Transcript Environmental Insurance 101 - FEI Canada

Environmental Liability Management –
A Changing Landscape
October 1, 2008
Presented by:
Kate Dodge, Aon Reed Stenhouse Inc.
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
Presentation Title
Driving Forces for Better Environmental
Liability Management Practices
Environmental Insurance 101
Driving Forces for Better Environmental Liability Management Practices
• Perspectives to consider:
– External pressures
– Internal balance sheet protection
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Environmental Insurance 101
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
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Environmental Insurance 101
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
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Environmental Insurance 101
External Pressures
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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)
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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?
Presentation Title
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Environmental Insurance 101
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
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Environmental Insurance 101
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
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Air Canada’s Carbon Off-set Program
• Legal Liability (reduce exposure to environmental impacts/unfair employment
practices)
• Regulatory Compliance
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Environmental Insurance 101
Internal Balance Sheet Management
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Third Party liabilities
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First Party liabilities
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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
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Off-site Clean-up
Bodily Injury
Property Damage (including loss of use, Diminution in Value, NRD)
Legal Defense Expense
Purchase & Sale Agreements/Indemnities
Service Agreements (waste haulers/disposal)
Lease Agreements
Punitive, Multiplied and Exemplary Damages/Civil Fines, Penalties, Assessments
Presentation Title
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Environmental Risk Management
Options
Environmental Insurance 101
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)
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Pollution Coverage in the Property &
Casualty Marketplace
Environmental Insurance 101
Pollution Coverage in the P&C Marketplace
• Limited coverage provided under the following “standard” lines of
coverage:
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General Liability
Automobile
Umbrella/Excess
Property
Boiler & Machinery
Marine
Directors & Officers
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Environmental Specialty Marketplace
Environmental Insurance 101
Environmental Specialty Marketplace
• $1.5B + Premium Industry
• The Markets:
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AIG
Zurich
Chubb
ENCON
Elliott Special Risks
XL
ACE
Liberty
• Competitive marketplace
• Flexibility of coverage design/tailored programs
• Multi-Year Programs
• Streamlined underwriting process
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Environmental Insurance 101
Dedicated Environmental Insurance Products
• Fixed Site “Pollution Liability”
• Remediation Stop Loss/Clean-up Costs Cap
• Lender Liability
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Dedicated Environmental Products
POLLUTION LIABILITY
Environmental Insurance 101
Pollution Liability
• Also known as:
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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
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Environmental Insurance 101
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
Pre-existing conditions
commenced prior to
the
continuity/delineation
or inception date
Presentation Title
Continuity Date
New conditions
commenced on or after
the
continuity/delineation
or inception date
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Environmental Insurance 101
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);
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Environmental Insurance 101
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
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Environmental Insurance 101
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.
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Environmental Insurance 101
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;
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Environmental Insurance 101
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.
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Environmental Insurance 101
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.
Presentation Title
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Dedicated Environmental Products
REMEDIATION COST CAP
Environmental Insurance 101
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 (coinsurance)
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Environmental Insurance 101
Remediation Cost Cap Program – Simplified Program Structure
Cost
Overrun
Coverage
Coinsurance
NOTE: Pricing
range for
Remediation
Cost Cap
programs are
between 6 to 12%
of the Estimated
Original Clean-up
Costs
Limit of
Liability
Buffer (anywhere from 10 to 25% of Estimated
Original Clean-up)
Selfinsured
Retention
Presentation Title
Expected
Cleanup Costs
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Dedicated Environmental Products
LENDER LIABILITY
Environmental Insurance 101
Lender Liability
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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
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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).
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Environmental Insurance 101
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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Questions & Answers?