Taking on a contaminated site is risky because it’s hard to be sure what’s down there. Now environmental consultants have found a way to manage the risk better
As anyone who has been involved with a land remediation project will tell you, the costs and liabilities involved with cleaning up a contaminated site are highly unpredictable. Whether it is because the site investigation has not revealed the full range of contaminants present, or perhaps because those contaminants have migrated more extensively than originally thought, remediation can take longer and cost more than expected. This, in turn, can cause expensive delays to the redevelopment of a site or the progress of a transaction.
Concern about land contamination liability is greatest in the USA, where stringent environmental laws are in force. In response, American environmental consultancies have for several years provided contractual solutions – known as “environmental liability assumptions” or “buy-out” – to clients confronted with the dual risks of contaminated land liability and remediation cost overrun. The aim is to allow clients to offload risk to a third party. The market for buy-outs is estimated at $600m (£315m) a year.
These contracts are now available to clients with contaminated sites located elsewhere in the world. In 2003, my employer, environmental consultancy WSP, launched Europe’s first liability buy-out solution. Now it has come up with a new deal, known as Remediation Plus, that combines guaranteed fixed price remediation with environmental indemnification for greater than 10 years. Other environmental consultancies may well develop their own liability solutions.
These offer more flexibility than traditional environmental insurance, which tends to be underpinned by standardised policy wording, a fixed duration and coverage exclusions for known issues and liability during remediation.
Fixed-price liability can cover clients during and beyond the period of remediation (for example, if environmental laws tighten and require further clean-up of the site). They can also protect against the possibility that known contamination has, for instance, migrated off the site. At its broadest, the new solutions can provide unlimited environmental indemnification – that is, with no caps on the amount of liability insured or the length of time that the cover lasts, even on high risk sites.
Another benefit is that parties can pass on their remediation liability, third-party liability and legal and technical defence costs to the environmental consultant. As with environmental insurance, on grounds of public policy, companies cannot be protected against criminal liability for environmental damage. At a time when environmental liabilities could have an unknown impact on a company’s balance sheet, the ability to predict costs in advance and budget for them accordingly will be attractive.
Sometimes the unknown factors of costs or scale involved in a particular site may be such that the environmental consultant cannot absorb the risk. In such cases the indemnity may be backed up by an insurance policy, either arranged by the environmental consultant to cover its own risks, or alternatively, as a broader policy that covers the client’s risks as well as the consultant’s. Arranging a policy in the name of the client ensures that it will also be protected should the consultant providing the indemnity go out of business.
This new approach to contaminated land liability management will appeal particularly to the mergers and acquisitions and commercial property markets. A solution that allows vendors to transfer their contingent liabilities and walk away from a contaminated site carries clear attractions. Purchasers will be encouraged by the opportunity to buy properties that are unaccompanied by expensive environmental liabilities.
Finally, the fact that buy-outs will enable companies to transfer their contractual liabilities to an environmental consultant will provide a way of unblocking deals that might otherwise be lost as a result of business uncertainty. These solutions are particularly attractive because of the varying periods of protection offered and the opportunity to structure a package to meet the requirements of a particular client.
Stephen Sykes is a solicitor at environmental consultancy WSP, Stephen.Sykes@WSPGroup.com