among all the documents.

Effective Risk-Management Programs

The final component of a good brownfield transaction is a properly structured risk-management/insurance program. The risk-management reqruirements fo each deal differ because the properties involved are unique. Nonetheless, all programs have certain characteristics in common.

The quality of the risk-management program is dependent on the skill of its developers and their understanding of the risks associated with the transaction. Obviously, those with the most experience in developing risk-management and insurance plans have an advantage. It also is necessary for the developers of the program to have a comprehensive understanding of the transaction based on a careful study of the information available concerning the site itself, the nature of contamination that must be remediated, the remedial action plan, and planned future uses of the property.

Creativity may be the most important ingredient of an effective risk-management plan. Even with the requisite skills, the risk-management consultant may not be able to be fully effective or creative if his or her role in the process is not clearly defined. By allowing the consultant to participate in the negotiation process and the drafting of the documents, the risk-management program can be woven into all aspects of the deal. Such close involvement in the transaction requires the consultant to commit the necessary time and effort to complete the deal successfully.

The task of developing an appropriate risk-management plan often falls to the insurance broker representing the buyer or seller. In some projects, brokers acting on behalf of both parties may be involved. The brokers may work with, or receive input from, attorneys for both sides, the remediation contractors, lenders providing funding for the deal, insurance company staff lawyers, and other parties asked to participate in the development of the risk-management/insurance program.

Although more minds may offer a greater number of alternatives, this combination of brokers, attorneys, and others does not always result in the best outcome in terms of the quality of the risk-management program. First, not all insurance brokers have the skills required to develop a risk-management program for a complex brownfield transaction. Whereas large national insureres often have specialists in environmental risk-management issues, smaller firms usually cannot provide this type of expertise. In some cases, even in the larger firms, assigning the right people to a specific project is problematic because of territorial and organizational requirments as well as the limited availability of the most skilled people. Because brokers typically are compensated only for selling insurance, broker specialists may tend to concentrate on insurance as a risk-management technique to the exclusion of other viable and appropriate alternatives.

A good risk-management program begins wih a comprehensive understanding of the transaction and the site involved. This requires the risk-management consultant to spend a significant amount of time reading the available materials describing the historic operations at the site, the characterization of the contaminants, the remedial action plan or alternatives, and the future use plans. The consultant also must review the documents facilitating the transaction, such as the purchase agreement and consent order, loan agreements, and remediation and construction contracts.

From this date, the consultant should be able to indentify the risks associated with the project. Once they are identified, those that are serious enough to present a significant risk of loss must be evaluated in greater detail. Estimates of the maximum possible and most probable losses need to be developed. Mitigating factors also must be considered. With this information, a risk matrix can be prepared that delineates the identified risks, assesses their potential impact on the project, considers risk-mitigation factors, and evaluates the protection that may be available through appropriate risk-management measures. It is easy to see why very few insurance brokers have the skills or the patience required to develop a comprehensive risk-management plan for the more complex brownfield projects.

Risk-management options include risk avoidance, risk control, and risk transfer through both insurance and noninsurance mechanisms. Each of these techniques must be considered in terms of its potential to resolve the risks that pose a serious threat to the project.

Risk avoidance is possible when certain aspects of the threat can be eliminated by redesigning the structure of the transaction. On one project, for example, the seller retained an onsite mercury-disposal facility in order to facilitate the sale of the balance of the site to a purchaser who was willing to deal with all other environmental risks. By carving out the subparcel where the disposal facility was located and leaving the liability for its historic and future risks with the seller, the sale was successfully completed. Avoidance also might entail cleaning up part of a site rather than transferring the obligation for remediation and its attendant uncertainties to the buyer.

Risk control uses measures intended to decrease the threat through appropriate engineering controls and mechanisms that eliminate possible causes of contaminant releases. Additional site characterization and engineering work on remedial measures are two examples of risk-control techniques that can be used to manage the threats associated with a brownfield transaction. Risk control also can be applied during the remediation and construction phases to reduce the risk of loss or to limit the severity of losses that cannot be prevented while remediation, development, and construction of improvements are being completed at the site. Safety and contingency plans, monitoring site activities, and use of redundant containment mechanisms are examples of this type of risk-control measure.

Risk transfers are effected through contracts that specify responsibility for certain risks associated with a contaminated property transaction. The allocation of liabilities and risk of loss in purchase agreements can serve as risk-transfer mechanisms that allow some of the parties to avoid the potential liability associated with historic or prospective activities at the property. In some cases, the contractors performing the site remediation are willing to assume the liability for any cost overruns associated with the cleanup. This liability assumption can be incorporated into the purchase contract or remediation contract as a guaranteed maximum cost provision or an indemnity agreement.

