UMAL Environmental Liability May 2009

1. UMALEnvironmental Liability May 2009 Tom Hillier Senior Underwriter – UK & Ireland

2. Content • Environmental Market Focus • Operational Pollution Risk • Traditional Insurance Solutions • ACE Environmental Solutions • Considerations

3. Environmental Market Focus (1) • UK industrial history • Legacy of contaminated land • Significant unknown pollution conditions • Transactional business – key market driver • Property Development • M&A / Corporate Investment • Commercial Lending • Pension / Investment Funds • Typical ‘EIL’ Solutions • Long-term policies • Cover for legacy liabilities

4. Environmental Market Focus (2) • Issues Created • High premium costs • Complex wordings • Difficult placement process • The Result • Limited access for the client majority • Slow market growth • Lack of innovation in products and distribution • Environmental insurance not on the broker/client radar

5. What’s driving our focus on this? • Public awareness & media – Reputation • Financiers • Corporate Governance • UK Legislation • Part IIA of Environmental Protection Act • Water Resources Act • European Legislation • Numerous EU Directives – waste, water, hazardous substances – and the most important: • EU Environmental Liability Directive (ELD)

6. Am I exposed to environmental risk? • Environmental risk is often associated with: • Contaminated land and our industrial past • ‘Heavy’ industries like chemicals, metals & waste • Large-scale disasters • In reality, few companies have no such risk: • If you own or operate or buy and sell property • If you redevelop ‘brownfield’ land • If you use or produce potentially contaminative materials • If you create waste (solid, liquid or gaseous) …then you have an environmental risk

7. Operational Pollution Risk • EU Environmental Liability Directive (ELD) • Transposed into English law through new regime - Environmental Damage (Prevention and Remediation) March 2009 – Wales and Scotland to follow soon • Prospective only – operational risks • Reinforces ‘polluter pays principle’ • Damage to land and water • Damage to natural habitats & protected species (Biodiversity) • Main implications • Strict Liability for ‘regulated’ industries • Imminent threat & preventative measures • Reporting requirement for operators • Reporting opportunity for ‘interest groups’ • Complementary & Compensatory Remediation

8. What if I’m not a ‘regulated’ business? • Focus is on significant environmental damage • Only ‘regulated trades will be strictly liable, but • these regulations do not introduce environmental liability – it already exists! • Existing environmental legislation: • is wide-reaching and well established; • covers impacts to land, water, air and natural resources already; • is more stringent in many areas than the new regs; • includes both historical and operational pollution impacts; • can hold any type of business liable • can already impose significant clean-up costs

9. So what are the consequences? • Civil/tort liabilities • Claims for damages from third parties • Bodily injury & property damage • Nuisance ….can result in compensation payments & legal costs • Regulatory action • Government bodies have enforcement powers • Human health & Local Authorities • Land, air and water - Environment Agency ….can lead to significant clean-up costs and associated expenses

10. Am I not already insured against pollution? • ABI Pollution exclusion early 1990s • Property Insurance • No cover for historical pollution • Land is not usually ‘insured property’ • No contaminated soils in debris removal • Possible ‘buy back’ of land cover: • Still no cover if gradual • Still requires physical loss – no DISCOVERY • Liability Insurance • No cover for historical pollution • No cover for gradual pollution • No cover for damage to own property • Expressly excluded under standard liability forms. • Vast majority of pollution incidents will result in clean-up of the company’s own site • No cover for Environmental Liability Directive • No cover for clean-up costs imposed by regulators

11. Traditional Insurance Solutions • Bartoline vs. RSA & Heaths • Background: • Manufacture/packaging of solvents and adhesives • Significant fire at UK site • Fire-fighting foam washed solvents and adhesives into adjacent watercourse • EA responded undertaking emergency remediation works on the river • Invoice issued to Bartoline, plus notice served for onsite works – total cost c. £700k.

12. Traditional Insurance Solutions • The Outcome: • Bartoline claimed under their PL policy written by RSA and placed by Heaths • RSA disputed claim so were sued for breach of contract • The court ruled in favour of RSA - liability to repay expenses incurred by the Environment Agency and liability to pay damages in tort are “quite different animals.” • Appeal was due to be heard in October 2007, but case settled out of court shortly before. Precedent set – S&A pollution, but still not insured

13. Can these risks be insured currently? • Many insurers have attempted to amend public liability policies to include ‘Bartoline’ cover, but: • Still no cover for clean-up of own premises; • Still no cover for gradual pollution; • Still fails to meet liabilities arising under the new Environmental Damage Regulations: • flora and fauna exclusion • clean-up coverage falls well short of Complimentary and Compensatory Remediation requirements • Liability underwriters lack understanding and experience of environmental risks • Uncertainty therefore prevails……

14. ACE Environmental Solutions • Specialist Policies – Key Benefits • Pollution conditions – no dispute between what is S&A or gradual • Based on ‘discovery’ of pollution – no physical loss requirement • Site-based policies or contractor coverage • Third-party ‘tort’ liabilities for S&A and gradual pollution • First-party regulatory clean-up for S&A and gradual pollution • Can include first-party business interruption – loss of profit, loss of rent. • Multi-year policies available • Policies designed to respond to claims under ELD

15. Can these risks be insured currently?

16. General Client Considerations • Existing Property & Casualty pollution coverage is inadequate • Client does not need to handle chemicals or waste to have exposure • Disclosure and Financial Reporting requirements expanding • Contract conditions are starting to address environmental liabilities • Awareness of Financiers • Future regulations are uncertain, but they WILL be more stringent

17. Questions