Urban Redevelopment and Environmental Insurance Concerns

Oftentimes, redevelopment sites present inherent challenges. The most desirable locations are often those surrounded by existing infrastructure, established workforces and ancillary attractions. To maximize potential profits, developers often choose blighted locations and properties in close proximity to other developing properties and/or locations that are set as cornerstone features. Permitting and local approvals can become huge obstacles, particularly in those areas that are already well established. Finally, redevelopment sites can have an environmental component associated with the presence of hazardous substances, pollutants or contaminants that pose additional challenges and risks.

In this post, we discuss

• the Environmental Protection Agency’s framework for the development of brownfield sites
• Environmental assessments and standards for testing
• Further steps developers and insurance carriers can take to reduce risk associated with environmental concerns

Redeveloping Brownfield Sites: The EPA’s Three-Phased Approach

A brownfield site is the term used by the Environmental Protection Agency (EPA) for the expansion, redevelopment or reuse of a property that may be complicated by the presence or potential presence of a hazardous substance, pollutant or contaminant. Clean up and reinvestment in these properties benefits the EPA and other regulatory bodies by:

• protecting the environment,
• reducing blight in the neighborhood and
• taking developmental pressures off greenspaces and working lands.

The EPA promotes a three-phased approach to the redevelopment of most brownfield sites:

• Pre-Development: conducting due diligence, preparing redevelopment plan, acquiring funding and environmental insurance
• Development: securing permits, conducting environmental cleanup and construction
• Management: any operation and maintenance needed for the property whether it is to be held or sold

This framework highlights the potential disconnects between investors, regulators, and insurance companies in terms of interpretation and participation in the process (Figure 1).

Figure 1: Understanding the Three Stages of Brownfields Redevelopment Process (Source)

The pre-development phase should require the most focus, attention, time, due diligence and careful monetary investment. However, as this phase is often the riskiest for developers and investors, requiring huge investments of money and time on a project that may never materialize, it is common that the least possible effort and money is invested in this stage. The decision to cut corners often results in incomplete and rushed environmental due diligence assessments, possibly missing environmental issues with potentially significant impact.

Protecting the Investment: Understanding Phase I Environmental Site Assessments (ESAs)

Redeveloping a brownfield site often presents considerable risk for insurance carriers. Most available data sets are based on historic data and/or potentially incomplete data. In many cases, the existence of site features (buildings, utilities, vegetative cover, etc.) is often a limiting factor in some due diligence activities. As such, careful due diligence, such as a Phase I ESA, that adheres to the American Society for Testing and Materials (ASTM) standards, is a crucial step for developers and insurance carriers to protect their investments and ensure that future losses are mitigated.

The newest guidelines for the ASTM standard (ASTM E1527-21) were published in November 2021, updating those published in 2013. The standard was adopted by the EPA as part of the All Appropriate Inquires (AAI) rule and made effective as of February 2023. This standard is designed to identify hazardous substances or petroleum products that might be present on a property, often referred to as Recognized Environmental Conditions (RECs). The updated standard aims to clarify best practices for conducting these assessments, which are vital for identifying contamination risks in commercial real estate under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

It is worth noting that between 2021 when ASTM E1527-21 was published and 2023 when it was made effective, the EPA proposed a Direct Final Rule in 2022 that allowed either the old (ASTM E1527-13) or new (ASTM E1527-21) standard for compliance. This move caused a great deal of confusion, and after receiving feedback, the EPA withdrew its Direct Final Rule and moved to formally adopt ASTM E1527-21. The approval of this standard as the final word on RECs is significant for the environmental community, ensuring clearer guidelines for environmental site assessments and the protection of stakeholders from liability for contamination.

There are several key changes introduced in the ASTM E1527-21 standard for Phase I ESA compared to the previous ASTM E1527-13 standard:

1. Clarification of terminology: The updated standard clarifies terms such as “RECS” and “controlled RECs,” offering more precise definitions to help assessors identify potential environmental risks.
2. Use of historical information: The E1527-21 standard emphasizes the need to review historical records more thoroughly, particularly in assessing properties that may have been used for industrial purposes. It offers more detailed guidance on the types of historical documents that should be reviewed to improve the accuracy of assessments.
3. Additional considerations for “vapor intrusion”: The updated standard includes specific guidance for evaluating the potential for vapor intrusion. This addresses concerns over hazardous vapors that might seep into buildings from underlying contaminated soil or groundwater.
4. Inclusion of new non-scope items: The E1527-21 standard adds a section about non-scope items that may be identified during the assessment. These items, though not considered RECs, can still present risks and should be considered in the report.
5. Clarification of qualitative and quantitative information: The new standard gives more attention to how assessors should handle both qualitative and quantitative information, enhancing the overall reliability and consistency of assessments.

These changes aim to make the Phase I ESA process more thorough, accurate and up-to-date with current environmental risks and concerns.

When it relates to insurance carriers and underwriters, the new standard is expected to decrease risk and exposure by identifying more RECS in the due diligence stage. The downside of more extensive standards is the possibility that additional RECS and more recommended subsurface investigations could cause the number of reported pollution claims to rise.

Best Practices for Brownfield Site Redevelopment

One of the most important components of a Phase I ESA is a site visit and interviews with those affiliated with the property. A facility can look great on paper but seeing the property in person, the general housekeeping and talking to employees can shed a lot of light on how the facility is truly run.

Other elements of a Phase I Environmental Site Assessment (ESA) include

• review of regulatory databases,
• examination of historical records and
• the solicitation of documents from state and local government agencies.

It is important to note that gaps in historical records may occur depending on their availability for the site. For example, it is possible that the site may have been used for short-term operations such as an auto repair shop or dry cleaner. If these historical activities are overlooked, subsequent subsurface sampling may not be fully comprehensive. For instance, if the presence of a former dry cleaner is not identified, and future sampling is limited to analyzing petroleum constituents, there could be undetected solvent contamination. This oversight may result in unexpected environmental impacts during redevelopment that were not initially recognized as a condition of the site.

During the underwriting process, it is crucial to thoroughly evaluate Phase I ESAs for their comprehensiveness. There have been instances where Phase I reports omit critical details from the executive summary, necessitating a more in-depth review of the entire report to identify RECs. In some cases, consultants may dismiss concerns that warrant further investigation. Similarly, it is essential to assess the thoroughness of any sampling work conducted.

How Can VERTEX Help?

Our team of environmental professionals, including scientists, geologists and engineers have the expertise required to facilitate due diligence for redevelopment sites, and assist insurance professionals on environmental pollution claims that are discovered during redevelopment. VERTEX’s strategic nationwide locations allow us to mobilize on behalf of our clients to identify and mitigate challenges associated with redevelopment sites and pollution claims. For more information, please contact Victoria Spina at vspina@vertexeng.com.