Land acquisitions require caution, diligence

An international corporation announces plans to close its local manufacturing plant. In a gesture of goodwill and in recognition of the adverse affect its decision has on the local community, the corporation offers to sell the city the physical plant and land at an extremely attractive price. Do you accept the offer?

The owner of a local dry cleaner retires, and the city offers to buy the building with an eye toward remodeling it to serve as a satellite service center. A purchase price is quickly agreed upon. Was your initial offer too high?

The acquisition of land as a gift or at a bargain price may be encumbered with unknown and costly liabilities. Proper diligence prior to acquiring land will help to avoid financial surprises and the possibility of labor and capital-intensive redevelopment initiatives that were unanticipated.

Proceed with caution

Contaminated sites that may subject the current owner to Superfund liability or to costly brownfield redevelopment initiatives can (and do) exist in communities of all sizes.

Your municipal insurance program excludes coverage for pollution liability, including Superfund liability and costs associated with brownfield redevelopment. The lack of insurance for this exposure requires municipal officials to be aware of the risk control and risk financing techniques that are available to address uninsurable exposures.

Exposure avoidance may be the most obvious option available. But a municipality that refuses all opportunities to acquire land free or at below market prices also loses the potential financial and community benefits. Avoidance should be considered on a case-by-case basis rather than as a matter of policy. A thorough review of all past activities at the site is a necessity.

Retaining the exposure by increasing taxes to finance a loss would not be considered sound risk management or good government. But it is an option available to public entities that is not available to private organizations. Besides the political fallout, a downside to this option is that taxes earmarked to pay for losses or redevelopment cannot be used to fund more productive public purposes.

Although difficult, it is far more productive in the long run for municipal officials to be generally aware of the many brownfield programs launched in the 1990s, led by the many programs initiated by the Environmental Protection Agency (EPA). A discussion of these programs is beyond the scope of this limited space. Extensive information on the EPA's various brownfield redevelopment initiatives, including liability issues, is available online using a search engine for "brownfield redevelopment" plus "EPA."

Sales tax interruption

Another exposure that often is given less attention than it deserves is a municipality's loss of sales tax revenue. This is an easily insurable exposure, when the preliminary work is performed to estimate your probable loss exposure, and when your insurance representative is experienced enough to recognize your exposure.

Consider, for example, the largest grocery store in your community. A fire, windstorm or some other insured peril could cause it to close, resulting in your loss of thousands of dollars in sales tax revenue. Tax interruption insurance can protect against this major disruption in your community's revenue, at least for a period of time to allow the affected business to rebuild and generate income.

Tax interruption insurance will only respond if tax revenue is disrupted due to an insured peril. This coverage will not respond due to a business decision or bankruptcy of a local business, or if loss of revenue results from an uninsured peril.

Deductibles often apply, to deter the municipality and insurer from involving themselves in settling small changes in tax revenue. The deductible could be a dollar amount, or may be a time limit of weeks or months. The effect is the same. Small losses are avoided, but the community is protected from major instability due to significant immediate changes in tax revenue from a loss caused by an insured peril.

Usually, specific local businesses to which the coverage applies are listed on a policy schedule.

Contact your insurance representative or the League's Risk Management Services Division at 800-653-2483 for more information.