February 20, 2008
By: Gerald Barrett, Legislative Fellow
You asked us to summarize the different types of environmental insurance. You also want to know how many states have insurance programs related to brownfield remediation and how many policies have been written in the states that have state-run programs.
Several types of environmental insurance exist, with three types specific to brownfield remediation. Pollution Liability, Cost Cap, and Secured Lender are the types of insurance policies that are used in existing state programs for brownfield remediation. As of 2006, four states (Connecticut, Massachusetts, New York, and Wisconsin) have state-run insurance programs specific to brownfield remediation. Within these four states, the number of policies issued ranges from zero to 320.
ENVIRONMENTAL INSURANCE POLICIES
There are eight types of insurance policies offered by the major environmental insurance companies. More tailored policies may also be offered by other major insurance companies. Of these eight types, three—Cost Cap, Pollution Liability, and Secured Lender insurance policies—apply to brownfield remediation. More information on current and proposed state brownfield insurance programs can be found at: http://www.brownfieldsinsurance.org/en/Reports.aspx.
Cost Cap policies help protect against cost overruns on planned remediations, due to newly discovered contaminants such as pollutants both on site and off site. Generally, policies are not made available for sites with estimated cleanup under $2 million.
Pollution Liability policies provide protection from third-party claims, private lawsuits or government mandates, bodily injury, cleanup costs, and property damage. Additionally, this policy provides protection from legal expenses.
Secured Lender policies pay for covered loans upon loan default where pollution conditions exist. Typically, the policy is designed to cover the lesser of the (1) outstanding covered loan balance, (2) cost of cleanup, and, (3) fair market value of the location. The policy can also cover the cost of legal defense, contract damages, and bodily injury.
EXISTING STATE PROGRAMS
Over the past 15 years, state environmental agencies have explored the potential for state-run brownfield insurance programs to manage the risks associated with brownfield cleanup and redevelopment. In January 2002, the federal Small Business Liability Relief and Brownfields Revitalization Act (P.L. 107-118) was signed into law. The act authorizes federal funding for state brownfield programs, and for grants or loans for brownfield assessment and remediation. Currently, Connecticut, Massachusetts, New York, and Wisconsin have state-run brownfield insurance programs.
Connecticut's brownfield program provides subsidies and technical assistance to help developers obtain insurance for brownfield projects. The Department of Economic and Community Development (DECD) staff works with clients throughout all phases of a project and provides financial assistance, customizing the type of assistance needed. The decision to provide insurance subsidies is based on DECD's judgment that (1) there are substantial risks that need to be insured and (2) the
cost of the insurance merits the coverage provided for those risks. Additionally, on state-supported projects DECD reserves 10% of the estimated cost for any cost overrun that may occur.
There are no preset limits on the amount of insurance subsidies awarded per project. The total amount of funds available is determined by annual legislative allocations.
Additionally, there is the Special Contaminated Property Remediation and Insurance Fund (SCPRIF), administered by DECD and Department of Environmental Protection (DEP), which provides assistance for brownfield remediation through low interest loans that have a term of five years. More information for SCPRIF can be found at: http://www.ct.gov/ecd/cwp/view.asp?a=1101&q= 2498 40.
In Connecticut, no policies have been issued under SCPRIF. However, at least five brownfield remediation sites have been a part of the DECD state-run insurance program in some way.
Massachusetts' Brownfield Redevelopment Access to Capital (MassBRAC) is the oldest state brownfield insurance, in existence since 1999. MassBRAC is administered by the Massachusetts Business Development Corporation (MBDC), a non-governmental, economic development organization. Under the current program, developers are able to choose from insurers prequalified by MBDC.
The three types of insurance offered by these insurers are Cost Cap, Pollution Liability, and Secured Lender policies. While no single carrier offers all three policies under MBDC, a developer can purchase separate policies from different insurers to meet the needs of a project. Currently, the state provides a 50% subsidy up to a maximum of $50,000 for private parties and up to $150,000 for public, quasi-public, and non-profit parties.
Massachusetts estimates that between 300 and 320 policies have been issued since the program began.
New York's 2003 Brownfield Cleanup Act created three tax credits, one of which is for environmental remediation insurance. The credit is for the lesser of $30,000 or 50% of the premiums paid. Eligible insurance must contain specified Cost Cap or Pollution Liability coverages. Developers must apply to New York's Department of Environmental Conservation (DEC) for the credits. The department awards them only if the developers remediate the property and are issued a DEC certificate of completion upon completion.
New York is not able to estimate the number of insurance policies issued that are tied to tax credits for brownfield remediation projects.
Wisconsin's Department of Natural Resources (WNDR) has initiated the development of two insurance programs. The Voluntary Party Liability Exemption (VPLE) insurance program is designed to allow the state to issue timely liability relief to developers.
Under the VPLE program, responsible parties may be granted a transferable WNDR certificate of completion. The certificate assures recipients that they are not responsible for further cleanup at a site due to past releases, even if environmental standards change, the cleanup action fails, or the contamination is found to be more extensive than anticipated.
In addition, Wisconsin's Brownfield Insurance Program (WBIP) was launched in November 2006. It differs from the VPLE program in that developers are the insured parties. WBIP involves the use of a single insurer that offers a 10% discount on Pollution Liability policies. No subsidies are offered. Developers negotiate their own coverage and premiums and are covered under the full range of the Pollution Liability policies. The insurer uses the company's own policy form, but a state-negotiated endorsement is attached.
The contract between the state and the insurer has reporting provisions. The insurer is responsible for providing information such as the number of policies written, claims paid or denied, premium costs, and policy processing time. The performance of the insurer is reviewed by the state every two years; if the evaluation is not positive, another insurer will be selected by the state.
Wisconsin's two state-run insurance programs have resulted in an estimated 108 insurance policies being issued for brownfield remediation sites.