POLLUTION RISKS PRESENT CHALLENGES TO U.K. BUYERS AND INSURERS

LONDON-U.K. insurers must develop a uniform and understandable environmental risk rating system to help businesses assess the pollution liability risk of real estate, a broker says.

Several insurers are developing new products for pollution coverages. However, the methods used to determine the degree of pollution are impractical, because they are not standardized in terms of what they measure or how the information is presented, according to Allan Rickmann, environmental director at broker Willis Corroon Ltd. in London, who spoke at a conference last month.

Legislative changes, culminating in the Environment Act 1995, have shifted the onus for cleanup of polluted sites to the current owner if the original polluter cannot be found.

Consequently, businesses are wary of buying potentially polluted land, or so-called brownfield sites, for fear of huge cleanup bills.

Insurers have responded to buyers' needs, developing such products as environmental remediation insurance, as well as continuing to provide environmental impairment liability insurance, Mr. Rickmann explained.

Yet in spite of the availability of these policies, there is an increasing need for a standard environmental risk rating system, said Mr. Rickmann. There has been severe devaluation of commercial properties in the United Kingdom because of contamination in the land or ground water.

Complicating this further, "since there is often insufficient accurate information and data relating to environmental statistics of a site, the asset value may be reduced," even where there is no firm evidence of a pollution problem, he said.

Environmental surveys of property are needed so the real level and extent of the contamination can properly be understood. But at the moment, these surveys, commissioned by underwriters but performed by scientists and engineers and written in scientific language, have no common methodology.

What's more, "the risk addressed will vary from report to report and can refer to environmental impact risk, legal liability risk or financial risk," Mr. Rickmann explained.

"There is a need. . .for a recognized methodology for delivery on environmental risk rating, particularly for contaminated land," he added.

Predicting the eventual removal of "sudden and accidental" pollution coverage from public liability policies, Mr. Rickmann predicted insurers will respond with a wider range of narrower products covering pollution problems.

If that's the case, they will need a "simple, robust and inexpensive" method of rating pollution risk, he said. Such a system could not only give companies a better benchmark for assessing risks, but also could be used by a variety of professions, including insurers, lenders and legal advisers, among others.

In the meantime, environmental remediation insurance may be bought by businesses that have to clean a site. This coverage insures against the need of any future cleanup relating to the initial pollution, Mr. Rickmann said.

Environmental remediation insurance "can be viewed as a 'guarantee' of an environmental assessment or remediation work that has been undertaken," he said.

Currently, coverage is offered with limits up to 5 million pounds ($8.1 million) and up to five years, though three years is the basic policy period.

"It is anticipated that the coverage will prove of value in facilitating property transactions," said Mr. Rickmann. "The benefit of the policy can be made available to purchasers or others interested in land."

Environmental remediation coverage also is available for sites yet to be cleaned, though in these circumstances the coverage depends on the remedial work being documented as properly carried out.

By having a policy in place, a site owner gains several benefits:

Property valuations will not be severely affected because of the site's history.

If the site is being sold, there's no need for detailed environmental risk assessments, since the coverage acts as a guarantee for the previously done cleanup.

Contractors' warranties and professional advisers' indemnity coverages, which only pay out for environmental impairment if there is a successful negligence claim against the professional involved, will not be called triggered because the remediation policy covers cleanup for any reason, as long as the regulator has demanded it. In the United Kingdom, the regulator is the local municipal authority.