Archive for the ‘environmental insurance’ Category
Wednesday, August 13th, 2014
The use of reps and warranties insurance (RWI) is becoming an increasingly popular risk allocation tool in corporate transactions. According to trade press reports, the volume of RWI doubled from 2011 to 2012, with the value of the insurance bound last year exceeding $4 billion.
RWI covers losses related to breaches or inaccuracies in reps and warranties, and can be purchased by either buyers or sellers. An RWI policy can add flexibility to a deal and help parties resolve key transactional issues such as the scope of the reps and warranties, the size of indemnification deductibles and caps, reduce or eliminate the need for escrow as well as extend the survival period. A buyer can use RWI to distinguish its bid in an auction process since the buyer could propose lower or no escrows or indemnification caps. In an odd twist, buyers willing to rely on RWI may actually be able to negotiate longer survival periods and higher indemnification caps since the risk for breaches or inaccuracies would be shifted from the seller to the insurer. RWI is also useful when the buyer has concerns about the seller’s credit such as in distressed asset sales since the RWI can backstop or collateralize the seller’s indemnity
RWI policies are attractive to sellers because they can used as to substitute or supplement a seller indemnity. In this way, an RWI policy can provide certainty to a seller that its exposure will be capped at the amount of a negotiated escrow. The coverage can also help sellers remove contingent liabilities from their balance sheets or avoid establishing new accruals or reserves. The policies can also facilitate a “clean exit” for private equity and “end-of-life” funds to maximize distributions, reduce risk of paybacks and enhance performance metrics.
The form of the policy and the claims handling procedures will vary, depending if the insured is the buyer or the seller. When purchased by a buyer, the RWI policy is written as first-party coverage. When the buyer learns of a breach or inaccurate rep or warranty, the buyer can simply file a claim directly with the insurer using of proof of loss form and does not have to deal with the seller.
When purchased by a seller, RWI operates as a “third-party” liability policy. After the seller receives a notice alleging of a breach or inaccuracy in the reps and warranties, the seller will tender the claim to the insurer. Often times the seller will remain obligated under the RWI policy to defend the claim but a seller policies is often able to obtain advancement of defense costs.
One key difference between a buyer or seller RWI policy is coverage for fraudulent misrepresentations. Seller policies will include an exclusion for fraudulent statements in the reps and warranties while RWI policies issued to a buyer typically would not exclude claims based on seller fraud. Thus, the buyer policy provides broader coverage.
The RWI policies can be structured to cover specific representations and warranties or provide “blanket” coverage for all representations and warranties contained within an agreement that are not otherwise excluded by the insurer. RWI policies generally do not cover known issues, such as issues discovered during due diligence, known to members of the deal teal or described in disclosure schedules. The policies also usually do not cover breaches for covenants or indemnification for specific contingent liabilities. However, a buyer could agree to look to the RWI for breaches of reps and warranties but continue to hold the seller responsible for other indemnification obligations, possibly allowing the parties to reduce any escrow or lower an indemnification cap. Other standard exclusions may include consequential or damages, fines and penalties and claims for injunctive or other equitable (non-monetary) relief.
Parties should be aware that the RWI underwriters will carefully review the transaction documents and discuss the transaction structure with the deal team. Insurers will particularly focus on the thoroughness of the seller’s disclosure process and the risk management policies of the target company. Underwriters may exclude provisions that they believe are easily breached or perhaps too buyer-friendly.
The pricing for RWI coverage depends on a number of factors including the nature of the risk, the extent of the due diligence performed by the parties and the relative size of the deductible. Coverage limits can be as high as $50MM though higher limits are available by aggregating policies. Premiums have been dropping and now commonly range from 2%-3.5% of the coverage limits. Even at those levels, sellers often prefer the cost of the insurance premium rather than having portions of the sales proceeds tied up in escrow or having to reflect indemnities on their balance sheets. Self-insured retention (deductible) also varies from deal to deal but often ranges from 1% to 3% of the transaction value.
It is important to know that not all RWI policies will cover environmental reps and warranties—especially if the environmental liabilities are potentially significant. In such cases, the parties would be better suited obtaining an environmental insurance policy. However, even where a buyer insists on an escrow or indemnity for environmental liability, an RWI policy can still be useful. By covering claims for breaches of other reps and warranties, an RWI policy could enhance the chances that the escrow would not be exhausted by non-environmental claims.
Saturday, February 15th, 2014
Earlier this week, Governor Cuomo sent his sweeping BCP reforms to the State Legislature. Under the state Constitution, the Governor has 30 days to make technical amendments to his budget legislation without involving the legislature.
Despite vociferous complaints by brownfield developers, environmental lawyers and affordable housing advocates about the severe curtailments to the categories of projects that would be eligible for brownfield tax credits, the Governor made only modest revisions to the original bill. However, the Governor submitted his legislation under a self-imposed 21-day amendment process so it is possible that there will be additional tweaking to the BCP portion of the bill. Once the 30-day period has expired, changes to the BCP would be subject to the usual legislative process.
Notwithstanding the cacophony of critical voices to the proposed BCP changes, there is much to like about the proposed revisions. In this post, we will cover the positive changes. In a second post, we will then discuss the changes that need to be tweaked and then close the series with a review of the changes that threaten to transform the BCP into a zombie program.
