Pollution Liability Insurance
Pollution insurance (sometimes called ‘environmental insurance’) costs money, no doubt about that. It is neither appropriate nor cost-effective in many development situations. However, in some brownfield development and investments it is a valuable component in the overall ‘package’ – sometimes because of the level of residual contamination under the developed site, sometimes because of the low risk appetite of the investor, and often for both reasons. However, for this to work, the sums have to stack up. The overall value of the investment, including the redevelopment appraisal that precedes it, must justify the level of insurance premium and there have to be good commercial and legal reasons to have such insurance. As such, it is more common in larger scale higher value redevelopments of heavily contaminated land, where you have both high value and potential high risk.
There is no such thing as a ‘cleaned-up site’. Even after expansive remediation, and even sign-off from the planning and environmental regulators, liability risk can remain. This is not because the remediation strategy has been flawed or incomplete, or because the regulators have failed in their job: it is simply a fact of life with legacy industrial contamination. Planning authorities tend to take a common-sense approach to remediation, often focusing on the so-called ‘suitable for use’ principle, which tends to set the remediation standard according to the future risk to users of the redeveloped site. Although some authorities will look beyond that limited concept of risk management and to the wider environmental (offsite) risk, it is nonetheless often the case that even ‘remediated’ sites retain high levels of residual contamination.
This in itself is normal, but on occasion it can mask a real liability risk for the developers, funders, owners and future investors. Developers tend to address ‘development-related’ risks such as near-surface clean-up, protection measures against gas or pollutant vapours getting into buildings, and in dealing with near-surface soils or groundwater where these can pose a risk to future users or to service media or building foundations. The problem with that can be that it ignores wider vertical and horizontal migration of residual contamination into sensitive areas of the wider (offsite) environment such as river systems, protected habitats, and sensitive deeper groundwater. This is where site location becomes pivotal. The geology, hydrology and hydrogeology of a remediated site can be such as to create the ‘perfect storm’ of liability potential, which is often missed altogether – see for example the Sandridge-St. Albans case. The important action is to assess the risk in the particular case.
Obviously, the best time to identify and deal with this is at the due diligence pre-acquisition stage, so that the relevant risk is a factor in pricing, but in many cases, this is not possible, due to a range of commercial factors. It is admittedly rare to have ‘the perfect storm’ which produces massive offsite liability. The more common scenario is one where one cannot discount the possibility of future liability from residual contamination and an incoming investor wants it dealt with. Thus, is it often less a case of the developer avoiding liability itself, but rather a question of enhancing (or achieving) asset marketability.
On a large scale, high-value development on what was once contaminated industrial land, even after it has been remediated, a sophisticated investor will be alive to the residual risk, perhaps because its due diligence has raised the question of residual contamination in a locality where geological, hydrological and hydrogeological conditions raise the stakes. Such an investor will usually seek further reassurance. In most cases, this reassurance should come via a sound technical and contractual remediation package with contractor and professional team warranties for the investor. However, particularly risk averse investors will ask difficult questions, and developers have to be aware that their sales and/or funding strategy may require some consideration being given to a bespoke, site-specific, insurance product.
There are flexible specialist insurance products which can be tailored to fit the risks, without breaking the bank. This indeed is the key: fitting the insurance product to the real risks that could arise. Vincent Brown regularly works closely with the leading brokers and underwriters in the London and German specialty pollution liability insurance markets. The legal service in these situations includes:
• identification of the true risks that should be covered;
• avoiding increased premium on risks that the insurer may cover but do not apply;
• minimising premium by clear presentation of due diligence pack to insurers;
• hiring the right broker to get the best out of the market;
• critical assessment of ‘fine print’ of the proposed policy wording;
• checking carefully widely drafted exclusion clauses;
• reviewing the proposed package from institutional investor perspective;
• making sure sensitive operations like deep piling are not excluded;
• considering short term remediation/construction phase cover;
• aligning with longer term pollution liability cover;
• building in flexibility for phased-in policies in sites where remediation/development phased;
• ensuring the ability to add new insured parties without loss of developer cover