1. Revolution and Evolution: Environmental Risk Management for Mega-Projects Brownfields 2006 November 14, 2006 Presented by: Richard M. Sheldon, Jr., ARM Willis Environmental Practice

2. Risk Management Options Avoidance Risk Reduction Risk Retention Contractual Risk Transfer Indemnities/Hold Harmless Agreements Insurance Coverages General Liability Property D&O Builder’s Risk Surety Bonds Contractors/Consultants Professional Liability Pollution & Remediation Liability

3. The Risk/Indemnity Matrix Buyer Seller 3 rd Party Insurer Risk Indemnity Risk Asset Risk Indemnity Risk Indemnity

4. Applications for Environmental Insurance Beyond their use in addressing every-day operational exposures, environmental insurance products can help facilitate many types of transactions by: Bringing a level of certainty to or “cap” environmental risks and associated liabilities Providing value-added services to the parties to the transaction (loss control, data and cost review, etc.) Off-setting or replacing reserves, contingencies, or other liabilities affecting balance sheets Covering insurance gaps under D&O, Property, GL, etc. Strengthening and/or replacing contractual agreements regarding environmental liabilities

5. Insurance Tools to Address Environmental Liabilities Type of LiabilityType of Insurance Known Contamination Remediation Cost Cap Insurance Covers cost overrun of specific cleanup project/approach Finite Insurance Vehicle for funding planned cleanup expenses as an alternative to a self insured retention Unknown Pollution Issues Pollution Legal Liability Insurance Protection against unknown, existing contamination or future pollution Contractors/Consultants Liability Protection against releases during performance, or exacerbation of existing pollution Known Contamination & Unknown Issues Blended Finite Insurance Combination of Financial Assurance and Cost Cap and/or PLL. A fully-funded Cost Cap with cost overrun and third party protection.

6. Pollution Liability Insurance Primary coverage terms: Designed to address “unknowns” Discovered or mandated clean up costs – on or off site Third party claims for property damage or bodily injury – on or off site Legal defense costs Subject to a self-insured retention or deductible May also cover: Business Interruption and Extra Expense Natural Resource Damages Non-Owned Disposal Sites (Superfund Liability) Pollution releases from transportation Underground Storage Tanks

7. Pollution Liability Insurance – Design Considerations Coverage can be designed for the Buyer, Seller, or both Coverage can be extended to Lenders or Financiers Coverage can address retrospective liabilities, prospective liabilities, or both Coverage can be tailored to interact with and support other levels of protection: As “fallback” for 3 rd party contractor obligations (contingent protection) As additional protection for contractual indemnity between private parties (excess coverage) As substitute for contractual indemnity between private parties As “difference in conditions” coverage (“wrap-around” NFA or other indemnities)

8. Pollution Liability Insurance – Design Considerations Additional items to consider: Confidentiality Access to Data Definition of Insured(s)/Additional Insured(s) Knowledge/Disclosure of Documents Who is “First Named Insured or Sole Agent”; responsible for any deductible/SIR, reporting claims, receiving notices, premium, etc.? Subrogation Terms Other transaction-specific items…

9. Remediation Cost Cap Insurance Addresses known clean-up obligations Covers cost over-runs related to –Discovery of additional contamination –Change in regulatory requirements –Unexpected site conditions –Increase in base costs –Failure of clean-up method Buffer applied in excess of estimated clean-up costs and before attachment of insurance limits Options for coinsurance on program limit Underwriter engineering review of technical approach and cost estimates $0 Insurance Coverage Estimated Clean-Up Cost ($x) Program Limit ($z) Self Insured Buffer Attachment Point ($y)

10. Risk Transfer Mechanisms – Service Providers Contracting ApproachRisk Retained by Site Owner Risk Transferred to Service Provider Time and MaterialsHigh Low High Fixed Price – based on defined scope of work Guaranteed Fixed Price – based on achievement of clean-up objectives Full Environmental Liability Transfer

11. General Environmental Insurance Industry Trends Increasing popularity and use of environmental insurance, but: Policy periods shortening on all products Available limits for certain types of coverage and certain classes of business decreasing Developing claims history - increased importance in developing partnerships Pricing is firming but realistic for the risk assumed – not yet a “Hard Market” for environmental insurance The market continues to be competitive: Still substantial capacity, up to $100M available on a single deal There is still flexibility in policy wording resulting in modification of standard forms Creative coverage approaches

12. Key Products, Key Issues Pollution Legal Liability (PLL): still most flexible product, 10 yr. terms max. for “retrospective” risks, 3 to 5 yrs. max. for “new” conditions, Natural Resource Damage coverage under scrutiny, rigorous mold underwriting guidelines and sublimits applied in most cases Remediation Cost Cap (Cost Cap): less companies offering this coverage, minimum premiums rising ($50-100K), 10 yrs. max., strict underwriting, “break-up” fees? Contractor’s Pollution Liability (CPL): very competitive market, better mold underwriting guidelines, ability from a few markets to get a project specific policy with completed operations coverage for a total ten year term (or more?) Environmental Errors & Omissions (E&O): prices firming, available limits capped, restrictions on classes of business Closure/Post-Closure (C/PC): very tough to procure, more collateral required, most require PLL to be written in addition Blended Finite: increasing popularity but few markets offering it, may be only way to get beyond a 10 year Cost Cap term, movement away from integrating PLL Real Estate Lenders Liability: limited markets, existing conditions can impact viability

13. Thank you! Richard M. Sheldon, Jr., ARM Senior Vice President, Mid-Atlantic Environmental Team Leader Willis Insurance Brokerage Five Radnor Corporate Center 100 Matsonford Road, Suite 200 Radnor, PA 19087-9052 Phone: 610-254-5625 Fax: 610-254-5600 Cell: 610-639-1416 richard.sheldon@willis.com