Managing Risk and Insuring Success: What is Environmental Insurance Pamela E. Barker, Esq.

What is Environmental Insurance? “Environmental insurance is a tool used to quantify and transfer risks related to brownfields cleanup costs and liability from project stakeholders to an insurance company. “

Why is Environmental Insurance Necessary? Fix the cost of known liabilities (i.e., investigation and remediation of known contamination). Provide protection against unknown future liabilities. Otherwise fix the “cost” of environmental liabilities. Protect contractors from pollution risk.

Types of Environmental Insurance Products Environmental Remediation Cap (a/k/a Remediation Stop Loss or Remediation Cost Cap. Pollution Legal Liability (“PLL”) (First and Third Party Liability Coverage) (a/k/a Environmental Impairment Insurance). Contractor’s Pollution Liability. Specialized Polices.

Remediation Cost Cap Cap the cost of remediation of known contamination. Allows a developer to fix the cost of the cleanup. Insured is typically the responsible party. Covers cost overruns due to: –Additional amounts of known contaminants. –Change in regulatory requirements. –Remediation plan failure. –Optional - discovery of new contamination

Remediation Cost Cap Self-insured retention (contingency) of % of estimated cleanup cost. Policy limit usually set at some multiple of the estimated cleanup cost. Policy period typically the time estimated to complete the cleanup. Does not cover “re-opener” (i.e., post RAP completion).

Remediation Cost Cap Premiums dependent on many factors. Typically in range of 8-20% of estimated cleanup cost. Premiums can be reduced by co-payment. Typically 20-25% of policy limit. Typically not used for remediations costing less than $1-2 million.

Pollution Legal Liability Provide protection against unknown future liabilities. Whereas the Cost Cap policy has a known cost basis, the PLL policy covers “unquantifiable” costs. Additional insureds can include past, current and future property owners, developers, investors (lender), and remedial contractors. First party coverage (i.e., environmental laws require action). Third party coverage (i.e., claims made by government or other third party).

Pollution Legal Liability Covers undiscovered and new contamination, bodily injury, property damage or cleanup liability. Optional coverage for: –Business interruption. –Non-owned disposal sites. –Transportation. –Contractual liability. –Defense costs. Typically excludes known conditions where remediation has not been completed (Cost Cap policy should be used).

Pollution Legal Liability Deductible (retention) typically $10,000 - $250,000 per claim. Policy limits highly variable based on potential maximum loss and other factors. Can be as high as $100 million. Policy period variable, but 5-10 years typical. Longer terms were historically available but have become more difficult to obtain.

Pollution Legal Liability Second policy period can be guaranteed at some percentage of original premium provided claims do not exceed a specified amount in the first policy period. Premiums are highly variable, based in part on: –Site history and conditions –Documentation (how extensively the site has been studied). –Other risk transfer mechanisms (e.g., indemnities, covenants not to sue, statutory exemptions, etc.). –Policy terms.

Pollution Legal Liability Most attractive for transfer of property with suspected but unknown contamination. Can augment or replace Seller’s indemnification for pre-existing conditions. May allow transaction to go forward with limited investigation thus, lowering risk to Seller.

Pollution Legal Liability Can also be used in lieu of voluntary closure. Can make property more marketable to potential developers.

Contractor’s Pollution Liability Provides coverage to contractors for claims made as a result of contractor’s activities on a client’s site or professional services rendered by the consultant. Covers claims for bodily injury, property damage, cleanup costs/environmental damage arising from pollution conditions caused during “covered operations.” For example, fuel spills, broken utility line, punctured UST.

Contractor’s Pollution Liability Often combined with contractor’s errors & omissions coverage. Term, years with renewal required each year work is performed. Premium typically around $10,000 for $1 million coverage. Deductible $5,000 and up. May be “occurrence-based” policy.

Specialized Polices Finite Risk/Pre-Funded – “self-insurance”. Secured Creditor – claims for which the lender may become liable through default. Asbestos Abatement/Containment – abatement operations/release of asbestos. Closure/Post Closure – UST or RCRA facilities. Transportation Spill Liability – transportation incidents. Storage Tank Pollution – releases from above or below ground tanks.

Environmental Insurance Important Considerations Identify what risks you’re trying to cover and who should be covered. Determine risk tolerance. Collect and review existing environmental information. Select competent legal counsel and environmental consultants. Identify other “tools” to address environmental liabilities (e.g., indemnities, contractual obligations, guarantees, covenants not to sue, statutory exemptions, etc.).

Environmental Insurance Selecting an Insurer Select appropriate insurers: –Experience. –Commitment/availability of resources. –Financial strength and rating. –Specialization in environmental insurance. –Claims payment history. –Years in market. –Coverage and policies available. –Pricing.

Environmental Insurance Timing Obtaining a quote from a carrier can take several weeks and negotiating the policy can take even longer. Accordingly, it is important to consider environmental insurance products early in the process.

Environmental Insurance Key Negotiation Points Claims Made vs. Occurrence Based: –Claims Made - claim must be made during policy period. No coverage after policy expires. –Occurrence Based – trigger for coverage is the occurrence of the event. Can be outside of policy period. –Extended reporting period can be purchased for Claims Made policies.

Environmental Insurance Key Negotiation Points “Known Conditions” – a policy may specifically cover (or exclude) known conditions. –Need to clearly define the term. –Reliance on environmental reports. –Is any amount of an identified contaminant covered? –Unknown contaminants within a known area of contamination? –Contamination below standards?

Environmental Insurance Key Negotiation Points Named Insured and Additional Insureds: –Named Insureds are primary beneficiaries. –Additional Insureds may only be covered if named insureds are covered as well. Bodily Injury – should include shock, medical monitoring, fear of disease, mental anguish/emotional distress. Property Damage – should include diminution in value.

Environmental Insurance Key Negotiation Points Exclusions – many policies narrow the scope of coverage through multiple exclusions. –USTs, Asbestos, Lead Paint, Mold. –Divested Property. –Intentional Acts. –Contractual Liability. –Natural Resource Damages.

Environmental Insurance Key Negotiation Points Choice of Law/Choice of Forum – many insurers will attempt to use NY since it is favorable to insurers. “Other Insurance” Provisions – excess over other available insurance. Notice Provisions – many policies require “immediate” notice. Assignment – policies may prohibit assignment.

Environmental Insurance Role of the Attorney The attorney can help a client decide whether an insurance policy is appropriate for a particular transaction. Environmental insurance polices are very site-specific and policy terms must be carefully negotiated in light of the specific needs and goals of the parties. The Environmental Attorney can assist the client in negotiating the appropriate coverage and favorable policy terms.