Insurance Can be a Piece of the Risk Management Puzzle in Contaminated Property Transactions

1. Environmental Professionals of ConnecticutEnvironmental Insurance: What LEPs Need To KnowPamela Elkow, Robinson & Cole LLPMichael P. Long, William Gallagher AssociatesMay 3, 2007

2. Insurance Can be a Piece of the Risk Management Puzzle in Contaminated Property Transactions • Estimate Cleanup Costs And Adjust Price • Also Estimate Tort Liability Costs • Escrow Necessary Funds And Hold Until Cleanup Is Completed • Indemnification For Any Costs Incurred (May Be Limited – Time, Amount, Viability) • Environmental Land Use Restrictions • Covenants Not to Sue • Insurance May Be Used To Supplement Or Replace Other Risk Management Measures

3. What is the Mission? On Site, Known Conditions? Offsite, Third Party Exposure? Change? - New Conditions; Changed Regs; Change in Use • Clean up Costs • Personal Injury • RSR Compliance? Insured Contracts Remediation? Construction? - Cost Cap Insurance - Create Endorsements - Create Endorsement

4. Environmental Insurance Defined • Pollution Legal Liability insurance offers protection against potential liability for site cleanup and third party claims related to pollution conditions. • Cost Cap insurance is used to insure against cost overruns related to site cleanup projects. • In real estate transactions, both Pollution Liability and Cost Cap policies are sometime used on a combined basis.

5. Pollution Liability Basic Coverage • Cleanup – On-site, Off-site • Bodily Injury – On-site, Off-site • Property Damage – On-site, Off-site • Legal Defense Expense • Covers Current and Past Operations

6. Non-owned disposal sites Re-openers Under Regulatory Order Changes In Regulations That Require Additional Remediation Discovery of New Contaminants (Onsite/offsite) Natural Resource Damage Claims Loss of Use or Loss Of Rents Business Interruption Due To Contamination Pollution Liability Coverage

7. The Process • Develop Understanding of the Site • Develop Understanding of Client Goals • Gather all Relevant Documents • Contact Broker • Work Out Confidentiality Arrangements • Work with Broker to Apply and Seek Indications • Analyze Language of Policy

8. Working With Insurance Broker • Can’t get anywhere with out one! • Provide independent, objective insurance advice • Perform risk analysis/program design/placement servicing/claims management • Negotiate with insurance carriers on behalf of clients • A good broker can be a very helpful intermediary

9. Some Key Definitions • Insured/Named Insured • Pollution Conditions • Claim • Pollution Conditions • Environmental Laws

10. Named Insured • All parties with ownership, tenancy, management control, financial interest may be named in a suit regarding pollution releases at a given property. • Named Insured Endorsement. • List all entities that require coverage. • Broaden the definition of insured to include all related entities (present, past and future), those with a financial interest or management control in the property, and those who have the responsibility to provide insurance for the property.

11. Definition of Pollution Conditions • The Definition of Pollution Conditions should be both comprehensive and site specific • Definition of Pollution Conditions Endorsement • Endorsement should include, if necessary: LLRW, Bacterial Matter and acts of terrorism • for example: Pollution Conditions means the discharge, dispersal, release or escape of any solid, liquid, gaseous or thermal irritant or contaminant, including, but not limited to, smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, medical waste, waste materials, and bacterial matter which is released as a result of an act of terrorism, viruses or other bioterrorist agents of any kind…

12. Definition of a Claim • Claim Definition Endorsement • Customize the coverage for local regulations • Endorsement should include remedial obligations under Transfer Act • May also need to amend definition of “Environmental Laws”

13. Disclosed Document Schedule • Potential disputes may arise regarding document disclosure • Disclosed Document Schedule Endorsement • To avoid claim disputes over disclosure, ensure that all documents submitted to the carrier become part of the policy, and carrier agrees that all documents are deemed disclosed

14. Pollution Liability Key Coverage – Insured Contracts • Indemnification Contracts • Insured Contract Schedule Endorsement • Policies typically exclude Contractual Liability, but with an endorsement such exclusion may be removed or modified to cover contracts where insureds are assuming the liabilities of others • The Purchase &Sales agreement should be scheduled if it includes an environmental indemnification

15. Pollution Liability Key Coverage – Material Change in Use • Site redevelopment typically involves changes in use • Material Change in Use Endorsement • Exclusion for material change in use of the property that is different from the “intended” use disclosed in the application process -- therefore insured needs to carefully define the intended use. • Intended use may be residential, commercial, industrial, mixed use etc. Intended use may determine cleanup levels. • If the site is being sold, this endorsement should be removed or a deed restriction established to control future use.

16. Known Pollution Conditions • Known Pollution Conditions Endorsement – Generally, “known conditions” are excluded from cove • Delineate discrete areas of pollution • Endorsement may afford coverage for Bodily Injury and Property Damage, and in rare instances, cleanup of the Known Conditions • It is imperative that the site engineer participate in the negotiation of this endorsement

17. Known Conditions • Re-openers or “Burning off” of exclusions • LEP verifications • DEP audits

18. Issues to Negotiate–Future Concerns • Capital Improvements • Are there any exclusions or policy modifications that restrict site development? • Can you schedule planned improvements? • Institutional Controls • What if breached? By whom? • Natural Resource Damage • Increasing regulatory activity and interest

19. Cost Cap • Cost Cap covers cost overruns for: • New found contamination during execution of RAP • Change orders required by government that are incurred during project execution during the policy term

20. Cost Cap • Cost Cap Basic Structure: • Insured may participate in Cost Overrun

21. Cleanup Cost Cap Key Coverage – Definition of Cleanup • What are the cleanup activities? • Definition of Remedial Plan endorsements • Engineer needs to describe in detail all cleanup activities and associated procurement, mobilization, demobilization , operation and maintenance, transportation and disposal to include in said endorsement • Endorsements may include changes to the remedial plan required by regulators which may include change in remedy

22. Cleanup Cost Cap Key Coverage -Definition of Cleanup Costs • Coverage may be afforded for Voluntary Cleanups • Amend Definition of Cleanup Costs Endorsement • Endorsement defines all the activities that the insurance company will pay in the course of a cleanup to the extent required by Environmental Laws or to satisfy a Voluntary Cleanup. • Add definition of a Voluntary Cleanup Program.

23. Cleanup Cost Cap Key Coverage – Transfer of Coverage • If the insured is unable to complete the cleanup or sells the property coverage may be transferred to new entity • Policy Assignment Endorsement • Endorsement insures that the policy stays in force and new entities receive full benefit of any funds expended by previous insured

24. Benefits of Environmental Insurance • Due Diligence exercise and protection against Catastrophic events • Helps to Manage Risk Associated With Cost of Cleanup and Potential Tort Liability • Removes uncertainty associated with Environmental Liability • Worldwide Coverage

25. Pollution Insurance Carriers • Carriers ACE, AIG, Chubb, Zurich, XL • $50 million capacity per site • 10 year terms • Only ACE, AIG, ZURICH and XL offer Cost Cap

26. Pamela Elkow Robinson & Cole LLP pelkow@rc.com 203-462-7548 Michael Long William Gallagher Associates mlong@wgains.com 617-204-6710