1 Brownfields 2006 Managing Natural Resource Damage Risks in Brownfields Transactions R. Timothy Weston Kirkpatrick & Lockhart Nicholson Graham LLP 17 North Second Street Harrisburg, PA

2 The Challenge – Risk Allocation and Management Risk allocation and management lies at the core of every transaction. The approaches available to manage risk are widely varied, used in numerous permutations and combinations subject to customization to meet particular needs and situations merit the constant application of creativity

3 Starting the process – NRD is one of several risks Environmental compliance risks Environmental remediation risks Toxic exposure liability risks Property damage liability risks Natural resource damage risks Off-site liability risks from arranging for transportation, treatment or disposal

4 The basic tools for risk management Due diligence Contractual provisions (representations, covenants, indemnities, releases) Insurance (including transaction-specific insurance) Liability limiting arrangements with government agencies (prospective purchaser agreements, voluntary cleanup programs, state brownfield laws)

5 The NRD challenge Due diligence: Difficulty of predicting likelihood of claim; uncertainty in calculating range of loss. Contract provisions: Who’s willing to take the risk? Liability limiting arrangements with government: Natural resource trustees are often “not at the table” in prospective purchaser negotiations Brownfields laws often silent Insurance

6 Historic insurance market Historic insurance products Can be important source of funds in some situations (critical for seller and buyer to review old policies). Extensive litigation over interpretation of varying exclusions over time. Insurers became wary of risks that were difficult to assess and underwrite.

7 New insurance market Maturing understanding of underwriting risks Development of new products - tailored to today’s environmental realities, risks, and transaction needs. Objective: reduce uncertainty that accompanies risk, and facilitate transactions. Different products may address risks of varying parties to the transaction.

8 Types of available insurance for “brownfield” transactions Cleanup cost cap / remediation stop-loss Finite risk Site liability environmental exposure Lender / secured creditor coverage Contractor and consultant coverages

9 Site liability environmental exposure insurance “ Modular” coverage Third-party liability Historic focus on toxic tort (personal injury/property damage claims NRD may be included – but may require special endorsement Scope: Known contamination from past operations Unknown contamination prior to policy inception New releases Government reopener protection May cover both buyer and seller

10 Insurance and risk control Environmental risks must be understood Due diligence is key to understanding risks Due diligence  site assessment  risk management plan Insurance is procured in context of the “whole deal” and risk management plan Insurance as tool where seller is unwilling or unable to provide meaningful indemnification

11 Use of State Brownfield Laws “Brownfield” sites that are not superfund NPL seriousness Choice of remediation standards Processes for obtaining state concurrence in remediation plan and achievement of cleanup Liability protections based on statute or voluntary cleanup agreements Useful to seller and buyer

12 A typical NRD clause Policy coverage Property Damage arising from Pollution Conditions. Property Damage means … Natural Resource Damage Natural Resource Damage means physical injury to or destruction of, including the resulting loss of value of land, fish, wildlife, biota, air, water, groundwater, drinking water supplies, and such other resources belonging to, managed by, held in trust by, appertaining to, or otherwise controlled by the United States …, any state or local government, any foreign government, any Native American tribe ….

13 Special issues in risk management & allocation for TRR transactions Complications from dual operations in same corridor (transit operator vs. freight operator) Dual use of same tracks and facilities Side-by-side corridors (cross-contamination) Determining who is responsible for given conditions (which may often be mixed) Negotiating up-front “rules of the road” for working through problems (cleanup standards, remedy selection, institutional controls, who is lead)

14 Issues in framing NRD coverage General exclusions to property damage coverage: Beware of exclusions for “on-site” or “owned” property damage Are natural resources (e.g., groundwater) below a site part of the site, or “owned” by the policy holder?

15 Issues in framing NRD coverage Definition of, and exclusions to, Pollution Conditions Known contamination problems -- can you delink exclusions regarding remediation coverage vs. NRD coverage

16 Issues in framing NRD coverage Claims made policy form Only cover claims first made and reported during period of policy and for some defined tail period. Uncertainty of when trustees will act Need to carefully consider federal and states statutes of limitations on NRD claims in negotiating policy period.

17 The keys  Keep an eye on the real risks for the deal  There is no “boilerplate” – in transaction documents or in insurance  Like other risks, NRD must be factored in provisions providing both a risk allocation and a problem solving process Think in both physical and time dimensions  Creativity, flexibility, thoughtfulness