In the news daily are stories about real estate developers gobbling up in-fill urban areas and abandoned military installations, with many of these areas earmarked for redevelopment into multi-use purposes, including new home neighborhoods. At first, it all sounds so politically correct, making something new out of something old, unsightly or abandoned. At second glance, however, the complexities of actually implementing redevelopment plans, using older infrastructure and building on brownfields, where contamination issues have not yet been addressed, can open up a virtual Pandora's box.

The contamination issue, especially where either industrial parks or military bases once stood, is of major concern from a liability standpoint from both developers and lending institutions. While environmental insurance has been widely used for commercial purposes for years, it is only now being used in residential construction, making these projects possible by taking the proverbial monkey off the backs of the developers. Handling the revelation of the existence and treatment of these formerly contaminated fields of brown to the buying public is accomplished in a simple, straight-forward manner: disclosure. After potential purchasers acknowledge that they are properly informed, environmental insurers can indemnify the developer, builder and lender from litigation arising from what came before them.

According to Kathleen Moriarty, managing director of Environmental Warranty, Inc., the promise of 'New Urbanism' includes brownfield development, deemed a much safer investment today than even five years ago. "Standards are now in place for clean up based on future use of the property, and in many states, a sophisticated environmental insurance market has evolved to facilitate the transfer of brownfields by mitigating, transferring or capping the risks associated with the property," says Moriarty.

"Lenders are increasingly using environmental insurance as a faster and simpler alternative to Phase I environmental assessment reports when it comes to having developers meet their environmental criteria," she goes on to say. "Although these reports are still necessary, environmental insurance is used to close the deals." The insurance provides sellers with assurance that they are covered for any future risk associated with the property, and give them the green light to proceed.

Important legislation, called "Early Transfer" has now been enacted for military base redevelopment, used to transform areas like the Charleston Naval Shipyard, the Orlando Naval Training Center, San Antonio's Kelly Air Force Base, and will be used for San Francisco's majestic Presidio transformation. Early Transfer calls for the transfer of the property owned by the Department of the Defense to a redevelopment authority for the sole purpose of contamination clean-up, formerly a responsibility of the DOD itself. "The clean-ups were not being done in a timely manner," says Moriarty. "The bases sat idle and no progress was being made, because the military wasn't set up to handle such a huge task." Instead, she cites, the responsibility is suspended while the redevelopment authority handles the clean-up. Subsequently, the transfer to the private sector can then be completed, but Early Transfer could not become possible without environmental insurance in place to assume the risk, according to Moriarty.

Moriarty, although wishing to name individual projects where environmental insurance is making progress possible, is bound by the usual confidentiality between client and provider. She does mention the existence of several ongoing residential and multi-use projects where the insurance was a key part of the process. One in particular is in the Southeast, where the property for single-family high-end homes in an inner-city in-fill development faced groundwater contamination from an adjacent property. Even though the clean-up rests with the property owner where the contamination occurred, Environmental Warranty was able to put insurance in place to cover the developer and the lender in the event that a third party makes claims against the developer, rising from the existing contamination.

"The only way people's lives would truly be affected is if they sank a well into their property, not using the existing city water," says Moriarty. "In these cases, the developer discloses the existence in the ground water condition to homebuyers there, and they are able to get the coverage they need. It is sometimes getting to the point where lenders will not lend the necessary funds without similar indemnification," she says, "and we can provide that as well on a separate policy."

Environmental insurance has been one of the key factors in allowing developers to restore value and use to a property that would otherwise have been left behind. "The prime properties in the cities have been scooped up," said Moriarty, "It's not a question of 'Will brownfields be a key aspect to urban development?,' but rather a question of 'Who will be able to cash in on this trend and who will be left behind,'" she said. It is clearly those developers and bankers who are familiar with the new brownfield arena that will take the early lead.