The changes listed below are not in order of importance but simply track the changes in the legislation.
1. Extension of BCP- Obviously, the most important change is that the legislation would extend the brownfield tax credits (BTCs) to December 31, 2022. The fact that the Governor agreed to extend the BTCs was a victory for brownfield developers since there was considerable sentiment within the budget office to allow the BTCs to expire because of their costs. Sites accepted into the BCP after December 31, 2022 would not be eligible for brownfield tax credits.
2. New COC Deadlines– Under the existing BCP, all sites had to obtain their COCs by 12/31/15 to be able to qualify for the tax credits. The proposed amendments retain the 12/31/15 COC deadline for sites that were accepted into the BCP prior to the 6/23/08 amendments. Projects that were accepted after 6/23/08 but before 7/1/14 will have an extra two years to obtain their COC (12/31/17) to remain eligible for the BTCs. Sites accepted into the BCP after 7/1/14 will have until 12/31/25 to obtain their COCs and qualify for BTCs.
3. Revised Brownfield Site Definition- The new definition requires that an applicant do sufficient sampling to establish actually contains contaminants that exceed the applicable soil cleanup objectives or other health-based environmental standards promulgated by the NYSDEC. This change brings more clarity to what constitutes a brownfield site but really just conforms the definition to current NYSDEC policy since the agency was requiring applicants to demonstrate that the site was actually impacted by contamination by performing and including the results if a phase 2 in the BCP application. The revised language indicates that the applicant must submit an investigation that is sufficient to demonstrate that the site requires remediation to meet the remedial requirements of the BCP.
Significantly, the revised brownfield definition does not require the contamination to be from an on-site source which represents a significant eligibility expansion since applicants are currently required to establish an on-site source of contamination to be eligible for the BCP. Instead of excluding these sites from the BCP, the proposed bill would simply prohibit applicants of these sites from claiming tangible tax credits for addressing such contamination. For example, an applicant who would have to install an sub-slab depressurization system (SSDS) to address vapors from contaminated soil gas because of a plume that originated from an adjacent dry cleaner could enroll in the BCP and be eligible for site preparation costs tax credit but not the tangible property tax.
4. Eligibility Extended to Class 2 Sites- The original BCP legislation contained a six month amnesty period for class 2 sites to apply to the NYSDEC that expired in July 2004. Since then, class 2 sites have been ineligible for the BCP even when innocent parties seek to redevelop the properties or the site may simply sit above a regional plume.
The proposed changes would allow state superfund sites (class 2 sites) to be eligible for the BCP where the applicant is a volunteer who owns the site or where the applicant is a volunteer who is under contract to purchase a class 2 site and the NYSDEC has been unable to identify a PRP with the ability to pay for the cleanup. [emphasis added]. It is unclear if the clause containing the limiting language following the “and” only modifies the clause pertaining to volunteers under contract to purchase a class 2 site or if the clause applies to sites already owned by the volunteer.
The explanation for the “viability” test is that the State of New York does not want to incur BTC liability when there is a financially responsible party who could pay for the cleanup. A responsible party is likely only to remediate a site to its current or reasonably anticipated use but in the absence of a development plan, the reasonably antiicipated use of a property with obsolete or deteriorating buildings may not be obvious. In contrast, a brownfield developer will be enhancing the property and likely doing a more robust cleanup in a shorter period of time. While there is a legitimate concern for requiring class 2 sites that are under contract to be eligible only if there is not a financially viable responsible party, it may be worthwhile to consider other tests for determining when a class 2 site should be eligible for the BCP such as the responsible party does not currently own or has not owned the site since the expiration of the original amnesty period.
While pondering the conditions for allowing class 2 sites to be eligible for the BCP, the legislature should also consider allowing sites that are under enforcement orders to be eligible for the BCP. This would particularly make sense for sites that are covered by multi-site manufactured gas plant (MGP) orders on consent that several utilities have entered into with NYSDEC. Many of these sites will have cleanups that require long-term institutional and engineering controls because the contaminants lie beneath existing commercial structures. So long as these sites are subject to site management plans (SMPs), the NYSDEC considers these sites to be still subject to an enforcement order and therefore not eligible for the BCP. It seems that the same rationale for allowing class 2 sites to be eligible for the BCP should apply to sites subject to enforcement orders. Indeed, there is precedent for this suggestion. In 2004, the legislature amended the BCP law to allow sites that were subject to petroleum stipulations agreement issued under the Oil Spill Program of the Navigation Law to be eligible for the BCP. If an innocent party is willing to remediate and redevelop a contaminated site, it should be able to enroll in the BCP subject to reasonable conditions such as ensuring that NYSDEC is reimbursed for past costs and the volunteer has not indemnified the responsible party.
5. Expansion of Track 1 Cleanups- If a BCP project has to use institutional or engineering controls, it is not eligible for a track 1 cleanup which allows for a higher site preparation cost tax credit and a 2% bonus for the tangible property tax credit. Where all the contaminated soil has been removed but elevated levels of contaminants remain in groundwater, the NYSDEC has been willing to approve conditional track 1 cleanups if there has been a significant reduction in the contaminant mass and contaminant levels have reached asymptotic conditions. Under this approach, the applicant will have to record an environmental easement and continue to monitor groundwater for five years. However, if the contaminant concentrations remain above groundwater standards after five years, the cleanup would revert to a lower cleanup track that could cause recapture of tax credits.
