Dig deep

The implementation of Part IIA of the Environmental Protection Act 1990 is providing a focus, as never before, on contaminated land risk and liability. Sellers are reluctant to retain continuing liabilities once they have sold; potential purchasers now need to take a much more rigorous approach in investigating the history of a site prior to securing a deal. Dr Norman Ellis, chief executive of Certa, on the liability of the land.

Recent Department of Environment, Transport & the Regions research estimates the scale of contaminated land in Britain as 360,000 hectares, with assessment and remediation costs at £15.2bn. Environmental insurance, then, is a growing area, and for a number of different reasons. Firstly, the law has changed regarding liability. In April 2000, the new contaminated land regime was implemented, based on Part IIA of the Environmental Protection Act 1990. This has increased liability in relation to contaminated land, spreading the burden from polluters to landowners and occupiers. Ideally, the law holds responsible anyone who caused or knowingly permitted the offending substance to be in, on or under the land. However, if after reasonable inquiry such individuals cannot be found, then liability shifts to a second tier of individuals, including owners or occupiers of the land in question.

Contaminated land is that which appears to be in such a condition, by reason of substances in, on or under it, that either: significant harm is caused or there is a significant possibility of such harm; or pollution of controlled waters is being or is likely to be caused. In relation to the former, the key lies in the word "significant", which is determined by government guidance on the relevant targets (receptors), types of harm, and possibility of harm. The government hopes this will keep the scope of the regime within reasonable bounds. The latter part of the definition, on pollution of controlled waters, is not limited in this way.

Remediation notice
Once land has been identified as contaminated, a period of at least three months is allowed to elapse before any further step is taken (except in emergencies). This is to allow for discussion and negotiation with those who may be liable. If it does not appear that the land is going to be cleaned up voluntarily, the authority can serve a remediation notice specifying what must be done. Early reports suggest some local authorities are already in the process of serving enforcement notices on owners of contaminated land.

Measures specified by an enforcement notice will depend on the nature of the contamination. Remediation, encompassing assessment, remedial measures and further monitoring, may be the subject of mutual agreement or may simply be imposed by the authority. The key requirement is one of "reasonableness" - having regard to the cost of the pollution.

Vested interest
In particular, Part IIA is helping to focus the mind on the risks and liability associated with brownfield sites, bringing the need for insurance directly into the heart of property deals. All parties have a vested interest in ensuring the risks associated with the land are minimised: sellers are often very reluctant to retain continuing liabilities once they have sold the land; potential purchasers now need to take a more rigorous approach in investigating the history of a site prior to securing a deal. A popular method for apportioning such liability is to require a buyer to hold the seller harmless for any claim against the seller arising from its ownership of the land.

The new legislation does allow for sellers to pass on liability through contract law, even though they may have polluted the land. However, timing is all-important and a transaction can begin to stall over negotiations on indemnities and counter-indemnities. Knowing that the indemnity risk can be passed to a blue chip insurance group is a powerful advantage, thereby allowing the buyer to renegotiate the purchase price and save time on extensive negotiations.

Those whose plans involve redevelopment of a landfill site, or land close by, often feel the landfill can blight the project and that it has the potential to reduce asset value. Landfills can cause this uncertainty because their contents are often subject to high uncertainty. The regulation of landfills has become much more strict in the last ten years, and so closed or disused landfills could have been filled at a time when there was little or even no regulation. In these situations it may be difficult to conduct intrusive site investigations. Owners of landfills also need to be aware of the problems of managing landfill gases and of complying with licence obligations, which may continue to be enforced long after the landfill has been closed. All of these issues can cause developers to consider landfills with caution. Many, however, are in good locations and provide excellent brownfield development potential.

Remediation of a contaminated site can involve a number of complex technical, legal and financial processes. Consequently, to ensure that a successful project can be completed it is of the utmost importance that the objectives of the remediation are clearly understood and agreed by all parties.

Both environmental consultants and contractors are increasingly finding that their own standard professional indemnity insurance cover may not be sufficient or provide an adequate scope of coverage for some projects. When the remediation of a site is viewed as too great a commercial risk and/or stakeholders are not willing to accept potential associated liabilities, the redevelopment of a site may be halted or may never commence.

New influences
Remediation stop loss is an insurance solution designed to cover unbudgeted costs resulting from the discovery of new sources of contamination during the remediation process for a given schedule of risks. The insurance is tailored to suit the project and stakeholders' needs and, by minimising the potential risk, it can enable the project to proceed. All those involved benefit from the insurance cover as the risks are effectively transfered to the insurer.

The demand for businesses to take contamination and pollution seriously has been growing throughout the last few years, not just due to Part IIA. Whilst the new contaminated land regime replaces statutory nuisance controls over contamination, other controls still apply to brownfield sites. These include planning, water pollution, common law liability, waste management licenses and integrated pollution and prevention controls.

In addition, a number of new influences have come to bear. Financial Reporting Standard 12 (FRS12), for example, relates to provisions, contingent liabilities and contingent assets. In the case of contaminated land, it revie ws the likelihood of having to undertake a clean-up, based on company and government policy. How much such a clean-up would cost must be calculated and balance sheet provisions must be made as a result. Being able to demonstrate that insurance can act as mitigation against these provisions is a positive way of handling this potentially negative presentation of costs.

Implications for Owners and Operators Implications for purchasers
  • Sale of a site may not relieve a vendor from liabilities for contaminated land: the presumption in the new regime is that the polluter pays. Although there are a number of exemptions (such as "Payments Made for Remediation" or "Sold with Information"), there is little precedent in this area. It is difficult to tell, at this stage, which get-out clauses will turn out to be legally defensible if remediation is required in the future.
  • Be prepared to have your site surveyed. Local authorities have powers to enter premises, take samples, carry out related activities and ask questions that must be answered. Seek environmental and legal advice.
  • Consider your own study. The new Integrated Pollution and Prevention Control regime includes contaminated land. FRS12 also required organisations to recognise environmental liabilities. It is, therefore, important you know the condition of your sites.
  • Carry out a survey before you purchase a site that could be contaminated. It could be anything up to two years before the local authorities complete all their surveys, so for the time being a search reporting that a site has not been identified as contaminated land does not guarantee that it will not be in the future. If you have had the opportunity to investigate the site it will probably be deemed to have been "Sold with Information".
  • Make sure your lawyers ensure contractual protection as far as it is possible.
  • Remember that contamination could be a significant liability even if a site is not defined as contaminated. Although a site may not require remediation now, if you want to redevelop it, or sell it on for development for a more sensitive end use, historic contamination could then be a major cost.
  • Check the register of contaminated land. Land on the local authority register is not removed after remediation and the regulator will not normally provide a certificate to confirm that remediation has been completed. Ensure that you know if the site has been remediated properly.

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