Insure against risk for a better brownfield price

Surplus brownfield sites are often sold at less than their market value, but if local authorities insured against liability issues, they could increase their revenue. David Brierley explains

Given the UK’s industrial heritage, many sites in local authority land banks are likely to have suffered some pollution. These may be in areas targeted for regeneration, but their history could deter developers or give them a reason for a cut purchase price. To some extent, they’re right to be wary.

For instance, the site may be identified as contaminated land, even after a clean-up programme approved by planners. This is because many programmes, being cost-driven from investigation to validation, carry an inherent risk of polluted residues being left behind.

Add to this the fact that funders are wary of reducing security values and environmental liabilities they could inherit in the event of repossession, and one is left to wonder how any brownfield sites ever get to be developed.

To make matters worse still, the Landfill Directive has made it almost impossible to landfill contaminated waste, leading to the use of alternatives such as capping and process technologies – which carry their own risk exposures.

Risky business

These are legitimate business concerns for developers and for LAs with substantial holdings of brownfield land. In the event of a pollution incident, site investigation, remediation and legal costs could impact disastrously on a balance sheet or an LA’s expenditure and revenue ratio. How can this financial risk be addressed?

Looking from the authority’s perspective, an indemnity from the purchaser of a site may prove worthless if the provider becomes insolvent. Retained sites could become hazardous to human health or the wider environment as the result of rising water tables bringing historic contamination to the surface. Capital support funding may be available for emergency clean-up works but this would provide little comfort to a future buyer.

What about insurance? Property policies carry a qualified or total pollution exclusion, meaning they do not insure own-site clean-up. And cover under standard public-liability policies has excluded gradual (and therefore historic) pollution since 1990.

To quote the Association of British Insurers model exclusion: “This policy excludes all liability in respect of pollution or contamination other than caused by a sudden identifiable unintended and unexpected incident which takes place in its entirety at a specific time and place during the period of insurance.”

This exclusion often extends to statutory liabilities. This means, for instance, that the cost of remediation of a polluted river, being part of the unowned environment, would need to be met either by the original polluter or the site owner.

Expert advice is essential to manage risks cost-effectively and plug gaps in existing insurance arrangements. Some insurance brokers have been sued by their clients following environmental losses, possibly because they lacked the specialist knowledge to recognise and address pollution risks.

The positive news is that many environmental risks can be covered by dedicated environmental insurance programmes. Armed with this knowledge, LAs and businesses simply need to explore their potential risk exposures and source the best available advice to quantify, mitigate and, wherever possible, transfer them to insurance.

Environmental insurance has been available since 1992. Steady growth in the specialist market has led in more recent years to wider coverage options and lower premiums.

In the majority of cases, environmental cover is used to surmount liability issues on brownfield land transactions, where it has been proven to speed up the deal and provide comfort to subsequent purchasers, including householders, for periods of up to ten years. Insurance is also available to cover remediation cost overruns and ongoing operational risks, which would be of particular interest to waste managers.

Insure liabilities to add value

Returning to LAs, it is a widely held opinion that surplus sites are sold at less than market value on the basis that purchasers are entitled to a discount to compensate for the liabilities they have been prepared to assume. If these liabilities were insured at a fraction of the discount that would otherwise be applied, authorities could increase their revenues while providing long-term comfort to developers and their successors in title.

For more difficult sites, there may be a case for the currently undersubscribed Capital Support funding being made available to pay for the preparation of sites for sale. Alternatively, a number of businesses are achieving high profits by purchasing contaminated sites, cleaning them up and selling them to developers.

These businesses are actively seeking to enter into joint ventures with site owners in the public and private sectors, whereby they would share the profits with the original site owners at the point of sale.

The above is intended to provide a short summary of some of the key contaminated land risks and the ways in which insurance can be used to manage them. Every site has its own characteristics. And the coincidence of contractual, legal and practical environmental issues makes effective management extremely complex.

For this reason, specialist advice should be sought on risk exposures and solutions to achieve optimum protection and potentially to boost revenue from the sale of surplus sites.

David Brierley is environmental risks manager at Bridge Insurance Brokers

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