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Environmental Insurance

Environmental Insurance. A Tool for Successful Redevelopment Thomas J. Barry Senior Vice President Massachusetts Business Development Corporation. Contaminated Property Transactions. We’ve got issues! Toxic Torts Loan Defaults

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Environmental Insurance

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  1. EnvironmentalInsurance A Tool for Successful Redevelopment Thomas J. Barry Senior Vice President Massachusetts Business Development Corporation

  2. Contaminated Property Transactions We’ve got issues! Toxic Torts Loan Defaults Legacy Liabilities Regulatory Re-Openers Property Devaluation Cleanup Cost Overruns Unproductive Assets Disposal Site Risk Downtime Remedy Failure Value Proposition

  3. Contaminated Property Transactions The Good News... Existing Infrastructure Permitting/Zoning Cost Advantages “Location-Location-Location” Limited “Green Space”

  4. Platform for Consensus Divergent Views Common Goals Communities Regulators Lenders Environmental Insurance Buyers Developers Sellers

  5. Risk Mitigation Tools • Contractual Tools • Reps. & Warranties • Indemnification's • Financial Guarantees • Liability “Buyouts” • Performance Guarantees

  6. More Risk Mitigation Tools • Regulatory Tools • Comfort Letters • Prospective Purchaser Agmts. • Covenants • Regulatory Sign-off’s (NFA’s) • MOA’s • Statutory protections

  7. Still More Tools... • Financial Tools: • Escrow Arrangements • Holdbacks • L/C’s • Trust Funds • Guar.Fixed-Price Contracts • Environmental Insurance

  8. Environmental Insurance Working Definition: A vehicle for transferring the financial responsibility for certain risks or costs that may be present in contaminated property transactions.

  9. Environmental Insurance Brief History: • Available for past 25 years • Extensively used for the past 5 to 10 years • Grew out of need caused by: • federal “Superfund” legislation and various state environmental statutes. • Exclusion of environmental risk from CGL & Title Insurance policies. • Increasing awareness of environmental impacts.

  10. Who are the Players? • Have come and Gone • Five majors now provide 85% to 90% • AIG • ACE • XL • Chubb • Zurich • All over $30 Billion in Assets • All rated “A” or better

  11. Environmental Insurance Benefits of Environmental Insurance: • Financial Certainty • Broad Range of Protections • Eliminates “Guesswork” • Predictable Cost • Can Protect Multiple Parties • Extensive Capacity to Cover Risk • Environmental Peer Review • Flexibility

  12. Environmental Insurance A few Disadvantages: • Doesn’t transfer ultimate responsibility for environmental issues. (Sarbanes-Oxley) • Can be difficult to obtain • Cost

  13. Environmental Insurance Disadvantages of Environmental Insurance: $$$ COST $$$ Negotiation - Deductible - Retentions Premium

  14. Limits Purchased Underwriting Cost Remedies/Science Quality of Site Characterization Regulatory Oversight Future Use Financial Strength of Insured # Parties Policy Term Property History Special Coverage’s Environmental Conditions What impacts the Price?

  15. What’s Out There? • About 20 separate insurance products • Pollution Liability/Real Estate Liability • Contractor Liability • UST • Cost Cap/Stop Loss • Blended Finite Risk • Remediation Warranty/Remedy Assurance • Secured Creditor • Transportation • Spill/Release policies

  16. The “Big Ones” • Pollution Legal Liability • Cleanup Cost Cap/Blended Finite Risk Applicable to 90% of Contaminated Property Transactions

  17. Primary Coverage’s • Pollution Legal Liability • Third Party Claims for Bodily Injury, Prop. Damage, Cleanup, both On-Site & Off-Site • Natural Resource Damages • Diminution of Value • Business Interruption/Loss of Use or Income • Regulatory Re-Openers • Transportation • Non-Owned Disposal Sites • Legal Defense/Expense • New Environmental Conditions

  18. Pollution Legal Liability • Benefits • Flexibility (Highly “Manuscripted”) • Transfers Env. Risk to Insurer • Financially Backstops Other Tools • Facilitates Loan and Investment Capital • Assures Financial Performance

  19. Primary Coverage’s • Cleanup Cost Cap (Stop Loss) • Cost Overruns on planned cleanup • Additional cleanup due to change in regulations • Discovery of new contaminants or more Contamination, within a RAP area • Transport & Non-owned Disposal Sites • SIR applies (usually a function of cleanup estimate) • Co-Insurance may be required • Only for cleanups of $1MM and up

  20. Cleanup Cost Cap • Benefits • Adds Certainty/Finality to Cost • Deals with Unexpected related issues • Facilitates Loan & Investment Capital

  21. What Environmental Insurance Can’t Do... • Transfer Risk in Absence of Data • Cover Risk in Perpetuity • Directly Eliminate Balance Sheet Liabilities • Pay claims related to Known Conditions (“burning building”) • Change Real Estate Market Realities • Pay Costs Resulting from Voluntary Change in Use

  22. What Environmental Insurance Can Do... • Transfer Financial Risk • Respond to Regulatory Changes • Provide Financial Assurance (Regulatory) • Provide Broad Range of Protections • Provide Extensive Levels of Protection • Protect Multiple Parties to a Transaction • Provide a “Second Look” at Environmental Issues by a party with financial interest

  23. Placing an Environmental Policy • A Few Tips for Users • Allow sufficient time • Assemble competent “team” (Broker, Counsel, LEP) • Identify & Quantify issues/risks • Practice full disclosure • Elaborate on the “Deal” • Keep Copies of everything

  24. Some Points to Remember • Aggregate Limits/Multiple Insureds • Single Limit/Self-Depleting Policies • “Claims Made & Reported” Policies • Choice of Law • Language consistent with state statutes

  25. Commonwealth of MassachusettsBrownfields Redevelopment Access to Capital Program(Mass.) BRAC Thomas J. Barry, SVP, Director Massachusetts Business Development Corporation 500 Edgewater Drive 781-928-1106 Wakefield, MA 01880 www.mass-business.com

  26. (Mass.) BRAC Program Program Purpose... to mitigate environmental risks and unexpected costs associated with the cleanup and/or redevelopment of Brownfield sites in Massachusetts, in order to facilitate the access to private sources of loan and investment capital to fund such projects.

  27. Accomplishing the objective Make state- subsidized environmental insurance available to: • Parties who undertake Brownfield cleanup redevelopment projects, and to • Lenders who finance any aspect of such projects.

  28. Program Benefits • State Subsidized 50%* of standard premium for qualifying policies/projects reimbursed by BRAC. * Maximum $50,000 for privately sponsored projects; $150,000 for publicly or quasi-public sponsored projects.

  29. Does my site qualify? Program Requirements • site must be considered a “Brownfield” • must be some form of “financing” associated with some aspect of the Project

  30. XL Environmental CHUBB ACE USA AIGEnvironmental Program Carriers

  31. (Mass.) BRAC Program Results (Inception through 12/31/06) Total Projects 290 Total Insurance Provided $1.06 billion Total Premiums $13.8 million Subsidies Paid $5.5 million Environmental Cleanups $165 million Development Expenditures $3.15 billion Permanent Jobs Created 22,131 Permanent Jobs Retained 9,362 Housing Units 2,500+* * since 2004

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