The proposed legislation will allow sites to qualify for an unconditional track 1 status where engineering or institutional controls are required for more than five years solely to address vapor intrusion as well as for groundwater remediation where the bulk contaminant concentrations have been reduced to asymptotic levels. However, there would no longer be a 2% tangible tax credit bonus for achieving track 1 cleanup;
6. Transfer of COCs- The legislation clarifies that COCs may only be transferred to subsequent legal or equitable title holders of all or a portion of the brownfield site. It had been unclear if the COC could be transferred without title changing hands.
7. BCP-EZ program- The proposed amendment would create a streamlined remedial program that would be called the BCP-EZ program. Applicants that qualify as volunteers would be exempt from certain procedural requirements for implementing remedial investigations and remedial actions for sites where the contamination does not pose a significant threat provided the applicant waives rights to any tax credits and the work satisfies the technical requirements of Part 375.
8. Oversight Costs- Because both the NYSDEC and the New York State Department of Health (NYSDOH) play a role in the state remedial programs, oversight costs can be significant especially for larger projects. Under the proposed bill, volunteers will no longer be required to pay oversight costs on or after July 1, 2014. This exemption applies both to applications submitted after July 1, 2014 as well as sites accepted into the BCP prior to July 1, 2014. However, parties that are accepted into the BCP as “Participants” will be required to pay the NYSDEC for past costs incurred prior to the effective date of the brownfield cleanup agreement but the NYSDEC may negotiate a “reasonable” flat rate fee for future oversight costs.
9. Extra Tangible Tax Credits For Certain Projects– The Governor’s bill would allow certain categories of projects to be eligible for extra tangible property tax credits above the base of 10%. A bonus of 5% would be available for projects with affordable housing (based on square footage of the total affordable housing units(§25), an extra 10% could be claimed by projects on sites located Environmental Zones and a bonus of 5% would be available for “strategic sites” located in and conforming with a Brownfield Opportunity Area (BOA) plan.
10. Clarifies Treatment of Costs for Expired Federal Brownfield Tax Credit- BCP applicants are currently allowed to claim up to $35MM ($45MM for manufacturing sites) in tangible property tax credits (known as the “hard cap”) or 3x the site preparation costs (6x for manufacturing ), whichever is less. The 3x or 6x times site preparation calculation is known as the “soft cap.” The proposed legislation clarifies that on-site groundwater remediation costs and costs that could have been ”expensed” and deducted for purposes of the IRS 198 brownfield tax credit but were not given such treatment may be used in calculating the “soft cap.”
11. Clarifies Treatment of Costs To Address Treatment of Contaminated Groundwater From Off-Site Source– Based on the way the qualifier in section 3 of the proposed legislation excluding tangible property tax credits for off-site contamination migrating onto property, it appears that site preparation tax credits will be available for costs to address contamination migrating onto site if required in the approved remedial action plan.
12. Abatement and Disposal of Hazardous Building Materials- The proposed amendment would allow applicants to include abatement costs for removing and disposing asbestos-containing materials, lead-based paint or PCB caulking in their site preparation costs provided the work is done under supervision of the Department of Labor or Department of Health would be eligible.
13. Hazardous Waste Generation Fee Exemption– Urban sites often contain significant swaths of fill material that may contain constituents such as heavy metals, semi-volatile organic compounds (SVOCs), petroleum and lead-based paint from demolished buildings. As a result, construction projects in urban areas can generate large quantities of excavated soil that may have to be managed as hazardous waste. Having to dispose soils and building debris as hazardous waste not only significantly increases disposal costs but can also trigger two types of state hazardous waste tax assessments or fees that can significantly add to the total project costs.
If the remediation is performed under the state superfund program or BCP, the generator of the waste does not have to pay the hazardous waste tax or fee. However, projects enrolled in the Voluntary Cleanup Program (VCP) administered by the New York City Office of Environmental Remediation (OER) are not exempt from the tax or fee. Depending on the size of the site or the depth of the excavation, the hazardous waste taxes could approach or even exceed the total remediation costs. Click here for more information about the hazardous waste fee and tax
The bill would also exempt remediation wastes from the state hazardous waste generator fee that are generated for cleanups are done under an agreement with EPA, pursuant to an order issued by a court or an agreement with a municipality such as OER that has entered into a memorandum of agreement with NYSDEC.
The legislation also includes some new submission deadlines and grounds for revoking COCs that have been criticized by some business groups but seem to fall into the into the “Meh” category (for readers who are not fans of the TV show “The Simpsons”, the term is like a verbal shrug of the shoulders that expresses indifference or lack of enthusiasm). At the very least, the provisions do not seem to be worth expending political capital and advocates would probably be better served keeping their powder dry for other more important issues raised by the bill.
