Is insurance the solution to the brown field dilemma?
This case study from Argyll Public Sector Services of the development of a former landfill site illustrates the key role that the insurance industry can play in ensuring the effective regeneration of contaminated land
A former domestic landfill site of approximately 3 hectares (7.5 acres), extant since 1970s, was owned and formerly operated by the local authority. Geotechnical surveys revealed levels of contamination. Operational controls during its lifetime were not to standards currently demanded.
The land was considered as having no value, while an increasing liability to the local authority owner. Previous enquiries for development were turned down for fear of creating greater liability.
A major local employer with premises throughout the borough was seeking to house and expand its warehousing and administration within one site. The council was keen to ensure that the company remained within the Borough boundaries, as the 400 employees were likely to increase to 600.
With leases expiring at various locations, the employer required a swift response to its accommodation needs. The former landfill site was identified as the only viable location meeting the employer’s criteria, as well as falling within Government guidelines for prioritising the use of previously-developed land.
Factors to consider were:
- The potential civil liability for damage or injury caused by pollution migrating off-site
- The potential remediation costs (including investigation, clean-up and follow-up costs) following the issue of a statutory notice
- The potential for criminal liability arising from breaches of legislation (particularly in relation to water contamination)
- Planning conditions or obligations associated with redevelopment
- Its ownership of the site and being causer or knowing permitter of the pollution
- Its responsibility as Regulator under the Environment Act 1995
- Its potential liability to commercial occupiers of the site for their financial loss following an interruption to trading
- Future changes in legislation may reduce pollution tolerances
The council’s preferred option was of soil remediation involving the removal of spoil to be undertaken by a local contractor. The cost was estimated at around £10 million but was discounted for the following reasons:
- In view of the maturity of the former landfill site and the anticipated extent of leachate migration into groundwaters, there could be no guarantee that the proposed works would effectively reduce the existing liabilities or give rise to the capping of the council’s liabilities
- The impact on the local community caused by the excavation works
- The considerable associated nuisance of heavy laden vehicles required to transport the spoil away to a licensed landfill site whose route would necessarily lead them through the adjoining residential development
- The council was keen initially to grant a lease since it was felt this would give the authority greater control over the future use of the site, thereby mitigating the potential for environmental liabilities. This view was to remain fixed until the council was persuaded to consider a financial guarantee in respect of its liabilities by its insurance broker
- The council employed the services of insurance broker, Argyll Public Sector Services, part of the Argyll Insurance Group, and a specialist in securing bespoke environmental impairment liability insurance for local authorities throughout the UK, to obtain the necessary solution
- Following detailed discussions between all parties to the land transfer, Argyll Public Sector Services was given the responsibility of accessing the insurance market to obtain the right insurance carrier to underwrite the various areas of liability facing the council. Detailed policy wording changes were negotiated with underwriters and ultimately a bespoke solution was created
- As negotiations unfolded, the council became comfortable in the knowledge that its exposure to liability could be capped satisfactorily by insurance cover, and it was agreed that a sale rather than a lease of the site could proceed
- One of the fundamental criteria for employing an insurance solution was that the insurer selected would require to offer the highest possible credit status over the full term of the cover
- It would be necessary to create two separate policies to indemnify the interests of the council and the employer. The intention would be to divide the overall policy indemnity to cover the individual risks and liability exposures of the two parties – the premium to be divided proportionately
- Restricted planning consents were applied to the proposed development by the council which were written into the insurance policy conditions
The insurance solution selected was written to indemnify the council’s:
- Regulatory Liability
- Residual Third Party Liability
- Injunctive relief legal costs
- Any other loss (including legal or associated costs) incurred by the council with the prior written consent of the insurer in defence of the subject matter.
The policy was structured to provide a maximum combined indemnity of £25 million with a built-in indexation provision, spanning a period of 25 years over numerous areas, but particularly offering indemnity for:
- Potential cost of removal of all previously tipped material
- Business interruption and relocation costs of the employer following potential site remediation
- Third Party liabilities arising both on or off site.
- The overall cost of the insurance solution was less than £500,000, an equated cost of around 5% of the potential spoil removal costs alone
The council achieved a capital receipt for the sale of the site.
In conclusion, therefore, what was once a thorn in the side of the council, increasing in its potential for liability over time, has been in fact been turned around into a substantial asset. The further benefits that flow from this initiative include:
- The employer was able to remain in the area and construct a centralised business resource upon which the company was better placed to move forward and grow
- The jobs of over 200 existing local workforce were made secure and because of the enhanced accommodation up to 200 further local jobs were to be made available
- The council was able to cap its potential civil liabilities arising from its previous landfill operations
- The substantial local impact of a landfill clean-up operation was avoided
- Considerable benefits flowed to the council as a result of its use of a brownfield site for this high-profile development.
© Faversham House Ltd 2022 edie news articles may be copied or forwarded for individual use only. No other reproduction or distribution is permitted without prior written consent.