Sustainable Land Development Today - October 2007 - (Page 19)

RISK MANAGEMENT The Environmental Liability Continuum in the Construction Project Timeline By John J. Heft When managing the environmental liability of a construction project, the direction tends to focus on pollution conditions resulting from project activities, errors and/or omissions of the general contractor, subcontractors or the architect and engineer. Environmental claims, however, can also arise from other scenarios such as the discovery of unknown pre-existing conditions at a site being redeveloped, or from third parties alleging bodily injury and/or property damage. These third parties could be tenants in a building undergoing renovation or from neighboring property owners living or working adjacent to a Brownfield site. As the redevelopment project progresses, various pollution insurance products are often used to help manage environmental liability. enough to protect against the “discovery” of unknown pre-existing contamination at the site. The combination of these risks, as well as lender requirements and contractual requirements including environmental indemnifications provided in purchase and sale agreements have prompted more property owners to transfer the risk via environmental insurance. Environmental Impairment Liability, also known as Pollution Legal Liability (PLL), has been the workhorse of the environmental insurance marketplace for over 20 years, comprising approximately 60 percent of the environmental insurance policies purchased in 2006. Approximately 60 percent of all of the PLL policies purchased resulted from real estate transactions and approximately 80 percent of the insured parties involved were first-time buyers. PLL is a claims-made and reported premises liability policy that provides coverage for bodily injury, property damage, defense and remediation/ clean-up that results from pollution conditions (both sudden/accidental and gradual) or events at, on, under, or emanating from a covered location. Offered for one or multiple locations with policy terms of up to 10 years, coverage can be tailored to include liability for known and unknown pollution conditions, as well as clean-up/remediation for unknown pre-existing or legacy pollution conditions associated with the property. ed throughout the U.S. For the owners of contaminated real estate, a unique set of issues may arise during the property’s redevelopment giving rise to important questions that need to be addressed: 1) If indemnification is in place, is it reliable? 2) How do I cap my known cleanup/remediation liability? 3) Does a mechanism exist to cap my known environmental liabilities? These questions can be answered through environmental insurance or a combination of insurance and liability transfer. Remediation Cost Cap (RCC), also known in the insurance marketplace as Remediation Stop Loss (RSL), insurance coverage is used for capping known environmental liabilities at contaminated properties. RCC provides risk transfer insurance above the known contamination (minimum between $1M and $2M) and the buffer or deductible layer, which is set between 10 percent and 30 percent of the remediation cost. Limits are available up to $50 million with policy terms of up to 10 years. Typically, RCC coverage is placed in conjunction with PLL coverage, thus providing protection against cost overruns for known conditions and protection against third party liability claims for both known and unknown pre-existing contamination. An environmental liability transfer or finite solution may be appropriate for a more sophisticated liability scheme involving contamination excess of $5M to $7M. For the property owner, the benefits of this approach are many, including: • The contractor/consultant assuming the environmental liabilities via a Liability Transfer Agreement; www.SLDTonline.com 19 Prior to Construction Redevelopment site owners, for instance, may be exposed to a variety of environmental issues, such as: • Soil and groundwater contamination resulting from historic operations at the site or neighboring sites; • “Unknown” legacy environmental issues including “phantom” underground storage tanks and old disposal areas or lagoons; • Construction debris containing hazardous materials from previous site capital improvement activities, and; • Damage to natural resources. “Clean” environmental due diligence, such as a Phase I Environmental Site Assessment (ESA), and even the more intrusive Phase II ESA may not be Project Site Contamination Some estimates tally over 400,000 contaminated, non-performing or abandoned properties, or Brownfields, locat- http://www.SLDTonline.com

Table of Contents Feed for the Digital Edition of Sustainable Land Development Today - October 2007

Sustainable Land Development Today - October 2007 Contents Our Voice Your Voice Editorial Board Mapping the Development Process Looking at a New Dimension The Environmental Liability Continuum GPS System Makes the Grade Regulations: Reactions Mixed Trends: Communications Easements Business Management: Recycling Sustainable Practices: LEED-ND Energy: Community Propane Systems Transportation: Mountain Solutions Recommended Reading Calendar Products/Services Showcase Classifieds Advertiser Index The Last Word

Sustainable Land Development Today - October 2007

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