environmental liability management & risk transfer solutions january 31, 2010

Presented by:

Kate Dodge, Aon Reed Stenhouse Inc.

Environmental Liability Management & Risk Transfer

Solutions

January 31, 2010

Presentation Title

Environmental Insurance 101

AGENDA

• External drivers fueling the need to re-evaluate proper Environmental Risk Management in Canada

• Environmental Exposures specific to Municipalities• Claims examples• Risk Management Options• Appropriate Contract Management• Insurance Based Risk Transfer Solutions

Driving Forces Effecting Environmental Liability Management

Presentation Title 4


Driving Forces Effecting Environmental Liability Management

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



External Pressures – Regulatory & Legal Framework

• Canada’s federal and provincial regulatory systems have adopted statutes designed to promote environmental responsibility and stewardship.

• In order to accomplish these goals, all provinces and territories have implemented environmental regulations that establish the rights, responsibilities, and liabilities of any property owner of a contaminated site or “generator” of a spill, including both private entities and municipalities– Exemptions in some provinces for land acquired through tax arrears– In the past residents/businesses were reluctant to bring suits against municipalities

(sovereign immunity, bad publicity, perceived lack of community loyalty)• This responsibility extends to individuals, including elected officials in

some cases.



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)• Province of Ontario vs Quinte-Eco Consultants Inc. & Ronald Carter

• Regulations;– Federal/Provincial/Local– Ministry of the Environment/Ministry of Labour– US vs Canadian jurisdiction and application– Native Assemblies



External Pressures- Provincial Regulations

Recent Changes in Ontario:

Bill 133 (June 2005/Aug 2007) Amends the EPA and OWRA – “You Spill You Pay”

•Environmental penalties which differ from fines in that liability without fault or trial can be imposed•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

Reg 511/09 (December 29, 2009)Amends Brownfield Regulation 153/04

•Revised Soil, Groundwater and Sediment Standards•Revised Environmental Site Assessment Requirements•Changes to the Record of Site Condition Process•Streamlined Risk Assessment•Transition Rules



External Pressures- Provincial Regulations

• Saskatchewan Regulations– Current regime developed in the 1970s to address “traditional” industrial pollution– November 30, 2009 significant boost to environmental protection while also encouraging

responsible economic development• New proposed act: Environmental Management & Protection Act, 2009• Amendments to: The Environmental Assessment Act & The Forest Resources

Management Act• “Results-Based” Regulations

– Move away from controlling activities by permit and regulate through a Saskatchewan Environmental Code

– Contaminated Sites: New process that requires the identification and assessment of impacted sites and encourages voluntary clean-up

– Create a publicly accessible registry of contaminated sites (location/condition)– Require municipalities restrict activities on impacted sites if required for public/environmental good– Strengthen compliance and enforcement tools (modifying penalty provisions - $1MM/day)– Impacted Sites Fund (Lieutenant Governor in Council)– Provide clearer standards and objectives– Qualified Persons with Ministerial oversight



External Pressures

• Financial Reporting Requirements (FIN 47);– Significant change in how firms must disclose their environmental liabilities

• FIN 47 (US – 2005)• Recent OSC audit results (Feb 29-08, “OSC Staff Notice 51-716”; Environmental

Reporting)– Reference to Ontario Staff Audit by BCSC– What is “Material”?– Do environmental matters/liabilities include climate change impacts?



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

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



Internal Considerations

• 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/Soft Costs & Delay – Diminution in Value– Associated Legal Costs

• Opportunity Costs• 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

Common Environmental Exposures



Common Environmental Exposures

Municipalities manage a wide spectrum of environmental exposures including risk common to other sectors but certainly not as varied;

We are “re-defining” what is meant by “Environmental Liability”

– Brownfield/Contaminated Site (Legacy Liability) – both known and unknown pre-existing conditions;

• Tax arrears• Economic Development• Changing Regulations• Midnight Dumping• Multiple Responsible Parties

– Infrastructure Stimulus;– “Pass through” contamination;– Natural Disasters;– Tenant Operations;– Fire/Explosion

• Firewater run-off• PVCs (polyvinyl chloride) plastics used in facility construction• Toxic clouds (evacuation)• Tank ruptures/explosions• Mould



