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Practical Uses of Environmental Insurance How To Increase Shareholder Value And Reduce Risk

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Title: Practical Uses of Environmental Insurance How To Increase Shareholder Value And Reduce Risk


1
Practical Uses of Environmental Insurance How To
Increase Shareholder Value And Reduce Risk
  • Presented to
  • The 14th Annual Advanced Contract Risk
    Management In Upstream Oil And Gas Conference
  • By
  • Joseph Naylor, Senior Counsel Joe.Naylor_at_enbridge.
    com
  • Enbridge Energy Company
  • and
  • David Dybdahl, CPCU, President dybdahl_at_armr.net
  • American Risk Management Resources Network, LLC.

2
Presentation Outline
  • History of insurance coverage for environmental
    risks
  • Modern Policies Specialized environmental risk
    policies currently available advantages and
    disadvantages
  • Considerations for negotiation of an
    environmental policy
  • Specific Example Use of environmental insurance
    in the purchase and sale of a company.

3
Modern Environmental Insurance
  • Specialized insurance coverage written
    specifically to cover environmental risks
  • Useful to fill the insurance coverage gaps
    created by pollution exclusions in traditional
    insurance policies.
  • Continuously available since 1980, but still not
    widely utilized.

4
History Of Insurance Coverage For Environmental
Damages And Claims
  • It is important to understand the historical
    coverage for environmental losses in traditional
    insurance policies to appreciate benefits of the
    new specialized environmental insurance products.

5
Commercial General Liability (CGL)
  • Environmental Liabilities become apparent
    beginning in the 1970s
  • Standard Business Insurance Policy Commercial
    General Liability (CGL)
  • CGL Insures Against Third Party Liability for
    Damages (not otherwise excluded)
  • Exclusions on the CGL for environmental damages
    evolved over time.

6
CGL Policies Prior To 1970
  • CGL Introduced in 1941 Coverage was generally
    broadened up to 1970
  • Provided coverage for Damages Caused by an
    Accident
  • Policies were Accident or Occurrence Based,
    rather than Claims Made Based coverage

7
1970 Qualified Pollution Exclusion
  • A exclusion was added to the GL policy that was
    designed to exclude claims caused by pollution,
    except where caused by events which are Sudden
    and Accidental
  • Problems determining what is sudden and
    accidental (See Primrose Operating Company, 382
    F.3d 546)

8
1986 Absolute Pollution Exclusion
  • Excludes Coverage for Damages Arising out of the
    actual, alleged or threatened discharge,
    dispersal, release or escape of pollutants
  • The sudden and accidentalexception to the
    pollution exclusion was dropped
  • Pollutants are broadly defined
  • Can lead to overbroad reading of exclusion and
    denials of coverage (See CBI Industries, 907 S.W.
    2d 517)

9
Time Element CGL Endorsement
  • Also Known As Time Element Pollution Coverage,
  • Coverage is created through an endorsement to the
    CGL policy to provide coverage for pollution
    events that fit within specific time parameters.
  • There is a significant difference between
    environmental coverage as an exception to an
    exclusion versus coverage provided within an
    insuring agreement.
  • Confusion on this point is common and leads to
    confusion about the efficacy of modern
    environmental insurance.

10
Time Element Pollution Coverage
  • Typical Time Element Coverage Triggers
  • Incident must be Sudden and Accidental
  • Incident must be Detected when it Occurs (or
    Within a defined Short Time Period Thereafter)
  • Incident Must be Reported to Underwriter Within a
    Specified Time Period (120 hours 30 days)
  • This coverage is common in the CGL sold to oil
    and gas risks.

11
Modern Environmental Coverage
  • By about 1990, Environmental risks became more
    quantifiable
  • Insurers offered new products specifically
    designed to cover pollution-related events.
    Coverage in true environmental Insurance is
    provided within the insuring agreement portion of
    the policy
  • Environmental insurance policy forms are not
    standardized and can be modified.
  • Buyers need to be keenly aware of differences in
    the over 140 environmental policies forms that
    are available.

12
Basic Types Of Environmental Insurance
  • Site Specific (EIL)
  • Contractors Operations (CPL)
  • Professional Liability (Errors and Omissions)
  • Clean Up Cost Cap
  • Packages of these policies are also sold
  • Contrary to popular belief litigated claims
    on these policies are in fact rare.

13
Environmental Impairment Liability (EIL)
  • Sold under many brand names including
  • Pollution Legal Liability (PLL)
  • Premises Pollution Legal Liability (PPL)
  • Premises and Remediation Legal Liability (PARLL)
  • Unique Features
  • Responds to loss arising from pollution
    conditions on or emanating from an insured
    facility.
  • Covers third party bodily injury and property
    damage losses.
  • Also insures remediation and defense costs.
  • Can insure prior acts, pre-existing conditions
    and superfund liability.

14
PL Policy Coverage Triggers
  • Generally written on a claims made and reported
    basis.
  • Multi year policy terms are available.
  • Known contamination at time of application are
    not covered.

15
Contractors Pollution Liability Insurance (CPL)
  • Also sold under many different brand names.
  • Provides coverage for pollution-related losses
    arising from described operations of the named
    insured
  • CPL coverage is important because most contractor
    CGL policies contain absolute pollution
    exclusions.
  • These exclusions can eliminate all coverage for
    any claim associated with a pollutant.
  • CPL is designed to fill the coverage gap in a
    contractors CGL policy.

