"INSURANCE CLEANING UP ENVIRONMENTAL HURDLES"

["cpeo@cpeo.org" <cpeo@cpeo.org>]

INSURANCE CLEANING UP ENVIRONMENTAL HURDLES

Date: 4/4/99
From: Star-Ledger, 990404
http://www.nj.com/news/

By Guy T. Baehr, Star-Ledger Staff

 When Gene Heller was negotiating to buy a 63-acre Revlon complex last
year, the issue of Revlon's liability for environmental cleanup costs
came up as a potential deal breaker.

 The veteran developer's plans called for tearing down most of the
vacant 750,000-square-foot former cosmetics manufacturing plant on
Route 27 in Edison and replacing it with new retail and warehouse
development.

 But the people at Revlon, after occupying the site for 40 years,
wanted to be sure the sale didn't come back to haunt them. They didn't
want the liability for pollution that might be found when Heller began
digging foundations.

 The key turned out to be an insurance policy, one covering
environmental cleanup.

 The use of such insurance policies is exploding in New Jersey as the
demand for contaminated sites heats up and insurance companies compete
with innovative policies designed to protect risk-adverse sellers,
developers and lenders.

 To make the $49 million Revlon Purchase and redevelopment deal go,
Heller Starwood LLC, Heller's Edgewater based joint venture with the
Starwood Capital Group of Greenwich, Conn., agreed to buy an $8
million policy to cover any unexpected cleanup costs.

 "They wanted to be out of it. They wanted us to indemnify them from
any potential contamination, and they weren't willing to accept just
our deep pockets as developers," said Heller, the former president of
Hartz Mountain Industries who has headed his own firm, G. Heller
Enterprises, for almost a decade.

 "We began to see more of this starting three years ago, but it's
really begun to take off in the last year or so," said Ann Waeger, a
partner with a Westfield law firm, Farer Fersko.

 Waeger, a specialist in commercial real estate liability issues, said
more companies are writing environmental risk policies, and premium
prices have come down, especially since August 1997, when Kemper
Environmental, a Princeton-based division of the giant Kemper
Insurance Companies, began heavily marketing its "brownfields
restoration and recovery" policies.

 The policies are still far from cheap.

 Waeger recalled a client who paid a $250,000 premium last year to buy
a 10-year policy covering cost overruns and legal liability involving
a $1.8 million cleanup. The policy covers up to $5 million for cost
overruns and $15 million for any unknown contamination.

 Robin G. Kelliher of Willis Corroon, an international insurance
brokerage, said premium costs usually range from 4 to 10 percent of
estimated cleanup costs. Typical policies kick in to protect the
insured if the overrun exceeds a deductible of 10 to 20 percent of the
initial estimate, she said.

 "It's a business decision," she said. "People are willing to pay a
little more because it's making deals happen that wouldn't get done
otherwise."

 Policies can be negotiated to protect buyers, sellers or third
parties such as lenders or tenants and can be tailored to cover a
variety of risks, from cost overruns to liability for unanticipated
contamination, she said.

Intense competition

 There are at least four large players now in the market, which gives
purchasers room to negotiate for the coverage they need, said
Kelliher, who works out of Willis Corroon's Morris Plains office.

 Besides Kemper Environmental of Princeton, she said the major
companies offering coverage include American International Group (AIG)
of New York City, the Reliance National Insurance Co. of Exton, Pa.,
and the Zurich Insurance Co. of New York.

 "It's an emerging product, so they're very competitive. They're all
trying to respond to what's happening in the real world," she said,
noting that New Jersey has made changes in the state's pollution
liability laws and eased cleanup standards in recent years to
encourage the redevelopment of contaminated sites in urban areas.

 Both Kelliher and Waeger said the new policies are so new and
innovation so rapid that many otherwise sophisticated real estate
developers, even in New Jersey, are still unaware of the
possibilities. "They make their living by developing property, not by
knowing about insurance," Kelliher said. "A lot of what we do is
education."

 While the options are impressive, so are the potential pitfalls.

 "These policies are not always a panacea," Waeger said. "There are no
standard policies or premiums, and you need to read them very
carefully to be sure you're really getting the coverage you think
you're getting."

 Richard S. Greenberg, who has a Ph.D. in organic chemistry, 15
pharmaceutical patents, a New Jersey real estate brokers license and
his own environmental clean-up company, offers his own variation on
the theme of environmental insurance.

 "I'm willing to bet on myself," said the 40-year-old founder of
Parsippany-based Environmental Waste Management Associates. "What
we'll do is sign a fixed-price contract to do the clean up. If I go
over that, it's my money."

 That's only happened once, he said. A cleanup he figured would cost
no more than $300,000 ended up costing him $340,000 to complete. "It's
probably the only one where I didn't make money," he said.

 Greenberg, who invests in real estate on the side, said it's not
contamination that makes developing on former industrial sites risky,
it's the inability of most consultants, lenders and developers to
confidently estimate the likely cost of the required cleanup and
gaining approval from state environmental officials.

 "It becomes a big unknown, and that scares people away," he said.
"What I do is get the hysteria out of it and put a dollar figure on
it."

Driven by deals

 That lets developers and lenders estimate cleanup costs with the same
certainty as, for instance, construction costs, and then determine
whether it all makes economic sense, said Greenberg, who served as
Heller's consultant on the Revlon deal and is doing the cleanup.

 In that case, he said, "I guaranteed it, but Revlon wanted even more
assurances, so we went to AIG and got an insurance policy."

 Ira L. Whitman, an East Brunswick-based environmental engineer and
consultant who has been in the business since the state passed strict
cleanup rules in 1984, said the increasing popularity of environmental
insurance is part of a larger trend in the field of pollution testing
and cleanup.

 "A lot of what we're doing now is not so much driven by regulatory
agencies as it is driven by transactions," he said. "Owners want to
sell or develop their land."