Practical Uses of Environmental Insurance How To Increase Shareholder Value And Reduce Risk
38
JUNE 2007 Practical Uses of Environmental Insurance How To Increase Shareholder Value And Reduce Risk Presented to The 14 th Annual Advanced Contract Risk Management In Upstream Oil And Gas Conference By: Joseph Naylor, Senior Counsel [email protected] Enbridge Energy Company and David Dybdahl, CPCU, President [email protected] American Risk Management Resources Network, LLC.
description
Practical Uses of Environmental Insurance How To Increase Shareholder Value And Reduce Risk. Presented to The 14 th Annual Advanced Contract Risk Management In Upstream Oil And Gas Conference By: Joseph Naylor, Senior Counsel [email protected] Enbridge Energy Company and - PowerPoint PPT Presentation
Transcript of Practical Uses of Environmental Insurance How To Increase Shareholder Value And Reduce Risk
JUNE 2007
Practical Uses of Environmental Insurance
How To Increase Shareholder Value And Reduce Risk Presented to
The 14th Annual Advanced Contract Risk Management In Upstream Oil And Gas Conference
By: Joseph Naylor, Senior Counsel [email protected]
Enbridge Energy Company
andDavid Dybdahl, CPCU, President [email protected]
American Risk Management Resources Network, LLC.
JUNE 2007
Presentation Outline History of insurance coverage for environmental
risks Modern Policies: Specialized environmental risk
policies currently available; advantages and disadvantages
Considerations for negotiation of an environmental policy
Specific Example – Use of environmental insurance in the purchase and sale of a company.
JUNE 2007
Modern Environmental Insurance Specialized insurance coverage written
specifically to cover environmental risks Useful to fill the insurance coverage gaps
created by pollution exclusions in traditional insurance policies.
Continuously available since 1980, but still not widely utilized.
JUNE 2007
History Of Insurance Coverage For Environmental Damages And Claims
It is important to understand the historical coverage for environmental losses in traditional insurance policies to appreciate benefits of the new specialized environmental insurance products.
JUNE 2007
Commercial General Liability (CGL)
Environmental Liabilities become apparent beginning in the 1970’s
Standard Business Insurance Policy: Commercial General Liability (CGL)
CGL Insures Against Third Party Liability for Damages (not otherwise excluded)
Exclusions on the CGL for environmental damages evolved over time.
JUNE 2007
CGL Policies Prior To 1970 CGL Introduced in 1941; Coverage was generally
broadened up to 1970 Provided coverage for Damages Caused by an
“Accident” Policies were Accident or Occurrence Based, rather
than Claims Made Based coverage
JUNE 2007
1970 Qualified Pollution Exclusion A exclusion was added to the GL policy that was
designed to exclude claims caused by pollution, except where caused by events which are “Sudden and Accidental”
Problems determining what is sudden and accidental (See Primrose Operating Company, 382 F.3d 546)
JUNE 2007
1986 “Absolute” Pollution Exclusion Excludes Coverage for Damages “Arising out of the
actual, alleged or threatened discharge, dispersal, release or escape of pollutants”
The “sudden and accidental”exception to the pollution exclusion was dropped
“Pollutants” are broadly defined Can lead to overbroad reading of exclusion and
denials of coverage (See CBI Industries, 907 S.W. 2d 517)
JUNE 2007
Time Element CGL Endorsement Also Known As: Time Element Pollution Coverage, Coverage is created through an endorsement to the
CGL policy to provide coverage for pollution events that fit within specific time parameters.
There is a significant difference between environmental coverage as an exception to an exclusion versus coverage provided within an insuring agreement.
Confusion on this point is common and leads to confusion about the efficacy of modern environmental insurance.
JUNE 2007
Time Element Pollution Coverage Typical Time Element Coverage “Triggers”:
Incident must be “Sudden and Accidental” Incident must be Detected when it Occurs (or
Within a defined Short Time Period Thereafter) Incident Must be Reported to Underwriter Within
a Specified Time Period (120 hours – 30 days)
This coverage is common in the CGL sold to oil and gas risks.
