Brownfield Redevelopers' Perceptions of Environmental Insurance (Working Paper)

An Appraisal and Review of Public Policy Options

Author(s): Meyer, Peter B., Kristen R. Yount and Kris Wernstedt
Publication Date: December 2002

38 pages; Inventory ID WP02PM1; English


Brownfield Redevelopers' Perceptions of Environmental Insurance	273 KB

Abstract

All real estate investments involve some risk associated with time and costs for construction as well as property market conditions. Brownfield properties, with past contamination concerns, pose greater uncertainties, associated with site conditions and market responses, and thus are far riskier than development on land without environmental quality concerns. Environmental insurance (EI), that permits risks to be capped or transferred to others, can contribute to a more effective and efficient market for brownfield sites, and thus to restraining the spatial segregation, underutilization of urban centers, and spatial expansion that has accompanied abandonment of suspect sites.

In this paper, we report on the results from a survey and interviews of brownfield developers on the role that EI plays in facilitating brownfield redevelopment. Our objectives were to add to the sparse body of empirical data on brownfield sites—providing information on both general characteristics of brownfield properties as well specific features of EI use—and to draw on this information to inform public policy and approaches to insurance use at brownfields.

We found that developers’ EI utilization rates are relatively low, reflecting in part poor knowledge of the availability of the tool, but also potentially due to the exceptional cost of the risk transfers for smaller development projects. To the extent that EI is used, the most important coverages appear to be protections for losses due to business interruption due to onsite pollution, cleanup of previously unknown onsite pollution, legal defense costs, and reopeners due to future regulatory actions. Insurance appears particularly relevant at sites where high risk financing capital is used, off-site contaminant migration is likely, or institutional controls on future land uses are prevalent. It also appears more important to a developer for projects that provide new and exceptional investment opportunities, for those that threaten major impacts on the firm’s reputation and financial health in the event of a substantial uninsured loss, or when the firm lacks adequate risk spreading across its investment project portfolio.

Local governments and nonprofit organizations can promote EI utilization through information dissemination, active intervention to promote risk pooling in local markets, and financial subsidies to developers for EI use. Community-based organizations similarly could use the EI tools for their larger projects and/or may be able to promote risk pooling in their neighborhoods.