Common Environmental Exposures – Own Operations

– Poor UST/AST inventory/maintenance• Uncontained• No leak detection/monitoring/regular testing• Old or unknown assets (Phantom Tanks)• Oil/water separators

– Water & Wastewater• Drinking water quality• Proper Treatment and Discharge/Disposal

– Solid Waste Management• landfilling, recycling, composting

– Site Development/Grading– Off-site migration (poor groundwater monitoring or leachate colllection systems)– Odour/Noise/Dust Control– Misdelivery/Inaccurate Waste Class ID– NODS– Stigma

– Indoor Air Quality (mould, bacteria, ACM, LBP)• Daycares, Residential, Long Term Care, Historical Properties




– Airports• Fuel Management & Liability Streams• Historial Conditions/Responsibility• De-icing/Glycol Management• Storm water Run-off• Noise

– Rail Transit• Operational/Maintenance/Expansion

– Road Maintenance;• Salt application/storage• Paving/repair

– Fleet & Garages;• Fueling services• Maintenance (storage & disposal of oils/solvents/lubricants)• Washing Facilities

– Fire Fighting Facilities & Operations– Cemeteries– Obsolete Equipment Yards




– Power Gens/Co-Gens• Asbestos & PCB containing equipment• Impact of thermal pollution (warm cooling water) on local surface waters, and aquatic and

marine life in the receiving stream, river or lake• Impacts on local ambient air quality from odors, NOx, SOx, and particulates due to the

combustion of coal and cooling tower emissions• Storm water runoff from coal storage areas and piles of fly ash, bottom ash, slag, heavy

metals/compounds etc

– Oil & Gas Production• Climate Change risks and emerging regulatory responses• Release from major upset conditions or explosions• Failure to detect and repair leaks from piping, values, pumps etc• Air pollution equipment that is not properly operated, maintained, tested and monitored

– Pools, Arenas and Recreational Facilities• Chemical containment and spill risk: ammonia, chlorine and other chemicals• Use of pesticides at outdoor recreational facilities• Ice Maintenance



Common Environmental Exposures – Contractor Related

• Scope of Contracting Operations giving rise to environmental risks– General Building– Excavation/Concrete– Demolition– Flood & Fire Restoration– Asbestos/LBP/Mould Abatement– Mechanical (HVAC), Electrical, Refrigeration– Street/Road and Heavy Highway – Environmental/Remediation – Geotechnical– Dredging– Utility



Common Environmental Exposures – Contractor Related

• Release of oils/fuels/chemicals from on-site storage tanks or other usage (weather related, vandalism, rupture);

• Impacting existing or underground infrastructure (utility & sewer lines);

• Discovery and/or disruption of pre-existing conditions (site prep work/excavation/demo);

• Completed Operations (i.e. mould);• Uncontrolled surface water discharge releasing sediments and

contaminants onto adjacent properties/waterways;• Third Party Transported Cargo/Waste Contractors;• Non Owned Disposal Sites;• Air emissions (fumes, dust).



Public Sector Claims…..

• Wetland Impact – A street/road contractor was lifting barriers when a crane overturned and spilled hydraulic

oil into the adjacent wetlands. Oily water and coated waterfowl. $650,000 in response costs and wetlands restoration;

– A third party is suing several municipalities for discharging their sewage lagoon into a nearby lake, thus polluting the third parties land and causing them emotional stress and anxiety.

• Dispersal of fungus through hospital HVAC– Mechanical contractor removed ductwork that was later discovered to be contaminated– Dismantling activities and on-site storage of ductwork caused the fungus to spread

through the HVAC system infecting numerous patients– Contractor found liable for BI & PD (claim in excess of $1MM)




• Contractor At Fault– In July 2007, a BC municipality hired a road contractor to perform routine maintenance.

During the course of performing the road repair, the contractor ruptured a pipeline, resulting in a crude oil geyser discharging product into the nearby Burrard Inlet and surrounding residential community for 30 to 60 minutes before being capped;

– A street and road contractor was preparing to lay asphalt down on a newly built Hospital parking lot. As they graded the site the contractor unknowingly ruptured the underground fuel line running into the hospital furnace. As the leak went unnoticed for a couple of days, product was allowed to build up under the foundation. The paving contractor is placing blame on the mechanical contractor for installing the pipeline too close to the surface. On the flip side, the mechanical contractor is arguing that the underlying geology of the site didn't allow for the pipeline to be entrenched any lower and the paving contractor should have taken better read of information and maps provided at the onset of the project. Depending on whether a full clean-up or risk assessment is allowed by regulators, clean-up costs range from $5MM to $23MM.