JUNE 2007
Modern Environmental Coverage By about 1990, Environmental risks became more
quantifiable Insurers offered new products specifically designed
to cover pollution-related events. Coverage in true environmental Insurance is provided within the insuring agreement portion of the policy
Environmental insurance policy forms are not standardized and can be modified.
Buyers need to be keenly aware of differences in the over 140 environmental policies forms that are available.
JUNE 2007
Basic Types Of Environmental Insurance Site Specific (EIL) Contractors Operations (CPL) Professional Liability (Errors and Omissions) Clean Up Cost Cap Packages of these policies are also sold
Contrary to popular belief litigated claims on these policies are in fact rare.
JUNE 2007
Environmental Impairment Liability (EIL) Sold under many brand names including:
Pollution Legal Liability (PLL) Premises Pollution Legal Liability (PPL) Premises and Remediation Legal Liability (PARLL)
Unique Features: Responds to loss arising from pollution conditions on or
emanating from an insured facility. Covers third party bodily injury and property damage
losses. Also insures remediation and defense costs. Can insure prior acts, pre-existing conditions and
superfund liability.
JUNE 2007
PL Policy Coverage Triggers Generally written on a claims made and reported
basis. Multi year policy terms are available. Known contamination at time of application are not
covered.
JUNE 2007
Contractors Pollution Liability Insurance (“CPL”) Also sold under many different brand names. Provides coverage for pollution-related losses
arising from described operations of the named insured
CPL coverage is important because most contractor CGL policies contain absolute pollution exclusions.
These exclusions can eliminate all coverage for any claim associated with a “pollutant”.
CPL is designed to fill the coverage gap in a contractors CGL policy.
JUNE 2007
Cleanup Cost Cap Coverage Also known as “Remediation Stop Loss Coverage”
or “Cost Containment Coverage” Covers Remediation Costs which exceed budgeted
costs Covers the costs incurred to complete the insured
remedial action work plan. Used extensively by the US Army to facilitate fixed
priced remediations. The U S Army estimates their clean up costs
decreased by 30% and time frames accelerated with the use of this insurance.
JUNE 2007
Negotiating an Environmental Policy Each Insurer has customized applications keyed to
proprietary rating models. The application becomes part of representations and
warranties of policyholder. Almost all disputed environmental insurance claims
are a direct result of a poorly prepared application. Use of qualified specialized environmental insurance
broker is highly recommended. The insurance industry is devoid of any formal
training in this complex line of coverage.
JUNE 2007
Insurance Can Increase Shareholder Value It can reduce the risk profile of the firm. Properties can be transferred for a fixed cost without
indemnities. It can facilitate property transfers by getting
environmental risks off the table as objectively priced by a third party.
It can help quantify Sarbanes Oxley disclosure requirements on Environmental liabilities.
JUNE 2007
Insurance Companies Have Inherent Advantages Premiums are tax
deductible Interest is earned on loss
reserves tax free Insurance uniquely creates
a sum certain for a wide rage of possible outcomes
If a loss occurs insurance underwriters have “claims”
Reserves are not tax deductible
Interest on cash reserves is taxed
Reserves cannot take into account the probability of events for a worst case scenario.
