Environmental Impairment Liability Insurance Emerging Trends and Coverage Issues

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Environmental Impairment Liability
InsuranceEmerging Trends and Coverage Issues

• September 26, 2006

J. Kevin Shane, ARM, CPCU, CSP Denver
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Overview

• Using Environmental Insurance to Solve Business
  Problems
• Environmental Market and Product Update
• Coverage Trends Emerging Trends
• Do Pollution Policies Pay Claims

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Using Environmental Insurance to Solve Business
Problems Creative Solutions
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Typical Calls From Attorneys...

• My client is going through a merger. They want
  insurance, but many of the 400 locations they are
  acquiring dont have any environmental
  information. Can you get us quote by tomorrow?
• My client is trying to settle litigation over
  cleanup, and is looking for a way to insure
  property values of home-owners if claims arise in
  the future. Is there anything off-the-shelf?
• My client is selling its property(ies) and wants
  to dissolve. Were looking for a way to back up
  reps and warranties without using an escrow. Can
  environmental insurance do that?

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Typical Calls from Attorneys...

• My client is buying a relatively old apartment
  building and is concerned about asbestos and
  lead-based paint. Oh, and what about mold?
• My client is dissolving its company, but it has
  two on-going cleanups, one of them for 30 years.
  How can we wrap up these liabilities?
• My client is getting an indemnity from the
  seller, but we want more. Can you back it up?
• My client wants to build high-end homes on a
  State Superfund site. If I cant talk him out of
  it, can you get us coverage for toxic tort and
  property damage claims?

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Who Is Using Environmental Insurance?

• REITS, Real Estate Firms, State Pension Funds
• Developers and Homebuilders
• Private Equity firms
• Technology Companies
• Public Entities, Cities, Transit Authorities,
  Port Authorities
• Oil Companies, Pulp Paper companies, Chemical
  companies
• Utilities, Mining companies
• Manufacturers, Consumer Products companies,
• Aerospace manufacturers / Defense contractors
• The Department of Defense (Army -- 300M in 2003)
• Environmental Consulting Firms, Environmental
  Contractors and General Contractors

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Uses of Environmental Insurance

• To facilitate transactions
• Acquisition, divestiture, merger
• Single site, several sites
• To facilitate redevelopments
• To provide a safety net for operations, part of
  EMS
• To address historical environmental liabilities,
  e.g., nonperforming assets, divested properties,
  Superfund sites
• And yes, there are solutions to all of the
  questions previously posed

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Market and Product UpdateInsurers and Coverage
Types
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Environmental Insurance Market is Thriving
2.1B Industry Premiums

• Great competition among insurers
• Different appetites for risk
• Varies from insurer-to-insurer and day-to-day
• Quotes may vary greatly
• But often are surprisingly close
• Insurer capacity
• Ranges from 25M to 50M
• Total market capacity
• Upwards of 200M

• ACE Environmental
• AIG Environmental
• Arch
• Chubb Environmental Solutions
• Liberty
• XL Environmental
• Zurich Environmental
• Several smaller players

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Market and Product UpdateInsurers and Coverage
Types
Parent Company Affiliate Insurer Admitted / Non-Admitted AM Best Rating
ACE Environmental Illinois Union Insurance Comp. Non-Admitted A / XV
AIG Environmental American Intl Specialty Lines Ins. Comp. Non-Admitted A / XV
Chubb Environmental Chubb Group of Ins. Comps. Non-Admitted A / XV
XL Environmental Indian Harbor Insurance Comp. Non-Admitted A / XV
Zurich Environmental Steadfast Insurance Comp. Non-Admitted A / XV

• Note that all insurers are non-admitted or
  provide coverage on a surplus lines basis
• Surplus lines fees/taxes are due with each
  placement
• Does the insurer rating matter and in what
  situations?

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Market and Product UpdateDoes Insurer Rating
Matter?

• Quick Answer
• Quanta Insurance Company
• Kemper Insurance Company
• Reliance Insurance Company
• Marsh can only structure and place coverage with
  insurers that meet or exceed a specific rating
• Short-term policies
• Not as big a concern
• Long-term policies
• Insurer rating should be a serious consideration
• An occurrence-based policy is long-term - CPL

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Pollution Legal Liability Covers Unknowns and
Certain Knowns

• PLL Covers Scheduled Insured Sites
• Provides the following standard coverages
• Cleanup costs (onsite and offsite)
• Toxic tort liability (3rd party BI and PD /
  onsite and offsite)
• Defense expenses
• Pollution Conditions Covered
• New
• Pre-Existing gt Unknown and Known/Insurable
  Conditions
• Numerous other PLL coverage types are available
• Coverage term
• Preexisting Pollution Conditions Up to 10 years
• New Pollution Conditions Up to 5 years
• Regulatory re-openers
• Natural resources damage claims

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Pollution Legal LiabilityCovers Scheduled
Locations
Insured owns and/or operates from each of the
fixed sites which are scheduled locations
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Contractors Pollution LiabilityCovers Project
Sites
Insured Contractor performs work at each of the
project sites, which are typically covered on a
blanket basis
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Remediation Stop LossCovers Scheduled Projects

