Insurance protection for brownfield development

June 4, 2020
Keith Davidson

Legal Counsel

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Contaminated land expert Keith Davidson explains how environmental insurance can play an important role mitigating liability risks in brownfield development projects.

Environmental liabilities – who should pay?

Land contamination and groundwater pollution can be a lottery in brownfield transactions where all parties are left with liability risks after completion. 

  • Developers can miss contamination hotspots and mobilise historic contamination during the remediation and construction work.
  • Buyers and long leasehold tenants are often asked to provide an indemnity for unknown and unquantified liabilities.  
  • Sellers face liability bounce-back risks as statutory exclusion tests and contractual liability transfer mechanisms are not guaranteed to work.
  • Funders are usually only offered a reliance letter that provides minimal protection.

Liabilities for land contamination and water pollution

Regulatory actionThird party liabilitiesContractual liabilitiesOther liabilities
Clean up obligations under planning controlsPrivate nuisance claims for off-site migrationLandlord and tenant claimsClean-up, investigation and monitoring costs
Contaminated land regimePublic nuisance claimsIndemnities in sale contractsLoss of property value
Environmental damage regulationsClaims relating to negligent adviceIndemnities in corporate agreementsDelay or aborted transactions
Water pollution legislationPersonal injury claimsRemediation agreementsAccounting provisions
Environmental permitting regimeMisrepresentationInsurance disputesNegative publicity

When is environmental insurance appropriate? 

If an environmental report identifies concerns, insurance can be useful option – particularly in the following scenarios:

  • Stalemate over the allocation of environmental liabilities  
  • Concerns regarding indemnity covenant strength or lack of guarantor
  • Unknown liabilities associated with offsite migration 
  • Significant risk of construction activities mobilising existing contamination

Phased approach for insurance protection

There are three types of environmental insurance policies to consider – contaminated land indemnity policies, site pollution liability (SPL) policies and contractor pollution liability (CPL) policies. 

Environmental insurance doesn’t cover remediation costs and site investigations required under planning controls, so there needs to be a combination of policies – ie CPL cover during the construction phase and SPL or indemnity policy cover after the planning conditions have been discharged.

Type of policyWhat it coversTypical exclusionsPolicy periodTypical premiums
Contaminated land indemnity policyOffers minimal protection for brownfield sites Really only suitable after planning has been discharged and where the buyer takes on liabilities under the contaminated land regime (ie Part 2A only) Responds if a regulator threatens to serve a remediation notice. Covers remediation costs, legal fees and loss of property value Site investigations, and redevelopment Civil claims Non-Part 2A regulatory action Spills from storage tanks 15 – 25 yearsLess than £5,000  
Site Pollution Liability (SPL) policy  Comprehensive protection for onsite and offsite contamination  Regulatory actionThird party claimsContractual liabilities Site investigations and redevelopment 5 or 10 years£50,000 to £150,000
Contractors Pollution Liability (CPL) policyRemediation or construction activities disturb the ground and mobilise existing contaminants Some insurers will exclude high risk known issues 3-7 yearsTypically 20% of SPL premium

The phased approach for environmental insurance at brownfield sites means that SPL and CPL insurance applies at different stages.  

Policy TypePre DevelopmentDuring DevelopmentPost Development
SPLOff Site Cover OnlyOff Site Cover OnlyOn and Off Site Cover
CPLCover for site investigationsFull CoverNo Cover

It is important to get a specialist broker and environmental lawyer involved at an early stage to summarise the options, exclusions and potential gaps in cover.  

Environmental liability risks for residual contamination

After a brownfield site has been investigated and remediated under planning controls, residual contamination will remain a concern. 

In addition to contamination that has been missed and unknown historic offsite migration, the construction activities can disturb the ground and mobilise historic contamination. 

The seller, developer, purchaser, tenant and funder can all face ongoing environmental liabilities.

Who is liable? Liability exposure
SellerRemains legally liable after sale if targeted as causer or knowing permitter. Extra risks if the developer mobilises existing contaminants 
DeveloperLegally liable for remediation during planning and for mobilising contaminants. Will often need to indemnify the seller  
Buyer Legally liable as new owner, knowing permitter and takes on the seller’s liabilities if the site is sold with information. Often indemnifies the seller 
Tenant Contractually liable under the compliance with statutory requirements or yield up covenants. Even with a tenant protection clause, can indemnify the landlord for new and aggravated contamination 
FunderContamination liabilities can reduce the value of the lender’s security and credit-worthiness of the borrower 

In the Sandridge case, a developer was deemed to have “caused” groundwater contamination by removing hardstanding at a former chemical site. Rainfall washed bromate contamination into the underlying chalk aquifer resulting in a 20km groundwater plume and over £16m clean up liabilities and compensation to damaged parties. The court held that both the developer and chemical company were legally liable.

Getting the right support 

When the stakes are high, a combination of environmental lawyer and specialist broker advice is required.

Environmental lawyer  Environmental insurance broker
Interpreting environmental reports and providing liability advice and tactics Approaching the insurers with the greatest appetite for particular type of risks
Drafting and negotiating environmental provisions in sale contracts, development agreements and leases Recommending the most appropriate policy and providing assistance to the lawyer in negotiations
Negotiating environmental insurance policy wording and providing summary of coverage Negotiating policy wording and binding cover