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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 action | Third party liabilities | Contractual liabilities | Other liabilities |
| Clean up obligations under planning controls | Private nuisance claims for off-site migration | Landlord and tenant claims | Clean-up, investigation and monitoring costs |
| Contaminated land regime | Public nuisance claims | Indemnities in sale contracts | Loss of property value |
| Environmental damage regulations | Claims relating to negligent advice | Indemnities in corporate agreements | Delay or aborted transactions |
| Water pollution legislation | Personal injury claims | Remediation agreements | Accounting provisions |
| Environmental permitting regime | Misrepresentation | Insurance disputes | Negative 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 policy | What it covers | Typical exclusions | Policy period | Typical premiums |
| Contaminated land indemnity policy | Offers 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 years | Less 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) policy | Remediation or construction activities disturb the ground and mobilise existing contaminants | Some insurers will exclude high risk known issues | 3-7 years | Typically 20% of SPL premium |
The phased approach for environmental insurance at brownfield sites means that SPL and CPL insurance applies at different stages.
| Policy Type | Pre Development | During Development | Post Development |
| SPL | Off Site Cover Only | Off Site Cover Only | On and Off Site Cover |
| CPL | Cover for site investigations | Full Cover | No 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 |
| Seller | Remains legally liable after sale if targeted as causer or knowing permitter. Extra risks if the developer mobilises existing contaminants |
| Developer | Legally 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 |
| Funder | Contamination 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 |