Presented by: Kate Dodge, Aon Reed Stenhouse Inc. Environmental Liability Management – A Changing...

Presented by:

Kate Dodge, Aon Reed Stenhouse Inc.

Environmental Liability Management – A Changing LandscapeOctober 1, 2008

Presentation Title

Environmental Insurance 101

AGENDA

• Driving Forces for Better Environmental Liability Management Practices

• Pollution Coverage in the P&C Marketplace

• Environmental Specialty Marketplace

• Dedicated Environmental & “Green” Products

Driving Forces for Better Environmental Liability Management Practices

Presentation Title 4


Driving Forces for Better Environmental Liability Management Practices

• Perspectives to consider:– External pressures– Internal balance sheet protection



External Pressures

• Legal System;– “Polluter pays” principal – polluters should bear the cost of cleaning up the effects of

pollution from their operations rather than the public taxpayer.• BC, Alberta, Ontario and Quebec have adopted the polluter pays principal as a central

policy underpinning their environmental protection regimes.• Lynnview Ridge, Calgary AB (Imperial Oil Refinery)• SCC: Imperial Oil Ltd v. Quebec• Province of Ontario vs Quinte-Eco Consultants Inc. & Ronald Carter

• Regulations;– Federal/Provincial/Local– Bill 133– US vs Canadian jurisdiction and application

• Tech Cominco– Use of Risk Assessments vs Generic Clean-up

• Regulatory Re-openers



Environmental Side Bar – Canadian Environmental Regulations

• Ontario – Bill 133 (June 2005/August 2007) – Amends the EPA and OWRA – “You Spill You Pay”– Introduces:

• Environmental penalties which differs from fines in that liability without fault or without trial can be imposed (“regulated persons”)

• Broader due diligence and reverse onus for Directors and Officers• Municipalities and the province can recover costs associated with clean-up efforts

without court action• New requirements for pollution prevention plans• Higher fines and longer jail sentences• “Pollution” and “Impairment” more broadly defined and consequently easier to prove



External Pressures

• Financial Reporting Requirements;

– Significant change in how firms must disclose their environmental liabilities• FIN 47 (US – 2005)

– Accounting for future asset retirement costs in the present• Recent OSC audit results (Feb 29-08, “OSC Staff Notice 51-716”; Environmental

Reporting)– Reference to Ontario Staff Audit by BCSC– What is “Material”?– Defining Risk Exposure Estimates (residuals and regulatory re-openers)– Do environmental matters/liabilities include climate change impacts?

• Climate Change– Xcel Energy – setting a precdent?



External Pressures

• Greater Accountability for Directors & Officers– Financial Disclosures (SOX)

• Improve the accuracy and reliability of corporate disclosures made pursuant to federal securities law

• Increases accountability of senior executives for the accuracy and completeness of reported financial information

– Operational & Compliance• Bill 133 (Ontario EPA/OWRA)

– Broader Due Diligence Requirements– Notion of Reverse Onus– Higher Fines & Longer Jail Sentences



External Pressures

• Sustainability– Being sustainable increases financial performance

• Reputation & Brand Strength • Cost of Capital and Borrowing Opportunities

– Investors are becoming more selective in where they put their money– Lenders, like insurers, are considering sustainability good proxy to overall management

• Increased Productivity thru maximizing efficiency– Reducing waste streams - lower disposal costs; – Reducing energy consumption

• Supply Chain Costs (Business to Consumer or Business to Business)– Consumers are becoming more selective and green in their buying– Businesses are looking to partner with other “sustainable” companies

• Air Canada’s Carbon Off-set Program

• Legal Liability (reduce exposure to environmental impacts/unfair employment practices)

• Regulatory Compliance



Internal Balance Sheet Management

• Third Party liabilities– Off-site Clean-up– Bodily Injury– Property Damage (including loss of use, Diminution in Value, NRD)– Legal Defense Expense

• First Party liabilities– On-site Clean-up– Business interruption/Extra Expense/Rental Income– Diminution in Value– Associated Legal Costs– Asset Retirement Obligations

• Managing “old” and newly reported liabilities on the books

• Mergers & Acquisitions

• Lender Concerns – Securing Financing on questionable sites or operations

• Securitizing Contractual Obligations– Purchase & Sale Agreements/Indemnities– Service Agreements (waste haulers/disposal)– Lease Agreements

• Punitive, Multiplied and Exemplary Damages/Civil Fines, Penalties, Assessments

Environmental Risk Management Options



Risk Management Options

• Self Insurance;

• Avoidance;

• Risk Control/Engineering;

• Contractual transfer:– Most commonly used environmental risk management tool– Questions to ask:

• Is there a credit risk?• Will the liabilities come back?

