J. Kevin Shane, ARM, CPCU, CSPDenver

Environmental Impairment Liability InsuranceEmerging Trends and Coverage Issues

September 26, 2006

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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 don’t 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. We’re 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 can’t 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 Update:Insurers and Coverage Types

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Environmental Insurance Market is Thriving: $2.1B Industry Premiums

ACE Environmental

AIG Environmental

Arch

Chubb Environmental Solutions

Liberty

XL Environmental

Zurich Environmental

Several smaller players

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

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Market and Product Update:Insurers and Coverage Types

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?

Parent Company Affiliate Insurer Admitted / Non-Admitted

AM BestRating

ACE Environmental Illinois Union Insurance Comp. Non-Admitted A+ / XV

AIG Environmental American Int’l 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

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Market and Product Update:Does 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 > 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 Liability:Covers Scheduled Locations

Insured Site #1

Insured Site #2

Insured Site #3

Insured owns and/or operates from each of the fixed sites

which are scheduled locations

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Project Site #1

Project Site #2

Project Site #3

Insured Contractor performs work at each of the project sites, which are

typically covered on a “blanket” basis

New Project #4 New Project #5

Contractors Pollution Liability:Covers Project Sites

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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 agency’s perception of project– Ineffective RAP . . .

Does not cover bodily injury/property damage claims Does not cover defense costs

Remediation Stop Loss:Covers Scheduled Projects

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Options/Programs:Remediation 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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Remediation Stop Loss

KnownRemediation Costs

Deductible or“Buffer”

Limit of Liability /Risk Transfer Layer

2) Cap remediation expenses actually incurred

3) Accelerate funding of known remediation expenses1) Transfer

historical & future environmental exposures

Pollution Legal Liability

Known/UninsurableCondition

Unknown/CurrentCondition

FutureCondition

Known/InsurableCondition

Insured Property

Onsite Offsite

Treating Environmental Exposures/Losses

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Insurability of “Known” Conditions

New Condition?

Covered by Pollution Legal Liability Policy

(Cannot be excluded as it does not yet exist.)

Preexisting Condition?

KnownCondition?

UnknownCondition?

Covered by Pollution Legal Liability Policy(What is not known

to exist cannot be excluded)

Unlikely to Cause Loss: Covered by Pollution Legal

Liability Policy

Has Caused / Likely to Cause Loss:Cannot be covered by Pollution Legal

Liability Policy

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Analogy: Can Property Insurance bePlaced on this Building???

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Summary of Recent PlacementsCoverage

TypeExposure

DescriptionLimits SIR Policy

TermTerm

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; S&A only

$100M $1M 1 Year $4M

PLL Operating O&G 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 > available on a greater basis than in the past– CPL Policies > 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 don’t 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 manufacturer“…the 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, methane…AND

– During construction, contractor’s that was dragging equipment damaged buried petroleum pipeline

– $5M claimed; $2M paid to date

– Other claims…other settlements…more 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 well…until 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 question:“Is 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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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

Preventing Claims DisputesWords to the Wise & Other Good Things to Know

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Reporting Requirements– Reporting of claims– Providing project update reports (stop loss policies)

Subrogation Rights– Recovering Your SIR > 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

Preventing Claims DisputesWords to the Wise & Other Good Things to Know

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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@marsh.com