Background on the Conservation Defense Insurance Program
- Costs and Responsibilities
- Why We Need to Work Together
- Benefits of Conservation Defense Insurance
- Captive Insurance
- Feasibility, Structure and Terms
- Next Steps
The Land Trust Alliance estimates that the litigation costs would range from $70,000 to $100,000 for a typical trial in a typical jurisdiction, $35,000 for summary judgment motions and $150,000 for appeal. The average historic cost of all claims was $38,000 including those that did not go to a full trial. This does not capture the risk of going to trial and the appeals process. In one particular case, litigation cost the land trust over $1.5 million dollars in outside attorney fees, an at least four other cases exceeded $250,000. A case in California cost the land trust almost $200,000, and it settled before trial. Your land trust has no way to know what issue will cause litigation, when it will occur, how many cases you might face in a year or how much it will cost.
Very few land trusts have the financial means to fund major litigation costs. Eighty five percent of land trusts have a budget of $250,000 or less. According to the 2005 National Land Trust Census, only 19 out of the 1,667 land trusts in the country have a separate legal defense fund of $70,000 or more, and fewer than 320 land trusts (19%) have any other monitoring, stewardship or defense-related endowments in excess of $70,000. Even if a land trust had a large endowment, those funds could be better used saving land than writing for a major lawsuit.
At the same time, federal law requires land trusts to have the resources to monitor and defend conservation easements, if a tax deduction is taken.
The IRS has recently changed the reporting requirements for land trusts and now asks for documentation of the amount of time and money a land trust spends in monitoring and defending its easements. In future versions of the Form 990, the IRS is considering a requirement that all land trusts document the financial resources that they have available to monitor and defend easements. Given the small number of land trusts with large endowments, most land trusts would have a difficult time answering that question satisfactorily.
Some land trusts may think they can count on their Attorney General to defend a violated conservation easement. But, as the political climate shifts with each election, land trusts may find that the attorney general is less willing to assist them. Sometimes there may be political reasons why an attorney general is unwilling to aggressively pursue a particular individual, and sometimes the attorney general may have capacity limitations that impede full and energetic representation. It may also occur that a particular expertise is required that is not represented on the attorney general’s staff and a land trust may need to retain outside legal counsel in a specialized area of law.
We all need to stand together to defend conservation easements as a legal tool and to help create favorable case law for conservation. The stakes are high, as a single adverse decision from a legal case could endanger the permanence of thousands of easements and create bad precedent. Without action now, the land trust community risks losing many of the gains made in recent years. No state has enough conservation law precedent for anyone to think that other state decisions won't be a factor in court opinions. Of the 23 decided and reported cases nationally involving land trust held conservation easements 20 had good conservation results. We have a good track record so far, but we have only just begun to develop the case law for conservation easements.
Many land conservation leaders are concerned about the increase in the cost of and the number of legal challenges to conservation easements and have asked the Land Trust Alliance to investigate the feasibility of insurance to cover these litigation costs. The Alliance has begun this investigation but has not yet determined if the program is feasible.
Your land trust’s financial resources may not be sufficient to fully protect your easements and land, especially at a time of increasing risk and litigation. If you use your stewardship endowment to pay legal fees, then your land trust will need to find alternate funds to continue your annual stewardship operations. Insurance could be a safety net for your land trust from these risks and add to your land trust's financial security, even when exposed to the uncertainties of litigation. Of course, you will still need funds for ongoing stewardship costs and the annual costs of insurance deductibles and exclusions such as remediation costs. Insurance also will not cover disputes not directly related to upholding conservation easements or defending fee owned land. The possible insurance program is not a substitute for adequate land trust reserves and good practices; it could be a backstop to good financial management.
Conservation defense insurance would also help a land trust build confidence with donors, lenders, regulators and legislators in its ability to uphold conservation permanently. The IRS is currently auditing hundreds of easements and land trusts, and has stated that a land trust could lose its tax status or ability to accept further donations if it does not have sufficient resources to monitor or defend easements. National conservation defense insurance would demonstrate to the IRS that land trusts are serious about their responsibilities to defend easements in perpetuity.