- An applicant will not be eligible for the BCP if it has failed to substantially comply with an agreement or order under another NYSDEC remedial program and the applicants participation in that other remedial program has been terminated by the NYSDEC or a court;
- NYSDEC will now have 30 days to advise an applicant if its application is complete;
- Applicants must implement work plans within 90 days of approval and complete the work in accordance with the schedule set forth in the document;
- Every report required to be submitted under the BCP must include a schedule for submitting subsequent work plans required under the BCP;
- Applicants must execute environmental easements within 180 days of commencement of the remedial design or at least 90 days prior to the anticipated issuance of the COC;
- The period of time for recording an environmental easement by an owner of an inactive hazardous waste site or the person responsible for implementing the remedial program is extended from 60 days to 180 days of commencement of the remedial design;
- Applicants seeking tangible property tax credits must evaluate two alternative remedies, with one alternative being a track 1 cleanup;
- Where the NYSDEC approves an alternative remedy (cleanup tracks 2,3 or 4) at a site that has been determined not to pose a significant threat, the public comment period notice shall apply to both the selected remedy and the approval of the alternative analysis by the NYSDEC;
- Final Engineering Reports now have to describe any interim remedial measures (IRMs) and the costs of the IRMs;
- COCs will now include the date of the brownfield cleanup agreement (BCA); the names of the parties eligible for the tax credits and the applicable percentage available as of the date of the COC;
- A COC may be revoked if the applicant makes a misrepresentation of a material fact concerning its eligibility for the tangible property tax credit. There was already a revocation for misrepresentation about the applicants qualification for volunteer status;
- A COC may be revoked if the environmental easement is not effective or enforceable. This was revocation condition was added as part of the streamlining of the environmental easement process to highlight the consequences of not properly preparing and recording the environmental easement;
- NYSDEC authority to grant waivers from local permits extends to investigations or remediation for contamination migrating from a brownfield site;
- NYSDEC is expressly authorized to inspect sites for compliance with site management plans including evaluating operation and maintenance of remedial components, confirming site use and collecting samples;
- The Department of State has responsibility for not only certifying Brownfield Opportunity Areas (BOA) but also confirming conformance with BOA plans for purpose of qualifying for the tangible property tax credit;
- Elimination of the environmental insurance tax credit for sites admitted after July 1, 2014;
- A municipality seeking to apply for funds from the Environmental Restoration Program (ERP) must assist in identifying responsible parties for the site by searching local records including property tax records;
- NYSDEC may implement an ERP project on behalf of a local government provided the municipality periodically pays its share of the costs to the state.
Tuesday, October 8th, 2013
Some time ago, we discussed the $14MM lawsuit filed by Lowe’s Home Centers against a consultant. Lowe’s alleged that the consultant failed to identify all areas that had been contaminated with PCBs and the store opening was delayed because of complications associated with the previously unknown PCB-contaminated soil was improperly disposed. The matter eventually settled
Another Lowe’s Home Center store development site has led to a lawsuit against a consultant, this time by an insurance company that issued an environmental insurance policy to Lowe’s Companies, Inc (Lowe’s). The complaint alleges that that the consultant failed to identify contamination associated underground storage tanks (USTs) during pre-acquisition due diligence and resulted in the plaintiff paying $1,050,103 under its insurance policy. Recently, the federal district court denied the consultant’s motion for summary judgment in Chartis Specialty Ins. Co. v. Aqua Science Engineers., 2013 U.S. Dist. LEXIS 124090 (N.D.Cal. 8/29/13).
In this case, Lowe’s was considering purchasing a 28-acre property in Concord, California for a proposed Lowe’s Home Center store. The property had a history of light industrial use including contractor equipment yards, diesel generator repair business, drilling company, automotive wrecking, wood truss manufacturer, ornamental iron fabricator and mobile home sales lot.
A phase 1 conducted by Anton Geological (Anton) in 2001 had identified a number of Recognized Environmental Conditions (RECs) including an abandoned oil-water separator, potential soil contamination from automotive wrecking operations, an above-ground storage tank (AST), areas where hazardous materials and wastes had been used by a variety of tenants and former underground storage tanks (USTs). A total of 11 underground storage tanks had been removed from the Site in the 1990s. Several of the USTs were removed without any regulatory oversight. Two USTs that had been operated by Judd Drilling were particularly notable. The USTs were removed in the early 1990s and the Regional Water Quality Control Board (the Board” ) granted closure in 1998 despite the fact that sampling detected over 1,000 parts per million (ppm) of benzene, toluene, ethylbenzene and xylene (BTEX) in soils and 15,000 ppb of diesel range total petroleum hydrocarbons (TPH-D) in groundwater.
In 2004, Aqua Sciences Engineers, Inc (AES) was retained by the Winton Jones Development Company (WJDC) to obtain regulatory closure on the RECs identified in the Anton phase 1 report to facilitate redevelopment of the property. AES identified significant petroleum contamination in one well that was located downgradient from the former Judd Drilling UST. However, no elevated levels were detected in the on-site drinking water well. Three test pits detected elevated concentrations of TPH-D, gasoline-range total petroleum hydrocarbons (TPH-G), and motor oil (TPH-MO) in the shallow soil.