• Pass Through Contamination– An Ontario-based drycleaner was in operation for a number of years before it was

discovered in 2004 that improper disposal practices of chemicals had severely contaminated their site. The plume had impacted groundwater and migrated off-site to adjacent properties, including municipal land and roadways. The drycleaner has not remediated any of the city-owned property to date.

• Brownfield – Tax Arrears– Under the Tax Recovery Act, a municipality claimed a gas station and sold it several

years later. Underground pollution was discovered and the new owner is suing all previous owners. (Note: the original owner is bankrupt);

– A municipality purchased property to be used for a maintenance yard. The previous owner of the property was unknown. In 1990, the municipality sold the property to an outside party. The new owner discovered that the property contained an underground tank that leaked, and the new owner sued all previous owners for the clean up costs.




• Municipal Permitting– A municipality issued an occupancy permit for a recycling facility; however, the municipal

officials were unaware that the operations included illegal storage of oil industry waste in unsafe underground containers. The business went bankrupt and the mortgage company sued the municipality for not ensuring the facility was utilized as intended.



Liability Streams

• Who has liability for pollution conditions at a fixed location?– Property Owner (Corporation and Individuals)– Property Manager– Tenants– General Contractor/Project Manager– Sub contractors– Lenders



Risk Management Options

• Self Insurance;• Avoidance;• Risk Control/Engineering;• Contractual transfer:

– Most commonly used environmental risk management tool• Risk Transfer (Insurance based solutions)



Contract Management

• Unprecedented shift in contractual liability being placed on others in Canada – especially in the public sector– Opportunity for the City to transfer risk– Possibility for City to assume unintended risk

• Types of Contracts with Environmental Clauses:– Purchase and Sale Agreement (acquisitions/divestitures);

• Gifting or for other consideration– Lease Agreements;– Right-of-Way/Access Agreements;– Service Vendors.



Contract Pitfalls

• Renewing contracts without re-evaluation• Lack of central verification process & consistency in language• Indemnification & Hold Harmless Provisions

– New Conditions (arising from Covered Ops or otherwise) & Pre-existing (Known or Unknown)

– Direct & Indirect Damage• Definition of Hazardous substances

– Inconsistent with regulatory definitions– May not encompass “non hazardous” such as storm water, sediment etc.

• Site conditions – Establishing Baselines– Appropriate Due diligence

• Insurance Provisions– Not consistent with indemnity obligations– Gaps in standard GCL/Wrap-Up– Certificates Obtained & Qualifying extent of Pollution Liability coverage evidenced

Insurance Based Solutions



Pollution Coverage in the P&C Marketplace

• Historical Perspective:– Pre 1966: No pollution specific exclusions– Late 1960s: Accident to occurrence (CGL)– 1970s: Absolute Pollution Exclusion (CGL)– Mid 1970s: Sudden & Accidental– Mid 1980s: Hostile Fire– Early 1990s: Limited First Party Clean-up (Property)– Mid 1990s to present: Development of dedicated environmental products



Insurance: Making Sense of it All……

• Practice CGL or Liability “Wrap-up”• Marine• Automobile • Property• Directors & Officers• Dedicated Environmental Products:

– Fixed Site Pollution Legal Liability (EIL/PLL)– Contractor’s Pollution Liability – CPL– Remediation Cost Cap/Stop Loss



The Environmental Marketplace

• Over $2 billion of premium annually (North America)• 20% annual growth rate for the past 5 years• Major Carriers – Chartis (formerly AIG), XL, Zurich, Chubb, Liberty,

ESR, ACE, Great American• Carriers have a physical presence in Canada and better

understanding of our unique risk profile• Rates have been very competitive given introduction of new players• Dozens of different products with new and improved forms• Product flexibility and tailoring to suit specific client needs• Multi-year policy periods with shared aggregate limits• Total Market Capacity - $250 Million +



Fixed Site Pollution Liability (EIL/PLL)

• Also known as:– Pollution Legal Liability (Chartis/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 “Insured” – Lenders, Tenants, Directors & Officers 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;• Defense expense is within the limits;• Who should purchase? Municipality, tenants, adjacent land owners,

contractors with public property in their CCC.