The Alliance is investigating the creation of a form of private insurance known as “captive insurance” that would be owned and managed by land trusts themselves. A captive program could provide more stability in premiums and coverage than a commercial insurance carrier, and it would have the ability to pursue key cases to set a positive legal precedent. Since the program would be owned by the land trust community, we could structure coverage and premiums to address the particular needs of land trusts. The captive insurance board, made up of representatives from the land trust community and the Alliance may be able to offer discounts in premiums to encourage practices that lower the risks of litigation.
Captive insurance has far more flexibility in what they will and will not cover than regular commercial insurers. The land trust community would control the payment of claims through a land trust insurance program, using a claims committee of land trust peers. The claims committee would have some latitude to take alternate approaches to resolving disputes (such as mediation, settling weak cases, and other creative solutions that uphold conservation permanence.) Older or weaker conservation easements are likely to create worse precedent so they may need the most help. The claims committee would also be in a position to triage cases and divert those cases from litigation that should not be tried but managed in some other manner that retains the integrity of the land trust and upholds conservation permanence. Such cases would receive appropriate legal services in other forms to resolve the matter as favorably as possible for conservation without creating any adverse precedent.
The Alliance contracted with a respected independent insurance consultant, Betterley Risk Consultants, to evaluate the feasibility of conservation defense insurance. The Alliance also contracted with the University of Wisconsin Survey Center to conduct a statistical survey of the land trust community to determine the history of litigation costs and land trust interest in conservation defense insurance. The survey showed that 73% of Alliance members had some interest in purchasing conservation defense insurance if it was made available.
Betterley used the University of Wisconsin survey to determine past risk and it evaluated future risk by examining variables such as increasing real estate prices, development pressure, sales of conserved land to successor owners, and third party trespass. Betterley combined the loss history and the future risk evaluation to arrive at the estimated annual premium and capitalization required for a private insurance program to be feasible.
The Betterley report proposes an annual premium per easement or land parcel of approximately $60 with a $5,000 deductible and a cap of $500,000 per occurrence. The report determines that the program would be financially feasible if at least 12,000 easements were enrolled in the program within the first four years. The Alliance needs written commitments to insure at least that many easements (and fee-owned land) in order to launch the program. The Alliance would also need to raise approximately $4 million in initial capital in order for the program to be approved by insurance regulators.
In the early years, it will be important to build capital by retaining excess revenues, which would help buffer against premium increases if risks increase dramatically in future years. Should the captive insurance program generate excess revenue over the long term, the board of the captive could decrease premiums or invest it in prevention programs to reduce risk.
The insurance program would retain contractors to manage the daily business of collecting premiums, paying claims and dealing with insurance regulators. This will be more efficient and cheaper than a commercial insurance product, since the captive does not need to earn a profit and it has lower costs to comply with insurance regulations. The Alliance would manage prevention programs.
Some land trusts are concerned that this insurance would only be available to accredited land trusts. The Alliance wants to help all of our members to run responsible and effective organizations, and low-cost insurance is one of the most valued and important benefits. If we determine that conservation defense insurance is feasible, we will make this service available to all qualifying members without regard to their accreditation status.
Depending on the feedback it receives from its members, the Alliance board will make a preliminary decision on the insurance program by June 2009 with a final decision by the end of 2009. In order to start the insurance program, the Alliance must have written commitments from land trusts willing to insure at least 12,000 conservation easements or fee-owned land parcels. After that and if the Alliance board votes to proceed, the Alliance would need to raise $4 million in capital, obtain regulator approval and start-up the program. All of this takes time and even more so in the current difficult economy. If the Alliance board votes to start the program, it is unlikely to be in operation before 2012.
The Alliance would like to hear what you think about this program and if your land trust would be interested in participating.
For questions, call or write to:
Conservation Defense Director
Land Trust Alliance
44 Deerfield Drive
Montpelier, VT 05062
802-262-6051 phone and fax