Small Sites Problem

The Problem: One of the thorniest challenges to the success of a contaminated property transactions is known as the “small sites problem.” Cleanup costs charged on a time and materials basis can be uncontrollable and unpredictable. There needs to be some way, for purposes of a transaction, of estimating what those costs will be. Some way of capping them. One method is cleanup cost cap insurance, which pays for cost overruns over an estimated cost. The problem is that this insurance is only available or cost effective for cleanup costs of $2 million or more; the two insurers (Zurich and ACE) who currently provide cleanup cost cap insurance charge a minimum premium of $350,000, so it does not make any sense for the typical brownfields cleanup which is usually under $1 million.

The Solution: This problem can be addressed by a variety of “alternative risk transfer” (ART) products. The most commonly used in recent years has been the guaranteed fixed priced remediation (GFPR) contract; an engineering company basically assumes or indemnifies the buyer or seller of a property for cost overrun liability under such a GFPR. If there are other risks of concern at the site, as is usually the case, e.g., third party claims or cleanup costs from unknown conditions, the GFPR can be accompanied by an SPL policy. In situations with the small sites problem, EIA can recommend engineers who will do GFPR’s. EIA can also assist in integrating the three contracts: SPL policy, GFPR, and purchase and sale agreement (PSA).

Other ART products can solve the small sites problem by grouping together or pooling sites with small cleanup costs so that the total cost exceeds $2 million. These could include portfolio policies for two or more sites owned by the same insured; a risk purchasing groups (RPGs) which allow a group of insureds to purchase a group liabilitypolicy for their small sites from an insurer; and group captives or pooling arrangements, involving self-insurance and sharing of losses among a group under a high deductible or self-inured retention. Pooling arrangements have benefits in addition to aggregating cleanup costs including cost and premium savings and the ability to obtain coverages not available in the general market. Whatever method is used, EIA’s integrated environmental risk management services will ensure that it is implemented effectively.

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