In 2006, ASE excavated contaminated soils from the three test pits in the central portion of the Site known as the Winton Jones Development Parcel (WJDP) pursuant to a workplan approved by the Board. Post-excavation sampling confirmed the residual contamination was below environmental screening levels (ESL) used by the Board for commercial property. ASE originally requested that the Board issue a site-wide NFA. However, the Board responded that the sampling performed to date was limited for a size and history of site and that the Board believed additional soil and groundwater contamination was present in areas such as where the USTs had been removed without regulatory supervision. As a result, ASE then modified its request, indicating that ASE was comfortable with the issues elsewhere as the property and was simply seeking confirmation that the 2006 soil remediation was completed in accordance with the approved workplan. In response, the Board advised AES in 2007 that if the owner wanted to receive an NFA letter allowing for unrestricted land use in the future but restricting shallow groundwater use via a deed restriction, it would need to undertake a more robust and complete investigation of the environmental conditions of the entire site that could require additional remediation. However, the Board said the seller could obtain an NFA with restrictions without additional environmental investigations.
In 2008, AES submitted a Revised Workplan for Soil and Groundwater Assessment to obtain a letter from the Board indicating that the property was suitable for redevelopment. ASE investigated two additional former UST areas that ASE had not aware of when it conducted its 2006 remedial work but had learned about from its review of the Board’s files. ASE also collected samples from four areas where stained soil was observed during a site visit or had historically been used to store equipment and vehicles. ASE detected TPH-D, TPH-G and TPH-MO that did not exceed the ESLs. ASE also issued a Soil and Groundwater Assessment for an adjacent five-acre parcel where three gasoline USTs had been removed from the site in 1987 and closure had been granted by the Contra Costa County Environmental Health Department and RWQCB in April 1995. ASE did not detect any petroleum hydrocarbons in the soil or groundwater and VOCs in the groundwater were detected below the ESLs. ASE recommended that the RWQCB prepare a no further action (NFA) letter for this parcel. The report contained a section title “Report Limitations”. This section stated that “This report does not fully characterize the site for contamination resulting from unknown sources or for parameters not analyzed by the laboratory.”
Also in 2008, Lowe’s retained ASE to perform a pre-acquisition phase 1 environmental site assessment (ESA) contemporaneous with the sub-surface investigation. Lowe’s selected ASE in part because the firm had performed a number of investigations and implemented remedial measures under the under the supervision of the Board during the preceding decade for the owner/seller of the property.
The ASE report had some curious language and suffered from the use of inconsistent terminology. In the “Findings” section, ASE concluded that the former USTs and surficial staining identified in 2004 were HRECs because of the prior remedial activities. ASE also said that the surface staining from improper handling of hazardous materials and the areas where equipment or vehicle storage each “would be considered a environmental conditions.” (The term “environmental condition” is undefined and not a term recognized by ASTM E1527-05. It is unclear if this was a typo and ASE meant to identify these conditions as RECs).
Then the report went on to say that the areas of heavy surface staining and equipment/vehicle storage were not considered “recognized environmental conditions that would that negatively impact the site” because sampling did not exceed the ESLs. The use of the phrase “that would negatively impact the site” seems to create ambiguity. Was ASE saying there are no RECs or that there are RECs that will not result in material impacts to the site? If the latter, why identify the release as a REC and not a de minimis condition (e.g., one that would not result in enforcement or cleanup obligations if brought to the attention of regulators).
ASE identified the areas where poor management of waste oils and chemicals as de minimis conditions because of the sampling.
The “Findings” section concluded with a box with bold type that seemed to contradict the aforementioned statements. The bold text stated “No recognized environmental conditions, historic environmental conditions or de minimis conditions were discovered in the course of this phase 1Environmental Site Assessment, with regard to the subject property that warrant further assessment activities.”
The “Opinion” section went on to state that “Although historical and recognized environmental conditions exist at the subject site, in our opinion, regulatory agency prepared closure letters and recent (2004, 2006 and 2008) assessment and remedial activities performed at the site render a conclusion that these afore-mentioned conditions no longer negatively impact the subject site and do not warrant any further assessment activities.”
The “Conclusions” section stated that “Based on the above-referenced information, there does not appear to be any current or former site conditions that warrant any further assessment.” This section ended with the following statement “ As discussed in Section 8.1 and 8.3, this assessment has identified historic recognized environmental conditions and de minimis conditions, which as detailed in sections 8.0 and 9.0, are not considered to negatively impact the property or warrant any further assessment activities. This assessment has revealed no evidence of evidence of recognized environmental conditions except for those conditions specifically detailed in Section 8.2; however, in our opinion, each of the recognized environmental conditions identified in Section 8.2 have been fully assessed and are not considered to negatively impact the property or warrant any further assessment activities.
Finally, in the “Recommendations” section, ASE recommended that the junk yard area where there was poor management of waste oils and chemicals be re-inspected after the vehicles were gone and that the drums and buckets containing liquid be immediately removed. ASE also recommended that stained soil be scraped and separately managed from non-stained soils.
The Board issued a letter in May 2008 confirming that the property was suitable for redevelopment and that the environmental assessments completed to date were sufficient to allow the Board to issue a No Further Action (NFA) if five identified requirements were met, including additional sampling of the eastern 5-acres, abandonment of the on-site well, recording of a deed restriction and implementation of a “Risk Management Plan to properly deal with unanticipated soil, soil gas, and groundwater issues that may arise during future construction activities. In accordance with the Board’s request, ASE conducted additional soil and groundwater sampling that did not identify any contaminants above the commercial/industrial ESLs and prepared a Soil and Groundwater Plan (SGMP) which was approved in May 2009.