• Risk Transfer (Insurance based solutions)

Pollution Coverage in the Property & Casualty Marketplace



Pollution Coverage in the P&C Marketplace

• Limited coverage provided under the following “standard” lines of coverage:– General Liability– Automobile– Umbrella/Excess– Property– Boiler & Machinery– Marine– Directors & Officers

Environmental Specialty Marketplace



Environmental Specialty Marketplace

• $1.5B + Premium Industry

• The Markets:– AIG – Zurich – Chubb – ENCON– Elliott Special Risks– XL – ACE– Liberty

• Competitive marketplace

• Flexibility of coverage design/tailored programs

• Multi-Year Programs

• Streamlined underwriting process



Dedicated Environmental Insurance Products

• Fixed Site “Pollution Liability”

• Remediation Stop Loss/Clean-up Costs Cap

• Lender Liability

Dedicated Environmental Products

POLLUTION LIABILITY



Pollution Liability

• Also known as:– Pollution Legal Liability (AIG/Liberty)– Environmental Impairment Liability (Zurich/ESR)– Environmental Site Liability (Chubb)– Premises Pollution Liability (ACE)– Pollution and Remediation Legal Liability (XL)

• It is a site-specific policy that allows the Insured to design a program suitable for the transferring the environmental risks of a single property or portfolio of properties;

• Can add multiple parties as “Insureds” – Directors & Officers, Employees, Lenders, Tenants, municipalities, province etc.

• It is a claims-made form;

• Covers pollution conditions on, at, under or migrating from a covered location (regardless if source is off-site);

• Insuring agreements are set out in “menu” format for easy customization…but each market sets up insuring agreements differently;

• Defense expense is within the limits



Pollution Liability

• Terminology: New Conditions, Pre-existing Conditions & Known Conditions– New Conditions commence after the inception date– Pre-existing Conditions commence prior to the inception date but are not discovered until

after inception– Known Conditions are identified and disclosed by the Insured prior to inception

Timeline of Coverage

Continuity Date New conditionscommenced on or after

the continuity/delineation

or inception date

Pre-existing conditionscommenced prior to

the continuity/delineation

or inception date



Pollution Liability – Clean-up Costs

• Clean-up Costs/Remediation Expense for both On-site and Off-site Pollution Conditions;– Coverage is triggered by:

• 1. Insured’s Discovery; • 2. Government Mandate; or • 3. Third Party claim;

• Includes investigation, removal, remediation and monitoring, disposal costs to the extent required by environmental law (or that have been incurred by the government/Third Parties);

• Includes “Replacement Costs” (damage to Insured’s property sustained during the course of remediation);



Pollution Liability – Bodily Injury & Property Damage

• Policies cover Third Party claims for Bodily Injury and Property Damage arising from conditions on, at, under or migrating from an Insured Site;

• Bodily Injury includes:– Physical injury, sickness, mental anguish, emotional distress, shock, building related

illness, death• Property Damage includes:

– Natural Resource Damages (injury/destruction and loss of value of land, fish, wildlife, biota, air, water, groundwater, water supplies and other resources owned/controlled by the government or any Indian band);

– Loss of use (whether the property has been physically impaired or not);– Diminution in Value



Pollution Liability – Defense Expense

• Defense expense is within the limits and erodes the policy aggregate (with the exception of Quebec – civil code);

• Some forms extend to insure the Insured’s associated legal expense – others only provide defense expense in support of a Third Party claim;

• In the event of uninsured claims, defense is provided until such time that the claim is demonstrated by the insurer to be excluded. At that point reimbursement by the insured to the Insurer for any payments advanced is required.



