Managing Environmental Risks and Liabilities – Environmental Impairment Liability Insurance Cliff Warman MARSH Environmental Practice Leader for EMEA

Environment & business Environmental risk management Agenda Environment & business Environmental risk management Environmental Insurance Emerging environmental risks Marsh

Environment & business The business lifecycle Operations How are resources used? What is the waste from the process? Permits and licenses Recycling End-of-life obligations CO2 emissions reduction Process efficiency Energy and water use Waste management Product commerciality Climate change Mergers & Acquisitions Process change What is the environmental strategy? Strategy Business lifecycle Liabilities Are liabilities estimated? What decommissioning or remediation will be needed? Environmental KPIs Corporate Responsibility Reporting EMS How are environmental risks assessed, managed and reported? Governance Decommissioning Contaminated land remediation Asbestos Employee and contractor health Pollution (uncontrolled emissions) Marsh

Environment & business Environmental risks and opportunities Assess environmental risks and opportunities Map processes for utilising raw materials, energy and water Define commercial position with respect to regulations & markets Process optimisation for resources, energy and water Operations Strategy Prioritise key environmental projects Reduce waste & emissions, and increase recycling Liabilities Risk management procedures, & responsibilities Governance Quantify liabilities for remediation and decommissioning Environmental information systems Manage remediation and decommissioning Environmental reporting and disclosures Manage long term liabilities for aftercare Marsh

Environmental Risk Management Sources of environmental information Environmental Assessment Environmental Impact Assessment Environmental audit Phase I – Desk study Phase II – Site investigation Qualitative / quantitative risk assessment Operational Risk Management Discharge monitoring Emissions monitoring Energy and water efficiency Environmental Management Environmental Management System Best Available Techniques LEGAL FINANCIAL TECHNICAL Compliance with environmental legislation Third party claims Contract review Warranties & indemnities Sale & Purchase Agreements LEGAL Accounting provisions for decommissioning or clean-up Financial provisions – Bonds, Escrows, Parent Company Guarantee Performance bonds Capital and operational expenditure budgets FINANCIAL Marsh

Environmental risk management Taking a Strategic Approach Develop a risk based understanding of potential impacts from ‘adverse business events’; Recognize that environmental risks do not respect borders (operational or geographical); Monitor for changes in Regulation, Liability Framework, Developing Case Law and Shareholder Expectations; Understand how risk are being managed at a local level and drive consistency across geographies; Develop robust risk identification, quantification, and management protocols; Understand the limitations of the various risk management processes and insurance arrangements and Identify the gaps Technical Financial Legal Strategic Environmental Risk Management Marsh

Environmental Risk Management Risk management options Mitigate / manage Accept Transfer Insure Strict liability Third party Operational Uncertainty Financial Legal Technical Marsh

Environmental risk management Strategic use of insurance Insurance cover required: Insurance cover required: Growth Efficiency Compliance Protection Business Interruption Delay in start up Product liability Environmental Impairment Strategy Insurance cover required: Operations Liabilities Insurance cover required: Governance Insurance cover required: Marsh

Environmental Insurance What is insurable? 1) - Compliance costs are NOT insurable 2) – Cover may be available under General or Public Liability insurance for “pollution” Usually GL & PL policies have pollution exclusions: Total pollution exclusion “Sudden & Accidental” cover only What is “sudden and accidental” pollution? Unlikely to cover “own-site” clean-up costs Is off-site clean-up mandated by the Environmental regulator covered? - Bartoline Ltd v Royal Sun Alliance plc (2006) Marsh

Environmental Insurance Environmental Impairment Liability insurance 1) - Site Specific Pollution Legal Liability insurance Covers “unknown” pre-existing &/or future contamination. Losses / liabilities covered can include: Statutory and third party clean-up costs: on- and off-site. Third party property damage (including loss of use, diminution in property value, and nuisance). Third party bodily injury Biodiversity Damage / Natural Resource Damage / Protected Species. First party business interruption losses. Associated legal and technical defence costs. Policy periods of up to 10 years available for pre-existing pollution Policy periods of up to 3 or 5 years for new pollution What is insurable? 2) - Contractor’s Pollution Liability insurance For liabilities arising from new pollution (or the exacerbation of historic pollution) caused by contract / project works. Broadly the same coverage triggers as for site-specific policies. Can be combined with a PI section / coverage to also cover the design errors & omissions risk. 3) - Clean-Up Cost Cap insurance Cap the cost of known remediation obligations. Use 1), 2) and 3) in Combined programme Clean-up Cost Cap on remediation works Contractor’s Pollution Liability cover for remediation contractors Site Specific Pollution Legal Liability cover for site post-remediation Marsh

Emerging Environmental Risks Environmental damage and biodiversity European Union - Environmental Liability Directive EU wide framework to prevent and remediate damage to the environmental based on the “Polluter Pays” principle Derives an inherent value to “the environment”, defined as protected species and natural habitats, soil and water Prevention, remediation, complementary and/or compensatory action are required Unlimited liability subject to proportionality principle Requires risk assessment and quantification of potential environmental damage Not retroactive (start date is May 2007) Marsh

Emerging environmental risks Climate Change Climate Change – Potential effects: Weather increased property damage due to increased severity (higher winds, bigger floods, longer droughts) more frequent severe weather events Economy Damage to critical (social and supply chain) infrastructure Loss of business due to change in behaviour (tourism, geographical avoidance) Disruption to supply chain Agriculture Shorter growing seasons Crop failure Forest fires Increased pest incidence Marsh

Emerging environmental risks Climate Change What is the insurance industry doing to assist ? Raise awareness of climate change related risk issues to clients Detailed risk analysis Research and forecasting (weather, flood, catastrophic incident, epidemics, business interruption, supply chain) Development of focussed risk management strategies Provide specialist insurance products Inform public policy making Reduce the impact of business on the environment Ref: Association of British Insurers Marsh

Emerging environmental risks “Climate proofing” Catastrophic weather risk cover Property damage Business interruption Non – catastrophic weather risks Parametric loss of revenue Marsh

Climate Change – “Climate friendly” Renewable energy projects Construction phase Construction All Risks Delay in Start-up Third Party Liability Operating phase Property Damage Business interruption Marsh

Emerging environmental risks “Climate friendly” Carbon Emission Credit Delivery Guarantee Carbon reduction assessment Construction Carbon transaction Issue of credits Feasibility and financing Validation and registration Commissioning Verification and certification CDM Project Project risks Political risk Counterparty credit Resources and supplies Business interruption Natural hazards Carbon risks Technology risk Eligibility and approval Delay in Start Up Validation and Reporting Carbon Emission Credit Delivery Guarantee Marsh

Managing environment risks and liabilities Summary Environment is a real issue and requires Board Room attention Risk assessment and active risk management, including the use of insurance, is needed Environmental insurance market is mature and has meaningful capacity New products are developing in response to emerging environmental issues Marsh