If a loss occurs, uninsured negotiators suffer career limiting events
JUNE 2007
The Use Of Environmental InsuranceIn a Property Transfer A Case Study
Background:Sale of a company for a fixed priceBuyer & seller agree on a fair value of $40,000,000 without
environmental “issues”There is an Environmental Remediation Plan for
$1,000,000Buyer’s due diligence raises “potential worst case
environmental liabilities” valued at up to $24,500,000 How much will the company sell for? $39,000,000 or $15,500,000
JUNE 2007
0
1
2
3
4
5
6
7
8
9
10
11
12
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Time in Years
Ris
k (
$0
00
,00
0)
Remediation Risks
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
Expected Cleanup $1,000,000 costs, 99% confidence over 2 years
JUNE 2007
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
Remediation Risks
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
$5,000,000 Excess Remediation Cost, 1% chance of being incurred over 5 years beginning in year 2
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
Liability During Remediation Risks
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
Third Party Claims during remedial operations. Potential cost of $5,000,000 over 10 years, no estimate of probability
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
Environmental Legacy Risks
Discovery of new sources of contamination on the property. Discovered in year 3, it takes $2,000,000 over 5 years to remediate, no estimate of probability
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
Environmental Legacy Risks
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
The facility used an old dump that became a superfund site. Discovered in year 3, it is expected to cost $100,000 per year for 15 years = $1,500,000, no estimate of probability
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Environmental Legacy Risks
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k ($
000,
000)
Ongoing Operations: $10,000,000 Loss Potential could be incurred in any year after purchase, no estimate of probability
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Environmental Impairment Liability Insurance
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Purchase EIL Insurance
$10,000,000 limit, 10 year term, $300,000 premium
•Non owned disposal sites
•On and off site clean up of unknown pollution conditions
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
Non-owned Disposal site exposure
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Purchase EIL insurance with non-owned disposal site coverage
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
Discovery Of Unknown Contamination
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Purchased EIL Insurance with on site coverage for unknown pollutants
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
After The Purchase Of EIL
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
Contractors Loss ExposuresPurchase Contractors Pollution Liability Insurance
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
After The Purchase Of CPL$70,000 for term of policy - 3 years
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
Cost Cap Insurance ($5,000,000 limit $1,100,000 self insured retention)
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property – Key, shaded areas show risk over time, not expected cost
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
Cost Cap Insurance
13% of $5,000,000 = $750,000 premium, term of policy - 3 years
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
After the Purchase of Cost Cap Insurance
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property -- Key shaded areas show risk over time, not expected cost
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
ENVIRONMENTAL RISKS ASSOCIATED WITH THE TRANSFER OF PROPERTY
0
1
2
3
4
5
6
7
8
9
10
11
12
Time in Years
Ris
k (
$0
00
,00
0)
Structured Settlement Annuities
Purchase An Annuity or Finite Risk Policy
$970,000 Cost
Property Value $40,000,000 -- Clean up cost estimates between $1,000,000 and $6,000,000 Chemical Manufacturing Property -- Key shaded areas show risk over time, not expected cost
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
JUNE 2007
Using Insurance Tools To Facilitate A Property TransferUsing Insurance Tools To Facilitate A Property Transfer
Risk Limits Insurance Policy Premium
Expectedclean up cost $1,000,000 Annuities $970,000
Excess remediation $5,000,000 Cost cap or $750,000costs remediation stop loss
3rd party claims $5,000,000 Contractors Pollution $ 70,000during remediation Liability
Discovery of new $2,000,000 Environmental $ 300,000contamination on Impairment Liabilityproperty
Superfund liability at a $1,500,000 Environmental Includednon-owned disposal Impairment Liabilitysite
Environmental loss from $10,000,000 Environmental Includedongoing operations of the Impairment LiabilityplantTOTAL COST $24,500,000 $2,090,000
JUNE 2007
Result The full $24,500,000 of environmental contingencies
are funded for a total premium cost of $2,090,000. The sales price $40,000,000 - $2,090,000. The Sarbanes Oxley disclosure exposure for the
seller is minimized. Buyer is also protected from assuming and
recognizing contingent liabilities on its balance sheet.
And the negotiators are not exposed to career limiting events!
JUNE 2007
CONCLUSIONCONCLUSION
• With insurance the company sells for $37,910,000.• The transaction needs to be set up with the anticipated use of insurance to be successful.• It requires specialist knowledge to fit the insurances together.• Effective use of modern environmental insurance can increase share holder value.