Between June and August 2009, contaminated soils were encountered during grading operations for the building foundation, excavation of a temporary stormwater retention basis and construction of a bio-swale. An estimated 18,500 tons of soil were disposed off-site and moderately-contaminated soils were reused beneath parking and driveway areas on the western half of the property, and beneath the concrete pad of the building
Lowe’s provided a Notice of Loss/Notice of Claim to its carrier, Chartis Specialty Insurance Company (f/k/a American International Specialty Lines Insurance Company). Chartis paid $1,050,103 to or on behalf of Lowe’s for the cleanup costs and then filed its lawsuit.
This case illustrates the challenges of redeveloping brownfield sites or those that have historic light industrial use. Phase 2 investigations are not comprehensive site investigations and it is not unusual for previously unknown contamination to be uncovered during demolition or construction activities. Insurers who write environmental insurance policies are certainly aware that unknown contamination is often encountered when developing industrial sites. Indeed, the frequency and magnitude of unexpected cleanup costs is a reason that insurers largely stopped writing cost cap insurance.
It may be that the plaintiffs will be able to uncover evidence of negligence on the part of ASE during discovery. However, given the numerous investigations and extensive oversight by regulators, it does seem that plaintiffs are embarked on a Quixotic mission. If there was negligence in this case, it seems it was committed by the insurer/plaintiff. The correspondence between ASE and the Board clearly reflect the concerns of the regulator about potential unknown sources of contamination in areas of the property that had not been fully characterized. These materials were readily available for review by the plaintiff’s underwriters. Thus, this lawsuit seems more a case of buyer’s regret on the part of the plaintiff for not having done more thorough due diligence or perhaps ignoring the risks to chase premium dollars during a credit bubble than the negligent performance on the part of the defendant.
Wednesday, April 17th, 2013
ORIX Capital Markets, LLC v. Cadlerocks Centennial Drive LLC, 2013 U.S. Dist. LEXIS 6081 (D. Mass. 1/15/13) involved a relatively small commercial loan but offers lots of lessons for borrowers, their counsel and environmental consultants.
In this case, Salomon Brothers Realty Corp. (Solomon) extended a ten-year loan in the amount of $1.925MM to Cadlerocks Centennial Drive LLC (Cadlerocks) in December 1999 that was secured by a mortgage on a 4.63-acre parcel located in Peabody, Massachusetts that was occupied by a 50,000 square foot warehouse that had been constructed in 1964. The loan was non-recourse to the borrower but the president of the sole member of Cadlerocks, Douglas Cadle, executed an Environmental Indemnity Agreement (“Environmental Indemnity”) and Guaranty Agreement (“Guaranty”) that made him personally liable for all amounts due on the Environmental Indemnity. Solomon subsequently assigned the loan and associated documents to Wells Fargo as trustee to a securitization trust in August 2000.
Prior to the loan closing, a Phase I Environmental Site Assessment (“ESA”) had identified recognized environmental conditions (RECs) based on the historic use and storage of degreasing agents by a former long-term tenant. In lieu of performing a Phase II inspection, Cadlerocks obtained a secured creditor environmental insurance policy for approximately $21K.
Cadlerocks was unable to pay off the loan when it matured in January 2010. ORIX as special servicer issued a Notice of Default to Cadlerocks who acknowledged the default and entered into a Pre-Negotiation Letter. Cadlerocks continued to make monthly principal and interest payments until August 2010 when it ceased making any further payments. Following default, ORIX filed a notice of a foreclosure sale.
As part of ORIX’s routine pre-foreclosure due diligence prior, ORIX ordered a Phase I ESA. The phase 1 identified RECs associated with the prior use of the property. Then in a classic case of obfuscation, the consultant said it “did not identify evidence of significant leaks, spills or the improper handling of petroleum or hazardous substances that might impact the environmental condition of the Subject Property”. In the “Hazardous Substances/Petroleum Products” space in Assessment Summary Table, the report found “No concerns identified”.
Because ORIX was considering foreclosure, it commissioned a Phase II that consisted of an integrity test of the 10,000-gallon heating oil underground storage tank (“UST”) and collecting soil gas samples from the exterior of the building. The UST passed the integrity test but the soil vapor sampling identified PCE. As a result, ORIX authorize indoor air samples that detected PCE in the tenant space occupied a daycare center at a concentration of 1.65 ug/m3, which was above the Massachusetts Department of Environmental Protection (“MADEP”) advisory limit for residential indoor air quality of 1.4 ug/m3.
Cadlerocks offered to transfer the property to ORIX through a deed-in-lieu of foreclosure but ORIX refused. ORIX then cancelled the foreclosure sale and filed a complaint asserting, inter alia, that the property had “multiple recognized environmental conditions that require investigation and possible remediation, including the presence of cutting oils, lubricants and solvents from an industrial machine shop that formerly operated on a portion of the Property, an underground storage tank and asbestos.” At the same time, ORIX filed a motion for obtained appointment of a Receiver to take custody of the property. Cadlerocks did not object to the appointment of the Receiver.