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 – Clean-up Costs

• What is Covered?– During expansion/construction of a new structure the Insured discovers an old

leaking storage tank which has impacted the soil & groundwater;

– “Pass through” contamination from a neighbouring property impacts an Insured site;

– A site was historically remediated to the standards of the day and proper closure obtained by regulators. Years later the regulations change and the property owner is forced to clean to a higher criteria (i.e. regulatory re-opener).



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 – Bodily Injury & Property Damage

• What is Covered?– Engineered controls fail on an exhaust source and emissions exceeding the

certificate of approval are released into the atmosphere. They settle on a neighbouring agricultural property and the Third Party farmer can no longer sell the crop and needs to replant the entire field;

– Operations at an Insured site contaminate the groundwater and migrate off-site impacting an adjacent site that is for sale. The Third Party can not obtain “fair market value” given the condition of their property and claims for diminution in value;



Pollution Liability – Coverage Extensions

• First Party Diminution in Value;– Covers the unrealized potential market value of a property that is sold by the Insured

(difference between the market value of the site prior to contamination being discovered and the value of the site after the pollution condition has been clean-up). Limited market available.

• Transported Cargo (Third Party/First Party);• Non-Owned Disposal Sites;• Punitive/Multiplied Damages & Civil Fines/Assessments/Penalties;• Terrorism;• Mould/Bacteria & Viruses;• Asbestos & Lead Based Paint;• First Party Business Interruption, Extra Expense and Rental Value;

– Include full and partial suspension of operations



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 – Required Underwriting Information

• Schedule of Locations including COPE information• Description of Operations• Environmental Risk Management Policy (including

Acquisition/Divestiture due diligence protocols)• Claims history• Environmental Site Assessments• Schedule of Underground Storage Tanks (age, construction,

contents, size, containment information, integrity tests)• Financials• Application (completed after Insurer has been selected)

NOTE: The above information is required for a firm bindable quote. Pricing indications can be obtained with site information/available

ESAs.



Pollution Liability – Pricing Considerations

• Premium is based on:– Limit of Liability required;– Retention/Deductible assumed (usually start at $50,000);– Policy Term (1 to 10 year terms available);– Site history and operations;– Site Conditions (i.e. “clean” or “contaminated”);– Availability of recent/comprehensive information;– Location and surrounding property uses;– Scope of Coverage Required (New conditions only vs Pre-existing; Off-site only vs On-

site);



Contractor’s Pollution Liability

• Covers Third Party claims for Bodily Injury, Property Damage or Clean-up costs arising from pollution conditions associated with the Insured’s contracting operations or services rendered;– Can be written on a practice/blanket basis or project specific basis;– Occurrence and Claims-made forms;– Contractor Controlled or Owner Controlled (OCIP) if part of a CGL wrap-up;– All market forms are very similar – key is to clearly defined the scope of covered

operations;– Wide appetite for a range of contracting operations (generals, demo, abatement,

mechanical, road/street, utility)– Can be written on a combined form offering E&O coverage as well (COPS);– Enhancements similar to the PLL/EIL form

• Who should purchase? Municipality (Project Basis) & Contractors



Clean-Up Cost Cap or Remediation Stop Loss

Cost Cap for Projects where remediation of known pollution conditions is required

• Provides protection against overruns on expected costs of remediation of known pollution conditions and cleanup costs for newly discovered conditions

• May also apply to some non-environmental activities (i.e., demolition, site preparation, capping of contaminated areas)

• Underwriting is based on a specific remedial action plan (approved by underwriters) and the expected costs to implement that plan

• Insurance coverage attaches above a “buffer” of 10% to 20% of expected costs

• Important coverage where cost overruns cannot be absorbed by the contractor(s)

• Who should purchase? Municipality, developers, remediation contractors



Remediation Cost Cap Program – Simplified Program Structure

ExpectedCleanup Costs

CostOverrun

CoverageCoinsurance

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

Questions & Answers

environmental liability management & risk transfer solutions january 31, 2010

Documents

environmental responsibility

environmental regulations

provincial regulatory

contaminated site

principal polluters

effects of pollution

amends brownfield regulation

lynnview ridge