• Policy used to manage finance risks associated
  with remediation cost overruns
• Policy pays for costs in excess of estimates
  contained in the underwritten remedial plan (RAP)
  
• RAP cost estimates might be exceeded because
• Greater amount of volume to be excavated
• GW must be treated as opposed to monitored
• Change in applicable regulations
• Change in lead agencys perception of project
• Ineffective RAP . . .
• Does not cover bodily injury/property damage
  claims
• Does not cover defense costs

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Options/ProgramsRemediation Stop Loss

• Remediation Stop Loss (RSL) coverage introduced
  in the mid 90s
• Poor Overall Loss Experience
• UWers review agency-approved RAP, associated
  costs and regulatory standards
• Retentions 25 - 50 of expected remediation
• Policy limits typically 100 to 200 of est
  remediation costs
• Sound reasoning behind this . . .
• Policy can cover a single project or multiple
  projects
• Policy terms usually run up to 10 years, but
  typically follow expected project length

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Treating Environmental Exposures/Losses
Pollution Legal Liability
Remediation Stop Loss
2) Cap remediation expenses actually incurred
Onsite Offsite
Limit of Liability / Risk Transfer Layer
Deductible or Buffer
3) Accelerate funding of known remediation
expenses
1) Transfer historical future environmental
exposures
Known Remediation Costs
Insured Property
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Insurability of Known Conditions
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Analogy Can Property Insurance bePlaced on this
Building???
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Summary of Recent Placements
Coverage Type Exposure Description Limits SIR Policy Term Term Premium
PLL Construction of townhome on remediated land 5M 100K 10 Years 120K
PLL Large lot of land with significant contamination future use is high-density housing 15M 100K 10 Years 420K
PLL Divestment of 500 acre property with product pipelines 5M 100K 5 Years 165K
PLL Purchase of PLL to use as sales marketing tool 10M 250K 10 Years 240K
PLL Mining Operation ongoing ops SA only 100M 1M 1 Year 4M
PLL Operating OG plant 10M 100K 5 Years 75K
PLL Purchase of policy to support purchase and redev of contaminated site 2 acres 5M 100K 10 Years 96K
PLL Purchase of policy to support purchase and redev of contaminated site 45 acres 5M 100K 10 Years 120K
PLL Purchase of policy to support purchase and redev of contaminated site 500 acres 10M 100K 10 Years 180K
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Coverage Trends Emerging Issues
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Emerging Issues and Coverage Trends

• Market Is Quite Stable at This Time
• PLL Policy Terms Getting Shorter
• Preexisting Pollution Conditions 10 Years
• New Pollution Conditions 1 5 Years (depending
  on insurer)
• Also True for RSL and Finite Structures
  Placements
• New Policies Underwriting Approaches
• ACE has a new PPL (PLL) policy PPL II
• XL now provides coverage via two policies
• Very Limited Market for
• Remediation Stop Loss
• Very strict underwriting guidelines
• Secured Creditor / Lender Liability

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Emerging Issues and Coverage Trends

• Natural Resources Damages
• Growing concern / Not covered in all PLL policies
• Vapor Intrusion
• Growing concern / Currently covered in most PLL
  policies
• Asbestos Exposures
• More stringent underwriting
• Used to be able to readily obtain coverage for
  remediation of soil/GW (as opposed to abatement)
  but that is more difficult today
• Redefining Bodily Injury
• Some insurers are redefining to require physical
  manifestation as a component of an emotional
  distress claim

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Emerging Issues and Coverage Trends

• Capital Improvements Exclusions
• More underwriters are trying to include these
  exclusions
• Eliminate coverage for any pollution condition
  discovered as part of a redevelopment
• Mold Coverage Grants and Restrictions
• PLL Policies gt available on a greater basis than
  in the past
• CPL Policies gt available depending on operations
  performed
• Negatives Aside, Market As a Whole Is Large And
  Competitive

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Do Pollution Policies Pay Claims?... And Words
to the Wise
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Are We Seeing Claims? Are They Being Paid?

• Short answer Yes (to both)
• Environmental insurers dont want the reputation
  of being unwilling to pay claims
• How many claims?
• Insurers deem this information confidential and
  refuse to share
• Recent history Some significant losses
• Carrier retrenchment in
• Remediation stop loss policies
• Lenders policies

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Claims You May Not Have Heard About
Redevelopment

• Redevelopment on former aerospace
  manufacturerthe policy that keeps on paying
• Mixed use, residential, condos
• 10-yr PLL policy placed providing 20M limits
• More contamination found than anticipated
  hotspots of VOCs, TPH, methaneAND
• During construction, contractors that was
  dragging equipment damaged buried petroleum
  pipeline
• 5M claimed 2M paid to date
• Other claimsother settlementsmore to come

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Claims You May Not Have Heard About
Redevelopment