ORIX advised the Receiver of the soil gas sampling results. The Receiver immediately retained an environmental consultant to collect 8-hour indoor air sample from the tenant space occupied by a daycare. This sampling detected concentrations of 1.16 ug/m3, slightly below the MADEP advisory limit. The Licensed Site Professional (LSP) who performed the sampling advised the Receiver that the PCE levels did not pose an acute or short-term risk but further sampling would be required to determine if there were long-term or chronic risks. The Receiver shared the indoor sampling results with the operator of the daycare center and then authorized collection of 24-hour air samples in the daycare center with the ventilation turned off to simulate the “worst case” scenario to which occupants might be exposed. PCE was again detected but below violated MADEP advisory limits.
The Receiver requested that Cadlerocks pay the Receiver’s costs related to environmental testing. When Cadlerocks did not reply, the Receiver requested that ORIX pay all of the Receiver’s costs and fees with respect to testing for the presence of PCE on the Property. ORIX agreed that the Receiver could draw down on income and sales proceeds generated from the Property that would otherwise have been applied to pay down Cadlerocks’ debt.
The defendants claimed that they should not be responsible under the Environmental Indemnity because the plaintiff failed to mitigate its damages by first seeking recovery from the insurance policy. However, the court agreed with the plaintiff argued that section 7 of the Environmental Indemnity (Independent Remedies) and Section 6 of the Guaranty (Election of Remedies) expressly allowed it to pursue Cadle for damages notwithstanding the availability of insurance.
Moreover, the court found the defendants had proffered inconsistent evidence regarding the term of coverage under the Insurance Policy. Defendants produced an Executive Summary of the loan closing memorandum that indicated that the borrower has provided the Lender with a 15 year AIG Secured Creditor Impaired Property Policy but also produced an unsigned insurance policy with a 10-year term which would have expired well before the plaintiff suffered the damages asserted. Without a signed copy of the actual Insurance Policy the Court said it could not determine the length of coverage. Consequently, the court held that the defendants have failed to prove their affirmative defense that reliance on Insurance Policy would have mitigated plaintiff’s claimed environmental damages.
The defendants further alleged that the costs and fees of the environmental testing and analysis should be offset by the proceeds from the sale of the Property. However, the court said this ignored the fact that both the Guaranty and Environmental Indemnity contain Election of Remedies clauses that allowed ORIX to recover from defendants without having to proceed directly against its collateral to satisfy the amounts due under the Environmental Indemnity. Further, the Court concluded the based on letters of intent from prospective buyers, it was unlikely that the Property could be sold for more than the outstanding loan balance.
Turning to the count that the defendants breached the Environmental Indemnity, the court found the environmental testing conducted at the Property was reasonable and necessary, particularly given the Receiver’s need to ensure that conditions were safe for the occupants of the day care facility on the premises. The court also concluded that the follow-up testing in 2012 was also reasonable so the Receiver could to provide potential buyers with up-to-date information regarding environmental conditions. Thus, the court ruled that the plaintiff is entitled to recover the reasonable costs for that testing and analysis.
However, the court ruled that ORIX could not recover the $2,650 cost for the Phase I. The court found that ORIX had ordered the phase 1 as part of its standard pre-foreclosure practice. Since the phase 1 was not conducted in response to specific environmental hazards at the Property, the court said the fee for the Phase 2 was not covered by the Environmental Indemnity Agreement.
One takeaway lesson for borrowers is not to assume that a lender or servicer will look to the insurance policy to recover their costs. Here, the Servicer had pointed out how the indemnity was far broader than the insurance policy. Thus, a borrower should try to include language in loan docs (especially an environmental indemnity or personal guaranty) that limit the election of remedies. In other words, the lender should be required to look to the insurance policy first before it can enforce the indemnity or guaranty.
Also-it is important for the borrower to make sure it gets the final copy of the policy. Often times, the borrower obtains a premium indication prior to the closing with the actual policy issued after the closing. Here, the borrower only had a summary of the policy and an unsigned draft policy.
Another lesson is how presence of day care centers can change the risk calculation for properties. We will be covering this topic in a later post.
Finally, this case also shows why many lenders use apply more stringent diligence approaches during pre-foreclosure. The insurance policy was acceptable when the loan was originated for securitization. However, both the Special Servicer and Receiver decided they needed to collect samples to determine if here was a risk that needed to be managed.
In a subsequent proceeding, the court awarded plaintiff $104, 106 in damages and $50K in attorney fees. ORIX Capital Markets, LLC v Cadlerocks Centennial Drive, LLC, 2013 U.S. Dist. LEXIS 48424 (D.Mass. 4/2/13)
Saturday, December 29th, 2012
The NYC Brownfield Program has been a popular tool for moderately contaminated sites because of the streamlined approach that allows sites to complete remediation fairly quickly. Properties that are remediated through the NYC BCP receive a Notice of Completion, which includes New York City liability release, a statement from the NYS Department of Environmental Conservation has no further interest and does not plan to take enforcement or require remedial action for the property. Applicants also receive a NYC Green Property Certification that symbolizes the city’s confidence that the property is protective of public health and the environment.
Statistics released by the New York City Office of Environmental Remediation (OER) illustrate the environmental and economic benefits of the NYC BCP. 110 sites have been enrolled for sites that on average have been vacant for 18 years. OER estimates the program has generated $2.6B in economic benefits, with an average of $5MM in new sales and income taxes per site. 50% of the sites that have been remediated achieved Track 1 unrestricted cleanups.
