Adam Keith by

Posted on June 24, 2016

Development sites can come with a multitude of legal and practical problems, perhaps none more difficult to resolve than environmental contamination. Lack of housing has reached critical levels within London and surrounding commuter towns. This has brought developers and those desperate for housing into direct conflict with people determined to protect the environment and particularly the Green Belt. The Green Belt, first envisaged in 1935, has gone through many changes, however, it appears certain to remain in place for some time yet. The new Mayor of London, Sadiq Khan, has pledged to support it.

It falls to developers to look elsewhere in the need to provide for London’s expanding population. ‘Brownfield’ sites, where the area has previously been used for industrial purposes or some commercial uses appears to be the solution to the problem for now. There are over 300,000 such sites in England, a number likely to increase as heavy industry and manufacturing declines. Brownfield sites often find the planning process far less onerous and communities far happier to accept their redevelopment. The sites are often cheaper than attempting to develop Greenfield sites. As with many aspects of life, there are downsides to Brownfield development, perhaps the most difficult to deal with is environmental contamination.

Transfer of Environmental Liability
As a rule of thumb, liability for pollution rests with the polluter. However, this liability regularly transfers to the property owner (who was not the polluter), where:

  • The owner has indemnified the polluter through the sale purchase agreement;
  • The polluter no longer exists; and
  • The owner knows about the pollution and fails to manage it.

Key Risks
The most common and onerous environmental risks associated with a property transaction include:

  • Known issues – site investigations and searches identify pollution;
  • Unknown issues – the above investigations (as a snap shot in time) fail to identify the pollution, for example the pollution has already migrated beyond the boundary of the property;
  • Data Gaps – intrusive investigations may not be wanted – as they could realise contamination that then needs to be dealt with;
  • Liability Bounce Back – a seller, although protected by an indemnity, may still retain the liability should the purchaser have inadequate financial strength (particularly when the buyer uses a Special Purchase Vehicle to ring fence liability); and
  • Changes in Law – or the response of the environmental regulator.  Over time the legal framework, or more likely the position of the regulator, may change allowing liabilities to attach to a property that were not envisaged at the time of the transaction.

These risks introduce uncertainty for both seller and purchaser, impacting the transaction process and value of the land.

Standard Insurance Products
Standard (Public Liability) insurance policies are unlikely to provide adequate protection from the above liabilities, as they will be limited to providing cover for “sudden and accidental” events only.  Historical leakage from drains or on disposal of waste material would be considered neither sudden nor accidental.

Environmental Insurance
The insurance market has developed products designed to cover this gap in Public Liability policies associated with environmental liability. These policies respond to Statutory, Civil and Contractual Liabilities and so are well placed to support transactions. Benefits of these policies include:

  • An ability to insure known issues;
  • Cover for gaps in the understanding of the condition of the property; and
  • Financial provision against liabilities, protecting the bounce back of liability post-sale.

These products therefore work on both seller and buyer side, with the ability to provide protection to funders and other stakeholders associated with the property.

Insurance for Known Issues
It is accepted that insurance cannot be purchased for “known” issues where the risk has materialised and is ongoing – the burning building.  However, with respect to environmental insurance, the presence of contamination does not necessarily mean that a liability exists at this time.

Insurance can therefore be used to manage these known “potential” liabilities, effectively taking them out of the negotiation process.

By Adam Keith, Transactional Liability Manager at Property Insurance Initiatives and Duncan Spencer of EDIA Limited