• Excavating and Moving Landfill
• Several closed landfills had to be moved
• Combination Stop Loss/PLL policy placed for 10
  yrs providing 20M limits
• Excavation went welluntil an unexpected
  contaminant was found that required special
  handling and disposal
• Claim is partially paid and expected to reach
  nearly 10M

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Claims You May Not Have Heard About Real
Estate Transaction

• Insurance Needed to Make Transaction Possible
• Strip mall containing a dry cleaner was to be
  sold and insurance was placed to support the
  transaction
• A PLL policy was procured providing a 5 yr term
  and 5M limits
• Underwriter asked the specific questionIs any
  additional engineering planned at the site?
• The answer No.
• Within one week after close the buyer installed
  additional monitoring wells
• PCE was discovered at actionable levels
• When NFA was obtained over 800K was paid
• Suffice it to say there was a big fight over
  certain representations

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Claims You May Not Have Heard About
Redevelopment

• Large redevelopment - former chemical mfg.
  facility
• Policy was structured with certain known
  conditions not excluded
• A PLL policy was procured providing a 5 yr term
  and 5M limits including Soft Costs Coverage
• During the redevelopment higher than expected
  levels of contamination were encountered
• When NFA was obtained over 1.5M had been paid

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Claims You May Not Have Heard About Plume
Containment Project

• Large industrial area with significant
  contamination
• Migrating contaminants threatened to shut down
  more public drinking water wells
• Responsible parties agreed to EPA settlement, but
  only if Stop Loss/PLL coverage could be obtained
• A policy was procured providing a 15 yr term and
  100M limits
• Treatment train worked well on bench scale, but
  has largely failed to date
• Too early to tell what the loss will be, but is
  expected to be in the 10Ms

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Do All Claims Get Settled Promptly?Claims
Drawing National Attention

• LA Schools in a Legal Mess With Insurer
• -- Los Angeles Times
• AIG Unit Denies 100 M Pollution Claim
• -- BusinessInsurance.com
• Insurance Firm Files Suit Against the Cards
• -- St. Louis Post Dispatch
• Note also that some claims are appropriately
  declined

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Preventing Claim Disputes
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Preventing Claims DisputesWords to the Wise
Other Good Things to Know

• Know Your Deal
• You have a lot more leverage with the underwriter
  before the deal is bound than after
• Plans to flip properties
• Implications of a very large portfolio
  divestiture
• Any Additional Insureds? Mortgagees?
• Eliminate Policy Administration
• No reporting of specific events
• Auto Removal of exclusion when Insured receives
  NFA
• Known/Undisclosed Environmental Conditions
• Has full disclosure been made
• In a merger, is knowledge of seller imputed to
  buyer if key employees remain the same?
• What if entire workforce comes with the
  acquisition
• Buyer and Seller on Same Policy?
• Have you considered the Insured vs. Insured
  Exclusion?

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Preventing Claims DisputesWords to the Wise
Other Good Things to Know

• Cancellation Condition
• Most are quite restrictive but can usually be
  amended
• Include limits on cancellation, cure language,
  applicability only to specific locations
• Material Change in Use
• Write directly into the policy a broadly worded
  description of the future intended use of the
  property
• Material Misrepresentation
• What happens with the policy deny claim or void
  policy?
• Choice of Law, Venue, and Jurisdiction
• These almost always stipulate New York
• Can almost always amend to more favorable
  jurisdiction or silent
• Types of Insureds and Impact on Coverage
• First Named Insured
• Named Insured
• Additional Insured

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Preventing Claims DisputesWords to the Wise
Other Good Things to Know

• Reporting Requirements
• Reporting of claims
• Providing project update reports (stop loss
  policies)
• Subrogation Rights
• Recovering Your SIR gt does the recovery fund your
  SIR?
• Other Insurance Condition
• Is it primary?
• Do you want it primary?
• Divested Property Exclusion
• It is essential that the exclusion not void
  historical coverage for divested properties
• Assignment Condition vs. Additional Insureds
• Policy Terms
• Claims made
• Pollution incident
• Disclosure issues
• Deductible/SIR

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Other Good Things to KnowEnvironmental Risk Mgmt
Consultants Brokers

• Marsh is a risk management consultant and broker
• Not to be confused with the insurer
• Similarly, Marsh is a risk management consultant
  and broker
• Not to be confused with an agent
• Marsh represents the insured, not the insurer
• Use an experienced risk management
  consultant/broker
• General insurance experience
• Technical environmental experience
• 75 professionals worldwide engineers,
  geologists, attorneys, consultants, MBAs
• Must know the difference between a ppm and a
  ppb
• Have ability to argue in preserving coverage
• Limit the exclusion of known pollution
  conditions
• Limit application of exclusions

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Continuing Legal Education

• Would a CLE program tailored to this topic
  beneficial and of interest either to
• Obtain necessary CLE credits
• Learn more about how EIL insurance is being used
• Created a five-section program in CA
• Was approved by CA Bar Assoc for CLE credits
• One hour per section / Sections can be taken in
  any combination
• Have not pursued such a program as yet in CO
• If interested, feel free to contact me
• Dir 303 308 4596
• Email kevin.shane_at_marsh.com