Insurance is a form of risk transfer that involves the assumption of specified risks to unrelated third parties in exchange for the payment of premiums. The availability of environmental insurance has greatly facilitated the successful completion of a number of brownfield transactions in recent years when other risk-management measures could not ensure that the parties could go forward with the planned activities for the sites.

An important aspect of purchasing insurance for brownfield transactions that is often overlooked is that it allows for the input of another qualified expert - the insurer - who can comment on the appropriateness of the transaction and the potential severity of the risks associated with the deal. Environmental insurers not only offer their engineering services to review the technical issues of the contamination and remedial action plans, but they also provide broad experience in business transactions that can be valuable in other ways. For example, they may be able to recommend structures for the transaction that are beneficial to the parties in terms of risk management, financial planning, tax deductibility of remediation expenses, and other aspects of the deal. If performance bonds are required, insurance may be an alternative, especially when the bonds do not provide the level of protection required. In cases in which the payment of cleanup costs must be guaranteed, insurance companies can offer finite risk programs and blended programs that allow the insurers to pay remediation expenses as they are incurred as claims under the finite policy.

The insurance used for contaminated property transactions has become extremely flexible, allowing the policies to be tailored to meet the needs of individual transactions. The modification of policies to fit the risk-management needs of the deal is a relatively complex task that typically requires all policies to be reviewed and approved by one or more sets of attorneys representing the parties to the transaction. As described above, this work often is done by a combination of insurance broker personnel, risk-management consultants, outside counsel for the parties, and staff attorneys of the insurance companies.

The types of environmental insurance discussed below are the ones most commonly purchased for transactions involving contaminated properties. The exact combination of insurance depends on the risks involved, the requirements of the various contracts, and the negotiations among the interested parties.

Remediation Cost Cap Insurance

Remediation cost cap insurance provides protection against unexpected costs associated with the required remediation of the brownfield property. It is important to understand that the policy responds to a specifically stated remedial action plan and will not pay for all necessary cleanup if no remedial action plan has been developed. The policy typically is written with a self-insured retention equal to the expected cleanup costs plus a buffer of 10 percent to 20 percent of the expected costs. The limit applies above this attachment point, and it is common for parties to purchase limits of from 100 percent to 250 percent of the expected costs, depending on the complexity of the project and the contractual requirements of the transaction, the nature of the contamination, and the expected results of the remedial action plan. The policies can insure remedial measeures as well as the long-term costs for operating remediation systems and for monitoring. Policy terms are designed to coincide with the period required to complete the remedial action plan. Coverage is only available on a claims-made basis.

Because the cost overrun policy is written to correspond with a specific remedial action plan and a budget of expected costs, there must be a well-developed cleanup plan if the policy is to provide comprehensive protection for unexpected remediation costs. If the plan has not been approved or if it provides for alternatives that could affect the final costs, the attachment point and pricing of the cost cap policy tend to be adjusted upward, or the policy may have more than one attachment point, depending on the plan's alternative measures. Elements of the remediation that are unspecified may be excluded from the cost cap policy as insured risks. In a recent project, for example, the state had not determined whether the owner of a site that was being sold would be responsible for groundwater remediation on the property. As a result, the range of possible costs for this element of the remdial action plan ranged from zero to $15 million. Insurers thus were unable to offer a policy that would insure the outcome of the state's decision in this particular case. It is always recommended that the availability of coverage for a specific project be discussed with an insurance broker or consultant so that appropriate contract provisions can be developed as the deal is being negotiated and structured.

Pollution Legal Liability

A pollution legal liability policy generally insures the interest of the property owner and pays for the costs of third-party claims against the insured for bodily injury, property damage, and cleanup of contaminanats that have migrated from the property. Because they are written for a specific property, these policies should contain a detailed description of the site to be insured. Often the legal description from the purchase agreement is used for this purpose. Pollution legal liability policies also pay for the costs of investigating and defending third-party claims. Policy limits are selected on the basis of the nature of the surrounding property uses, and other elements that could affect the severity of an environmental damage claim. It is common for limits of $5 million or more to be required for significant property transactions. The largest brownfield deals may require limits of $200 million or more. Coverage is written on claims-made forms.