Pollution Liability – Coverage Extensions

• First Party Diminution in Value;

• (Transported Cargo (Third Party/First Party);

• Non-Owned Disposal Sites;

• Punitive/Multiplied Damages & Civil Fines/Assessments/Penalties;

• Terrorism;

• Mould;

• Asbestos & Lead Based Paint;

• First Party Business Interruption, Extra Expense and Rental Value;



Pollution Liability – Known Conditions

• All conditions known to a “Responsible Insured” must be disclosed to the insurer;

• Different approach to carving out Known Condition Exclusions taken by insurers;

• Depending on how well the condition is delineated/characterized, many insurers will provide coverage for Third Party claims of BI/PD arising out of these identified conditions;

• Clean-up costs for conditions above standards are obviously excluded EXCEPT if a condition is being managed through a Risk Assessment – can sometimes get the policy to “wrap around” the remedy and insure against any government required changes.



Pollution Liability - Exclusions

• Employer’s Liability

• Prior Knowledge/Non-Disclosure

• Contractual Liability (unless the contract has been reviewed by Insurer)

• Insured vs Insured

• Known Underground Storage Tanks & Piping (unless scheduled)

• Punitive Damages and Fines/Penalties*

• Intentional & Illegal Acts (committed by a partner, director, officer)

• Asbestos & Lead*

• Transportation beyond the site boundaries*

• War/Terrorism*

*except to the extent broader coverage is purchased.


REMEDIATION COST CAP



Remediation Cost Cap Program

• Also known as Clean-Up Cost Cap and Remediation Stop Loss

• Covers First Party cost overruns associated with the remediation of a known condition (no Third Party liability coverage);

• Min. thresholds of $1MM (usually north of $2MM to $5MM is targeted)

• AIG, XL, Zurich and ACE

• Basic Structure– Coverage attaches above the expected cleanup cost (estimated in a Remedial Action

Plan)– Premium discounts may be available if the insured elects to have the coverage attach

excess of a “buffer: layer– Additional premium discounts are available if the insured shares in the cost overruns (co-

insurance)



Remediation Cost Cap Program – Simplified Program Structure

ExpectedCleanup Costs

CostOverrun

CoverageC

oin

sura

nce

Self-insured

Retention

Limit of Liability

Buffer (anywhere from 10 to 25% of Estimated Original Clean-up)

NOTE: Pricing range for

Remediation Cost Cap

programs are between 6 to 12% of the Estimated

Original Clean-up Costs


LENDER LIABILITY



Lender Liability

• Protects the lender for loss arising from a default on a commercial real estate loan accompanied by the discovery of a pollution condition (contamination does not have to be the default trigger – any technical default satisfies the policy);

• Also Known as:– Secured Creditor Liability– Collateral Impairment Liability

• Pays the lesser of the clean-up costs OR outstanding loan balance

• Also protects the lender from Third Party Liability associated with Bodily Injury/Property Damage claims and associated defense expense;

• Borrower can not be added to this policy – intent is to insure the contingent liability of the lender only;

• Only two markets (XL/Zurich) are actively underwriting this product;

• Limited appetite for sites that are known to be contaminated at the time of policy inception;

• Best applied for single sites only (as opposed to portfolio programs).



Innovative “Green” Insurance Solutions & Initiatives

• Products and services specifically designed to insure the manufacture, assembly, construction and or operation of wind, solar, geo-thermal, bio-fuel, hydro, waste to energy and alternative energy sources;

• Discounts linked to Quantification of Environmental Benefits:– Pollution Liability Premium Credits for LEEDS properties;– Discounts for Low Emitting vehicles

• “Upgrade to Green” Property Insurance Products to bring Damaged or Destroyed Property up to a “Green certified” standard

– Responds to partial or total losses to allow insureds to upgrade building to the next level of LEED standard, or a silver LEED standard for buildings which are non LEED

– Coverage focuses on energy efficiency, water efficiency, indoor air quality and sustainability.– In Canada, buildings account for 33% of all energy consumption and about 30% of GhG emissions.

Currently only about 4-5% of new construction in North America meets any kind of Green standard.5

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Presented by: Kate Dodge, Aon Reed Stenhouse Inc. Environmental Liability Management – A Changing...

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