Sites enrolled in the NYC BCP are eligible for the Brownfield Incentive Grants (BIG) Program which funds for types of grants. The grants include pre-enrollment investigation costs, remediation, technical assistance to non-profit developers of Preferred Community Development Projects and purchase of pollution liability insurance or cleanup cost cap insurance.. BIG grants may also be used to satisfy the Hazardous Materials E-Designation and Restrictive Declaration Remediation programs.
The BIG program is temporarily over-subscribed. The first 85 sites in the NYC BCP have been earmarked or guaranteed BIG funding. It is possible that another ten sites may receive funding since some of the enrolled projects may not proceed to completion. OER hopes BIG will receive additional funding from the City Council when the City Budget is announced early in 2013.
Friday, December 28th, 2012
According to representatives of the New York State Department of Environmental Conservation (NYSDEC), approximately 1600 residential properties suffered oil spills following Superstorm Sandy. Most of the spills were the result of damaged heating oil tanks. More than 3000 oil spills were reported following Sandy for all categories of properties.
NYSDEC performed emergency response such as removing damaged tanks and floating product but property owners are responsible for completing remediation. To facilitate insurance coverage, NYSDEC will issue notice of liability letters upon request. These letters can be obtained by contacting the NYSDEC region offices.
Tuesday, February 21st, 2012
Can a party be indemnified for its own negligence? In many states, such provisions are void as against public policy. Other some states allow enforcement of indemnification for the indemnitee’s own negligence when the clause expressly references “negligence.” Likewise, many states will enforce indemnities where the indemnified party is strictly liable because of its status as an owner or operator if the clause refers to “strict liability”. As a result, environmental indemnity clauses often contain a parenthetical reference to “including strict liability” to ensure that such liability is covered.
Even in those states that where indemnification for the indemnified party’s negligence is void as a matter of public policy, there may be circumstances that allow enforcement of such a provision. For example, a New York case recently allowed enforcement of an indemnity where the tenant was required to obtain an insurance policy for third party liability.
In DiBuono v Abbey, LLC, et al, 2011 N.Y. App. Div. LEXIS 2822 (App. Div.-2nd Dept. 4/5/11), the plaintiffs commenced an action for property damage related to contamination that had migrated from three nearby service stations. One of the defendants, L.M.C. Partners, LLC (LMC) filed a third party complaint against its former tenant, Palisades Resources, Inc. (Palisades), alleging that Palisades breached its the lease by failing to defend and indemnify LMC and for not obtaining insurance.
LMC moved for summary judgment.Palisadesargued that the General Obligations Law (GOL) § 5-321 prevented enforcement of the indemnification provision in the lease. GOL § 5-321 provides that exculpatory clauses that purports to exempt a lessor from its own negligence are void and unenforceable. However, the trial court said that GOL § 5-321 does not apply to an indemnification provision in a commercial lease negotiated at arm’s length between two sophisticated parties when coupled with an insurance procurement requirement. Under such circumstances, the trial court explained, the purpose of the indemnity clause is not to exempt the lessor from liability to the victim, but to allocate the risk of liability to third parties between the lessor and the lessee. The said the lease indemnification provision operated as such an allocation since LMC and Palisades agreed in that Palisades would be responsible for liability to third parties arising from damages incurred during the lease period. Accordingly, the trial court granted summary judgment to LMC. The appellate division affirmed that the indemnification clause was enforceable but modified the order so that the indemnification was limited to damages incurred during the term of the lease.
Sunday, February 19th, 2012
An Illinois appeals court ruled that an insurer had a duty to defend a successor of an insured where the insured made an assignment of benefits pursuant to a asset sales agreement. The assignment of benefits had been made without consent of the insured and the insurance policy had contained an anti-assignment clause..
In Illinois Tool Works, Inc. v Commerce and Industry Insurance Company and United States Fire Insurance Company, 2011 Ill. App. LEXIS 1250 (App. Ct. 12/12/11), a landlord had filed a lawsuit against its former tenant, Binks Manufacturing and Illinois Tools Works (ITW)as successor to Binks, for contamination alleged to have been caused by the tenant operations.Binks had leased the property from 1959 to 1998 when it sold its assets to a predecessor of ITW who continued to lease the premises until 2003 As part of the asset purchase, ITW received an assignment of rights to all insurance Binks’ insurance policies.
Defendants Commerce and Industry Insurance Company (C&I) and United States Fire Insurance Company (USF) defended Brinks in the lawsuit filed by the landlord but declined to defend ITW. In 2006, ITW filed a declaratory judgment action in Illinois state court seeking a ruling that C&I and USF had breached their policies by refusing to defend ITW in the underlying landlord litigation. ITW asserted that it was entitled to a defense because it was a successor of Binks and had been assigned the rights under the policies.
On cross-motions for summary judgment, the trial court ruled in favor of the insurers but the appeals court reversed, holding that an assignment of rights can be made without consent of an insured since such as assignment does not expand the risk to carriers as the assignor cannot grant rights greater than it has under ther policy. The court also said that an assignment of a policy can be made without the insurer’s consent where a loss has occurred. Since in this case, the contamination had occurred prior to ITW’s purchase of the Binks assets, the court held the assignment was valid and the insurers should have provided defense to ITW,