Managing risks on contaminated sites boosts market for insurance solutions

Managing risks will be a key aspect of implementing recent Government guidance on contaminated land, leading to a growth in environmental insurance. Dr Norman Ellis, Chief Executive of CERTA, which specialises in this field, providing tailored solutions relating to contaminated land, explains how the focus of government legislation is leading to increased demands for environmental insurance solutions.

The growth in site remediation has spurred demand for environmental insurance

The growth in site remediation has spurred demand for environmental insurance

Environmental insurance is a growing area, for a number of different reasons. Firstly, the law has changed regarding liability for contaminated land. As from April 2000, a new contaminated land regime is being implemented, based on Part IIA of the Environmental Protection Act 1990. This has increased the 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 the liability is moved to a second tier of individuals, including owners or occupiers of the land in question.

There are some basic questions in relation to Part IIA that it are worth reviewing.

What is Part IIA?
It extends the Environmental Protection Act 1990 and creates a new regime for the identification, and clean up of contaminated land. This involves onerous statutory duties on local authorities and potential financial liabilities for landowners and occupiers.

Identifying contaminated land
Land 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 is likely to be caused.

In relation to (a) the key is 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 well keep the scope of the regime within reasonable bounds. However, (b) on pollution of controlled waters is not limited in this way.

Local Authorities are involved because they must now cause their area to be inspected for contamination from time to time. Under the Guidance, the authority must produce a written strategy for inspection.

When land is identified as contaminated, there is a period of at least three months 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.

What measures will be required?
This depends on the nature of the contamination. "Remediation" (clean up) can encompass assessment, remedial measures and further monitoring. It may be the subject of mutual agreement or imposed by the authority. The key requirement is one of reasonableness, having regard to the cost of the pollution.

What will it mean for insurance covers and claims?
The implementation of part IIA is therefore a slightly double-edged sword, for insurers and brokers alike. Opportunities and burdens can be both be seen to result from its introduction. As part IIA imposes potential liability for remediating contamination cause by historic incidents on, amongst others, owners and occupiers, it brings with it the need for specialist insurance policies which can cover the associated costs.

Policies challenge
The challenge, however, is that a number of non-specialist liability policies may end up being the route of last resort for individuals caught out by the new legislation.

In particular public liability policies that are occurrence based may be subject to claims, especially where they provide a cover for property damage and bodily injury during the policy period and have no exclusion cause for gradual pollution.

Although most public liability policies issued or renewed after 1990 include such clauses, pollution exclusions in pre-1990 public liability policies are rare. Therefore if property damage or bodily injuries from past pollution incidents occurred prior to 1990, liability insurers may be faced with long tail liabilities for pollution.

Professional liability considerations
Professional negligence claims may also rise, based on Part IIA. Brokers and insurers providing solutions to professions such as accountants, environmental consultants, environmental engineers, solicitors and surveyors may need to offer their clients amended cover. If any of these professional advisors have clients who are adversely affected by the new regime due to their reliance on a professional's negligent advice, then they could experience claims.

For example, a solicitor who fails to advise a site purchaser of the environmental liabilities associated with the prior use of the site could well experience a negligence claim. This would bring into effect the professional indemnity policy, unless it excluded cover for all pollution-related claims. Brokers and insurers may therefore wish to advise their professional clients to review their policies to determine whether they have the necessary cover. If not, it may necessary to provide a policy which specifically covers such liabilities.

Risk management
Risk management is another key area of opportunity in relation to Part IIA. The new regime will have significant implications in relation to the planning, development, sale purchase, valuation and management of any property in the UK, whether commercial or residential. There is scope for many practical measures to both manage and control the potential risks and liabilities.

Specific concern should be paid to the possibility of transferring the existing liability to another party. Additionally, it is important to avoid picking up liability for contaminated land that is not related to an existing business. Lenders in particular will not want to risk picking up liability or losing the value of their security. They will also wish to be assured that the borrowerÕs ability to meet it repayment obligations will not be impaired. Companies such as CERTA who specialise in assessing such risks and designing bespoke environmental insurance solutions are ideally placed to help. Insurance is increasingly becoming the most attractive and flexible mechanisms for dealing with potential risks over contaminated land. Cover from a specialist policy will do much to alleviate the concerns of all parties involved.

However, it is important also to understand what other techniques are practicable in such circumstances. These include obtaining a Phase I (desk top) and/or Phase II (intrusive) Site Investigation from recognised environmental consultants. They can advise whether (and to what extent), remediation is required. However, it is important to emphasise that whilst consultants can provide an excellent service, they should not be seen as a route for transferring risk. Ideally, attempts should be made to transfer the risk to the buyer using a financial solution, such as decreasing purchase price by the amount assessed by professional consultants to be the quantified clean up cost. Liability can also be offset by "selling with information" and allowing the buyer full access to the site.

Contractual solutions in the form of indemnities are also an option. The Local Authority or Environment Agency are required to have regard to agreements made between the parties which transfer the risk under the regime. This is provided such agreements are at arm's length and do not seek to evade liability.

Property concerns
In particular Part IIA is helping to focus the mind on the risks and liability associated with brownfield sites. It is bringing the need for insurance right into the heart the property deal. Potential purchasers need to take a more rigorous approach to investigating the history of a site prior to securing the deal. All parties in the deal have a vested interest in ensuring the risks associated with the land are minimised. Certa is frequently called upon to provide back up environmental indemnities in contracts. Parties are often very reluctant to have continuing liabilities once they have sold the land. 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. Timing is all-important and at transaction can begin to stall over negotiations on indemnities and counter indemnities. The ability to know that the indemnity risk can be based to a 'AAA' rated insurance group is a powerful advantage, allowing the buyer to renegotiate the purchase price and save time on extensive negotiation.

Certa was one of the first specialists providing tailored insurance solutions to meet these type of environmental risks. For the past two and half years it has designed hundreds of different policies to cover all manner of projects including PFI's Local Authority Stock Transfers, Bond Replacement Insurance (in relation to Waste Management Licences and Planning Agreements) as well as international transactions.

The demand for businesses to take contamination and pollution seriously has been growing throughout this period, not just due to Part IIA. In fact a number of influences have come to bear. The Financial Reporting Standard 12 is a new accounting standard recently introduced. It relates to provisions, contingent liabilities and contingent assets (FRS12). This sets out how to report contingent assets and liabilities. In the case of contaminated land, it reviews 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.

In addition, the new spectre has been added to corporate life of individual criminal liability for company officers. This is certainly focusing the mind of non-executives and other company officials in relation to the corporate liabilities they may be exposed to.

Part IIA is a significant piece of legislation, but it merely adds another dimension to the complex web of environmental laws that businesses face. Managing the liability minefield is quite a challenge. However, with the right knowledge and informed support, at least the insurance can be straightforward.



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