16
Cleanup Cost Cap Coverage
  • Also known as Remediation Stop Loss Coverage or
    Cost Containment Coverage
  • Covers Remediation Costs which exceed budgeted
    costs
  • Covers the costs incurred to complete the insured
    remedial action work plan.
  • Used extensively by the US Army to facilitate
    fixed priced remediations.
  • The U S Army estimates their clean up costs
    decreased by 30 and time frames accelerated with
    the use of this insurance.

17
Negotiating an Environmental Policy
  • Each Insurer has customized applications keyed to
    proprietary rating models.
  • The application becomes part of representations
    and warranties of policyholder.
  • Almost all disputed environmental insurance
    claims are a direct result of a poorly prepared
    application.
  • Use of qualified specialized environmental
    insurance broker is highly recommended.
  • The insurance industry is devoid of any formal
    training in this complex line of coverage.

18
Insurance Can Increase Shareholder Value
  • It can reduce the risk profile of the firm.
  • Properties can be transferred for a fixed cost
    without indemnities.
  • It can facilitate property transfers by getting
    environmental risks off the table as objectively
    priced by a third party.
  • It can help quantify Sarbanes Oxley disclosure
    requirements on Environmental liabilities.

19
Insurance Companies Have Inherent Advantages
  • Premiums are tax deductible
  • Interest is earned on loss reserves tax free
  • Insurance uniquely creates a sum certain for a
    wide rage of possible outcomes
  • If a loss occurs insurance underwriters have
    claims
  • Reserves are not tax deductible
  • Interest on cash reserves is taxed
  • Reserves cannot take into account the probability
    of events for a worst case scenario.
  • If a loss occurs, uninsured negotiators suffer
    career limiting events

20
The Use Of Environmental Insurance In a Property
Transfer A Case Study
Background Sale of a company for a fixed
price Buyer seller agree on a fair value of
40,000,000 without environmental
issues There is an Environmental Remediation
Plan for 1,000,000 Buyers due diligence
raises potential worst case environmental
liabilities valued at up to 24,500,000
How much will the company sell for?
39,000,000 or 15,500,000
21
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Remediation Risks
12
Expected Cleanup 1,000,000 costs, 99
confidence over 2 years
11
10
9
8
7
Risk (000,000)
6
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Time in Years
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
22
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Remediation Risks
12
5,000,000 Excess Remediation Cost, 1 chance of
being incurred over 5 years beginning in year 2
11
10
9
8
7
Risk (000,000)
6
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Time in Years
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
23
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
24
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
25
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Environmental Legacy Risks
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
26
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
27
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Environmental Impairment Liability Insurance
12
  • Purchase EIL Insurance
  • 10,000,000 limit, 10 year term, 300,000 premium
  • Non owned disposal sites
  • On and off site clean up of unknown pollution
    conditions

11
10
9
Risk Gone
8
7
Risk (000,000)
6
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Time in Years
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
28
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Purchase EIL insurance with non-owned disposal
site coverage
Risk Gone
29
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Discovery Of Unknown Contamination
12
Purchased EIL Insurance with on site coverage for
unknown pollutants
11
10
9
8
7
Risk (000,000)
6
5
4
3
2
Risk Gone
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Time in Years
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
30
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
After The Purchase Of EIL
12
11
10
9
8
7
Risk (000,000)
6
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Time in Years
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
31
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Risk Gone
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
32
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
33
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Cost Cap Insurance (5,000,000
limit 1,100,000 self insured retention)
12
Cost Cap Insurance 13 of 5,000,000 750,000
premium, term of policy - 3 years
11
10
9
8
7
Risk (000,000)
6
5
4
Risk Gone
3
2
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Time in Years
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property Key, shaded
areas show risk over time, not expected cost
34
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
After the Purchase of Cost Cap Insurance
12
11
10
9
8
7
Risk (000,000)
6
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Time in Years
Property Value 40,000,000 -- Clean up cost
estimates between 1,000,000 and 6,000,000
Chemical Manufacturing Property -- Key shaded
areas show risk over time, not expected cost
35
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER
OF PROPERTY
Risk Gone
36
Using Insurance Tools To Facilitate A Property
Transfer
Risk Limits Insurance Policy Premium Expected
clean up cost 1,000,000 Annuities
970,000 Excess remediation 5,000,000 Cost
cap or 750,000 costs remediation stop
loss 3rd party claims 5,000,000 Contractors
Pollution 70,000 during remediation Liability
Discovery of new 2,000,000 Environmental
300,000 contamination
on Impairment Liability property Superfund
liability at a 1,500,000 Environmental Included
non-owned disposal Impairment
Liability site Environmental loss
from 10,000,000 Environmental Included ongoing
operations of the Impairment Liability plant TOT
AL COST 24,500,000
2,090,000
37
Result
  • The full 24,500,000 of environmental
    contingencies are funded for a total premium cost
    of 2,090,000.
  • The sales price 40,000,000 - 2,090,000.
  • The Sarbanes Oxley disclosure exposure for the
    seller is minimized.
  • Buyer is also protected from assuming and
    recognizing contingent liabilities on its balance
    sheet.
  • And the negotiators are not exposed to career
    limiting events!

38
CONCLUSION
  • With insurance the company sells for
    37,910,000.
  • The transaction needs to be set up with the
    anticipated use of insurance to be successful.
  • It requires specialist knowledge to fit
  • the insurances together.
  • Effective use of modern environmental
    insurance can increase share holder value.
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