Insurance: A Facilitator in Redevelopment
By Robert P. Hallenbeck, Jr.
Businesses know they need insurance. It is viewed as more of a necessary evil than a valuable business tool. Premiums are paid and the benefits of insurance -- a financial payment when a claim is filed -- are only realized when something, usually something not in the best interest of the company, happens. In more and more business circles, however, that perception is beginning to change. Insurance is now seen as more of a facilitator in deals. In fact, these days insurance is helping close many business deals that many would have walked away from in the past. How does this happen?
Take, for example, the increased redevelopment activities occurring on military bases these days, and how those involved in reuse projects are using environmental insurance to their advantage. In these situations, the role of environmental insurance has increased dramatically in its significance.
While military bases have lost their usefulness in defense-related activities, these valuable parcels of land are now reinventing themselves. The advantages of their redevelopment are very attractive for local, state and federal governments, which stand to benefit from enhanced tax revenue, the redevelopment of contaminated properties, and the resurgence of jobs, especially in areas that lost a significant amount of jobs as a result of the closings. But many liability issues stood in the way.
There is extensive environmental liability associated with former military sites. Years of military operations have left a legacy of contamination. There are landfills and incinerators that need to be addressed, and there is the lingering question of what additional contamination could be discovered during redevelopment activities, or even years later. The U.S. Department of Defense is liable for the environmental contamination and is addressing the cleanup issues. If the property is transferred to private hands and developed, those taking control of the property and performing construction or remediation have their own liability concerns about the property when it is their responsibility.
Environmental insurance purchased for these projects addresses specific liability concerns. In its traditional role, environmental insurance does provide a financial cushion that assures money will be available if an environmental incident occurs. As remediation expenses can be costly, a project without that kind of protection would remain stalled for an undetermined amount of time. Therefore, insurance in these situations helps such projects get off to a good start and stay on schedule, which is attractive to all working on the redevelopment or those looking at investing in the land later on.
Economic development agencies and businesses involved in these activities are not overlooking the other added advantages that this provides. Having a mechanism to handle potential environmental liability now and in the future is an important selling tool when attracting buyers and tenants. The use of environmental insurance provides reassurance to potential buyers by eliminating or reducing the uncertainty surrounding the property. For instance, why would a buyer want to purchase land on which the discovery of contamination, undetected before, could be uncovered years after the purchase? Such contamination could be due to an oversight in the environmental studies performed prior to remediation, or could be the result of seepage from a neighboring contaminated property.
Likewise, insurance can be used to assuage the surrounding communities' fears about contamination, potential environmental incidents or the spread of contamination during construction activities.
The insurance coverage available today not only addresses the concerns that surround liability, business interruption and remediation costs, but also helps businesses and public agencies manage cash flow and protect themselves from unanticipated expenses, which can then, in turn, be re-invested in the project. More businesses and public agencies are aware of the fact they can purchase millions of dollars' worth of environmental insurance to fully protect all aspects of a redevelopment project — thus making it feasible and financially worthwhile for all concerned — with relatively low insurance premiums. A low annual premium for environmental insurance is certainly more attractive than a five or six figure cleanup expense, which diverts money that could have benefited the project elsewhere. It also provides assurance that the project will not be derailed by unanticipated cleanup costs.
Historically, the marketplace reaction to environmental insurance was adverse. Coverage was too expensive. The policies were too limiting. In today's market, however, the terms and conditions of environmental coverages are much more customer-friendly. Businesses and public agencies involved in redevelopment activities are not buying environmental insurance for the sake of buying it, but are using it strategically and successfully in allowing redevelopment opportunities to move ahead.
ECS, Inc., an XL Capital Company, is an underwriting manager providing integrated environmental risk management services worldwide, and is headquartered in Exton, PA. Bob Hallenbeck is senior vice president of government affairs at ECS. Visit ECS' website at www.ecsinc.com. Write him at HallenbB@ecsinc.com.