Environmental Impairment Liability Insurance Emerging Trends and Coverage Issues

1. September 26, 2006 Environmental Impairment Liability InsuranceEmerging Trends and Coverage Issues J. Kevin Shane, ARM, CPCU, CSP Denver

2. Overview • Using Environmental Insurance to Solve Business Problems • Environmental Market and Product Update • Coverage Trends & Emerging Trends • Do Pollution Policies Pay Claims

3. Using Environmental Insurance to Solve Business Problems: Creative Solutions

4. 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?”

5. 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?”

6. 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

7. 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…

8. Market and Product Update:Insurers and Coverage Types

9. ACE Environmental AIG Environmental Arch Chubb Environmental Solutions Liberty XL Environmental Zurich Environmental Several smaller players Environmental Insurance Market is Thriving: $2.1B Industry Premiums • 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

10. 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?

11. 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

12. Pollution Legal LiabilityCovers “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

13. Insured Site #1 Insured Site #2 Insured Site #3 Pollution Legal Liability:Covers Scheduled Locations Insured owns and/or operates from each of the fixed sites which are scheduled locations

14. Project Site #1 Project Site #2 Project Site #3 New Project #4 New Project #5 Contractors Pollution Liability:Covers Project Sites Insured Contractor performs work at each of the project sites, which are typically covered on a “blanket” basis

15. Remediation Stop Loss:Covers Scheduled Projects • 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

16. 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

17. Known/Uninsurable Condition Known/Insurable Condition Future Condition Unknown/Current Condition Treating Environmental Exposures/Losses Pollution Legal Liability Remediation Stop Loss 2) Cap remediation expenses actually incurred Onsite Offsite Limit of Liability / Risk Transfer Layer Deductible or “Buffer” 3) Accelerate funding of known remediation expenses 1) Transfer historical & future environmental exposures Known Remediation Costs Insured Property

18. New Condition? Preexisting Condition? Covered by Pollution Legal Liability Policy (Cannot be excluded as it does not yet exist.) Unknown Condition? Known Condition? Unlikely to Cause Loss: Covered by Pollution Legal Liability Policy Covered by Pollution Legal Liability Policy (What is not known to exist cannot be excluded) Has Caused / Likely to Cause Loss: Cannot be covered by Pollution Legal Liability Policy Insurability of “Known” Conditions

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

20. Summary of Recent Placements

21. Coverage Trends & Emerging Issues

22. 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

23. 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

24. 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

25. Do Pollution Policies Pay Claims?... And Words to the Wise

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. Preventing Claim Disputes

34. 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?

35. Preventing Claims DisputesWords to the Wise & Other Good Things to Know • 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

36. Preventing Claims DisputesWords to the Wise & Other Good Things to Know • 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

37. 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

38. 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