The role of the Lenders’ Insurance Advisor Barry Williams INDECS Consulting Limited

1. The role of the Lenders’ Insurance Advisor Barry Williams INDECS Consulting Limited 24th September 2010

2. The role of the Lenders Insurance Advisor How the Insurance Advisor fits in Purpose of Insurance Tasks of Insurance Advisor Typical Project Insurances Lender Protections Documentation Process Current Hot Topics

3. “Lender Side” Advisory Roles Lenders’ Legal Advisor(s) Lenders’ Technical Advisor Lenders’ Environmental / Social Impact Advisor Lenders’ Financial/Modelling Advisor Lenders’ Insurance Advisor Channels of Communication: Own Team “Opposite Number”

4. Purpose of Insurance To provide: • a degree of certainty of the future at a known cost • indemnity for accidental unintended loss or damage Insurance does not provide a blank cheque – coverage is always subject to conditions and exceptions. In addition some risks are simply uninsurable. Insurance Due Diligence Where there is limited (or no) recourse to sponsor companies, desirable for lenders to transfer risk of loss of project assets or revenues to another party (i.e. an insurer) to the extent possible – reduces the risk of defaulting on loan Greater the recourse, lesser the onus on insurance.

5. Role of Insurance Advisor – Pre-Financial Close • Advise on key risk issues, including contractual and environmental • Advise on appropriate insurance provisions in project agreements: • EPC Contracts • Supply Agreements • Offtake Agreements • Host Government Agreements • Land Leases • Operations & Maintenance Agreements • Prepare / negotiate insurance provisions in finance documents • Assist in syndication / credit committee approval processes INDECS Approach • Align the position of Lenders and Borrowers to the extent possible • Establish good working relationship with Borrower’s insurance brokers • Work closely with Lenders’ technical and legal advisors • Sometimes involved in the bid process

6. Role of Insurance Advisor – Post-Financial Close • Perform due diligence review of achievement of requirements of: • finance documents • other project agreements • local legislation • Report to Lenders in satisfaction of Conditions Precedent to Drawdown • Monitor insurance market and prevailing risk issues • If necessary, monitor claims • Review risk issues associated with changes in ownership, refinancing, etc.

7. Typical Project Insurances OPERATING PHASE Property Damage / Machinery Breakdown Business Interruption (loss of revenue) Legal liability to third parties Terrorism (assets and revenue) Insurances required by legislation CONSTRUCTION PHASE “Construction All Risks” Delay in Start Up Legal liability to third parties Terrorism (assets and revenue) Marine Cargo (assets and revenue) Insurances required by legislation • Uninsured / Uninsurable risks typically include • - Risks which are beyond the resources of commercial insurers (e.g. war, nuclear / radioactive contamination) • Risks which are not deemed ‘accidental’ (e.g. damage resulting from normal wear and tear, deliberate act of the insured) • Risks which are covered by more specialist policies, if purchased (e.g. terrorism) • Risks which have a potential upside (speculative risks)

8. Lender Requirements Breadth of Cover Financial Strength of Carriers Specific Lender Protections

9. Breadth of Cover Scope of Cover Policy Limits Deductibles Period Sublimits Terrorism Coverage EML vs. Full Value Design Coverage

10. Carrier Financial Strength Local Legislative Requirements Sometimes unrated local cover is obligatory: • Back-to-back reinsurance with rated reinsurers • Reinsurance Assignment (vs Cut Through)

11. Specific Lender Protections Named insured status Assignment of policies Non-vitiation Waiver of subrogation rights Loss payee provisions (not Liability policies) Letters of Undertaking Specific to Liability policies: Cross liabilities Worldwide jurisdiction

12. Documentation Process • “Contract Certainty” defined by AIRMIC as; “…the situation where the terms of an insurance or reinsurance contract are agreed before the inception date of the contract rather than being negotiated otherwise” • Furthermore, AIRMIC sets the following targets: “ (i) The full wording must be agreed before any insurer formally commits to the contract. (ii) An appropriate evidence of cover is to be issued within 30 days of inception. The full wording of the submission to insurers will be a combination of: (i) wordings and/or clauses; (ii) either referenced and/or full text; (iii) bespoke and/or model material.” REALITY – IMPROVEMENT BUT FAR FROM IDEAL

13. Documentation Process • Insurance / Reinsurance Slips • Insurance / Reinsurance Cover Notes • Policy Wordings Other insurance related documentation • Broker Letter(s) of Undertaking • Assignment of Insurance • Assignment of Reinsurance • Underwriting Information • Endorsements

14. Questions

15. Current Hot Topics • Developing Insurance Industries • Less dispensation from requirement for local insurance • Reliance on Reinsurance rather than Insurance • Obligatory local retentions • No Two Deals are the Same • Pressure for “Standard” requirement • Context of the balance of the deal between Borrower and Lender • Desirability of Risk affects balance between Insurer and Project • Market Capacity • Internal Legal Scrutiny • Contractor-Arranged Insurance • Appeal is reduction in EPC Price • Lender Clauses difficult / impossible to obtain

16. Current Hot Topics • Terrorism • Tight Project Budgets • Whether a “Prudent Operator” is a fair comparator • Capacity vs. Perceived Threat vs. Cost • Broader form policies which include more cover for marginally more premium • Acceptable Security • Downgrade of insurance markets – “A-” now the benchmark requirement • Acceptance that local retention often inevitable • Acknowledgement that local retention sometimes desirable • Use of Captives • Contingent Business Interruption • Sublimited • Limitation on perils

17. Current Hot Topics • Role of the Broker • Limitation of Liability to Lenders • Greater reliance on Insurance Advisor • Implications of Global Economic Environment • Period of inactivity • Deals driven by Supply and Demand • Lenders’ Market – borderline clauses less readily available • Drafting Styles • List of Requirements vs List of Policies • “Precedent Deals” • Prescriptive Policy Provisions • Pre-set deductible requirements • Reinsurance Assignment Drafting

18. Questions