Environmental Insurance for Brownfield Redevelopment

What is environmental insurance?

Environmental Insurance refers to a suite of insurance products designed to protect the insured (e.g., the developer, the remediation contractor) from cost overruns associated with environmental cleanup projects. The insurance is in addition to the general liability insurance typically carried by remediation firms and is particularly important for contractors on performance based contracts because they are paid for successful completion of milestones, not based on the level of effort to achieve those milestones. If an unexpected condition arises that drives the cost of the cleanup beyond what was originally anticipated and proposed, the insurance can provide the necessary funds to complete the work, up to the agreed upon spend limit.

What is the purpose of environmental insurance coverage?

The developer benefits from minimizing the impact of cost overruns through use of environmental insurance. This has the effect of limiting the overall cost risk to both the developer and contractors. In certain circumstances, without insurance, contractors might have to include very high contingencies and the overall cost to the developer might be prohibitively high. If insurance is used and the contractor encounter unanticipated contamination levels, extent, or constituents, or should the contractor have difficulties in the field, instead of the developer funding subsequent contract modifications, the contractor is required to seek insurance payment in order to cover the additional costs.


What sort of coverage does the insurance provide?

The insurance provides coverage for cost overruns - project costs that exceed the amount estimated in the project contract. The most common type of policy that protects against cost overruns above the estimated cost of remediation is Remediation Stop Loss Insurance (also known as Cleanup Cost Cap Insurance). The cost overruns covered by these policies are generally due to one of three occurrences:

* Regulatory or requirement changes;
* The discovery of new contaminants, or more extensive contamination, not identified when the remediation plan was designed; or
* Delays and difficulties in the execution of the original remediation plan.

The carrier issuing the policy indemnifies the insured for remediation costs above the estimated costs, plus an additional retention level, up to the policy cap. For example, a $1 million cleanup may require a $100,000 retention amount. In this simplified example coverage under the policy begins after $1.1 million (value of contract award plus retention amount) has been spent on the covered remediation project. If remediation costs exceed the insured amount, the additional costs revert back to the insured.

Why should a developer pay for insurance policies?

The insurance policy allows contractors to take on a greater amount of risk at a reduced cost to the developer. The developer is willing to pay the insurance premium because of the reduced remediation cost, the ability to cap remediation funding required to complete work at an installation, and because of the additional funding available via accessing the insurance policy should unforeseen circumstances arise.

How can the developer determine whether environmental insurance will be required?

Several factors are incorporated into the decision on whether to require environmental insurance on a project. These include the nature and scope of the work anticipated on the contract (e.g., groundwater remediation versus installation of a pre-approved cap design), the level of uncertainty remaining on a project, and whether the work will be conducted by a large or small business. In addition, the developer should carefully examines all aspects of the anticipated scope of effort to determine if there are some elements of the work that should not require environmental insurance. Such elements include long-term management of landfill caps and covers and development of the Project Management Plan.


How much does the insurance typically cost?

Policy premiums for the required insurance are based on a percentage of the guaranteed costs in combination with the limits of the policy, generally falling between 10% and 15% of the proposed remediation project cost.

Are the policy premiums considered a "remediation cost" under State Brownfield Tax Credit criteria?

Contact your State Brownfield Coordinator to determine whether policy premiums can be offset with a brownfield tax credit.