In recent years, insurance companies have expanded the coverage available in the pollution legal liability policies to cover a variety of other first - and third-party exposures. The most recent versions of these forms can be adapted to provide coverage for the following additional risks:

• First-party property damage due to contaminant releases at the insured property.
• First-party bodily injury to persons on the insured property.
• First-party cleanup of contaminants at the insured property.
• First- and third-party claims for diminution of property values due to the release of contaminants at the insured property.
• Business interruption losses associated with releases of contaminants at the insured property.
• Natural Resource Damage Claims pursued by state or federal trustees.
• Claims arising out of trasportation of hazardous wastes from insured properties (both in the insured's vehicles and in the vehicle of common carriers).
• Claims arising out of the release of contaminants from third-party treatment, storage, or disposal facilities to which materials from the insured property were taken for disposal.

The broad coverage these policies can provide makes them ideal for complex real estate transactions in which the parties want protection against a variety of sources of potential liability. Normally, terms of ten years are available when only historic releases are being insured, but longer terms may be insured when the contracts or other factors create the need for protection beyond the ten-year period. If prospective contaminant releases also must be covered, it may be preferable to purchase a separate policy. Underwriters typically are not willing to write these risks for periods longer than three years, especially if there are potential sources of new contamination associated with the onsite activities or if a change in the use of property is possible. Pollution legal liability policies may list any number of interested parties as named or additional insureds.

Contractors' Pollution Liability Insurance

Contractors' pollution liability insurance provides protection against damages resulting from contaminant releases caused by the activities of contractors performing environmental remediation and by general or trade construction services performed on the insured property. The remediation contractors usually purchase this coverage, and the policies can be written on either claims-made or occurence forms. The policies provide protection against losses resulting from the insured contractors' covered operations, and it is therefore important that the definition of "covered operations" be reviewed carefully by all concerned parties. The policies can be written to cover specific work or all operations performed by the contractor in a policy year in connection with the project. For larger projects, the insurer often requires a separate policy for the specified work or asks for a dedicated limits endorsement. When operations extend beyond the project's expected completion date, coverage is provided for a period of one to five years.

The amount of contractors' liability protection required depends on the risks associated with the project. It is common for the site owner to require limits of $5 million or more from the remediation contractors providing services at the site. In some cases, general and trade contractors also are required to provide contractors' pollution liability insurance. The limits for these contractors may be reduced, depending on the nature of their work and the relationship they have to the other parties working on the site.

For large cleanup projects or sites where remediation is followed by construction of site improvements, owner-controlled and contractor-controlled wrap-up insurance programs may be arranged to provide protection against environmental liability for all contractors working on various aspects of the project. These programs typically offer higher limits than individual policies because they are designed to cover all construction activities of all contractors. Wrap-up programs normally are written for the term of the remediation and construction portions of the project.

Professional Services Errors and Omissions Insurance

Professional liability insurance is required for design professionals, including architects and engineers, performing work related to the brownfield property. Their work may include assessment and characterization of environmental conditions, the design of remedial action measures, and the design of site improvements that will be implemented following completion of the remediation. Policies are written on a claims-made basis and typically cover all work done by design professionals during the policy year. Separate policies can be written for specific projects if there is a concern that the limits of the design professional's policy might be used up as a result of losses on other peoples' work. Limits of $3 million to $10 million often are required for contaminated property transactions. If firms provide both engineering and construction or remediation services, combined insurance forms are available that insure contractors' liability and errors and omissions risks in a single policy.

CONCLUSION

The complexity of the work required to complete a real estate transaction involving contaminated property has made success difficult to predict for any given site. Although the characteristics of a viable parcel of real estate are well understood, less thought has been given to the other elements of a successful brownfield deal, especially when the parties have a greater measure of control in shaping the transaction. Carefully drafted contracts and an effective risk-management/insurance program are two areas in which additional effort can result in significant rewards for parties planning to venture into the challenging world of brownfield projects.

Developing a comprehensive, coordinated set of contracts that are consistent in their approach to the project, that conform in their use of terms, and that recognize the existence of the other agreements that facilitate the transaction can ensure that an otherwise viable deal will not be derailed by unexpected events. A marginal project can be upgraded by applying these same principles to improve the chances for success.

An effective risk-management program can ensure that a good deal will not result in unexpected financial consequences due to unforseen losses. It also can improve a marginal deal to the point where the project becomes successful because the parties recognize that the risks are appropriately limited and well managed.

The development of carefully drafted contracts and an effective risk-management program does not occur without the involvement of skilled professionals with experience in complex transactions. Although the talent to successfully develop these programs is limited, it is available to those who understand the importance of these functions to the success of their brownfield deals.