Environmental Liability Management – A Changing Landscape October

Environmental Liability Management – A Changing Landscape October 1, 2008 Presented by: Kate Dodge, Aon Reed Stenhouse Inc.

Environmental Insurance 101 AGENDA Driving Forces for Better Environmental Liability Management Practices Pollution Coverage in the P&C Marketplace Environmental Specialty Marketplace Dedicated Environmental & “Green” Products Presentation Title

Driving Forces for Better Environmental Liability Management Practices

Environmental Insurance 101 Driving Forces for Better Environmental Liability Management Practices Perspectives to consider: – External pressures – Internal balance sheet protection Presentation Title 4

Environmental Insurance 101 External Pressures Legal System; – “Polluter pays” principal – polluters should bear the cost of cleaning up the effects of pollution from their operations rather than the public taxpayer. BC, Alberta, Ontario and Quebec have adopted the polluter pays principal as a central policy underpinning their environmental protection regimes. Lynnview Ridge, Calgary AB (Imperial Oil Refinery) SCC: Imperial Oil Ltd v. Quebec Province of Ontario vs Quinte-Eco Consultants Inc. & Ronald Carter Regulations; – Federal/Provincial/Local – Bill 133 – US vs Canadian jurisdiction and application Tech Cominco – Use of Risk Assessments vs Generic Clean-up Regulatory Re-openers Presentation Title 5

Environmental Insurance 101 Environmental Side Bar – Canadian Environmental Regulations Ontario – Bill 133 (June 2005/August 2007) – Amends the EPA and OWRA – “You Spill You Pay” – Introduces: Environmental penalties which differs from fines in that liability without fault or without trial can be imposed (“regulated persons”) Broader due diligence and reverse onus for Directors and Officers Municipalities and the province can recover costs associated with clean-up efforts without court action New requirements for pollution prevention plans Higher fines and longer jail sentences “Pollution” and “Impairment” more broadly defined and consequently easier to prove Presentation Title 6

Environmental Insurance 101 External Pressures Financial Reporting Requirements; – Significant change in how firms must disclose their environmental liabilities FIN 47 (US – 2005) – Accounting for future asset retirement costs in the present Recent OSC audit results (Feb 29-08, “OSC Staff Notice 51-716”; Environmental Reporting) – – – – Reference to Ontario Staff Audit by BCSC What is “Material”? Defining Risk Exposure Estimates (residuals and regulatory re-openers) Do environmental matters/liabilities include climate change impacts? Climate Change – Xcel Energy – setting a precdent? Presentation Title 7

Environmental Insurance 101 External Pressures Greater Accountability for Directors & Officers – Financial Disclosures (SOX) Improve the accuracy and reliability of corporate disclosures made pursuant to federal securities law Increases accountability of senior executives for the accuracy and completeness of reported financial information – Operational & Compliance Bill 133 (Ontario EPA/OWRA) – Broader Due Diligence Requirements – Notion of Reverse Onus – Higher Fines & Longer Jail Sentences Presentation Title 8

Environmental Insurance 101 External Pressures Sustainability – Being sustainable increases financial performance Reputation & Brand Strength Cost of Capital and Borrowing Opportunities – Investors are becoming more selective in where they put their money – Lenders, like insurers, are considering sustainability good proxy to overall management Increased Productivity thru maximizing efficiency – Reducing waste streams - lower disposal costs; – Reducing energy consumption Supply Chain Costs (Business to Consumer or Business to Business) – Consumers are becoming more selective and green in their buying – Businesses are looking to partner with other “sustainable” companies Air Canada’s Carbon Off-set Program Legal Liability (reduce exposure to environmental impacts/unfair employment practices) Regulatory Compliance Presentation Title 9

Environmental Insurance 101 Internal Balance Sheet Management Third Party liabilities – – – – First Party liabilities – – – – – On-site Clean-up Business interruption/Extra Expense/Rental Income Diminution in Value Associated Legal Costs Asset Retirement Obligations Managing “old” and newly reported liabilities on the books Mergers & Acquisitions Lender Concerns – Securing Financing on questionable sites or operations Securitizing Contractual Obligations – – – Off-site Clean-up Bodily Injury Property Damage (including loss of use, Diminution in Value, NRD) Legal Defense Expense Purchase & Sale Agreements/Indemnities Service Agreements (waste haulers/disposal) Lease Agreements Punitive, Multiplied and Exemplary Damages/Civil Fines, Penalties, Assessments Presentation Title 10

Environmental Risk Management Options

Environmental Insurance 101 Risk Management Options Self Insurance; Avoidance; Risk Control/Engineering; Contractual transfer: – Most commonly used environmental risk management tool – Questions to ask: Is there a credit risk? Will the liabilities come back? Risk Transfer (Insurance based solutions) Presentation Title 12

Pollution Coverage in the Property & Casualty Marketplace

Environmental Insurance 101 Pollution Coverage in the P&C Marketplace Limited coverage provided under the following “standard” lines of coverage: – – – – – – – General Liability Automobile Umbrella/Excess Property Boiler & Machinery Marine Directors & Officers Presentation Title 14

Environmental Specialty Marketplace

Environmental Insurance 101 Environmental Specialty Marketplace 1.5B Premium Industry The Markets: – – – – – – – – AIG Zurich Chubb ENCON Elliott Special Risks XL ACE Liberty Competitive marketplace Flexibility of coverage design/tailored programs Multi-Year Programs Streamlined underwriting process Presentation Title 16

Environmental Insurance 101 Dedicated Environmental Insurance Products Fixed Site “Pollution Liability” Remediation Stop Loss/Clean-up Costs Cap Lender Liability Presentation Title 17

Dedicated Environmental Products POLLUTION LIABILITY

Environmental Insurance 101 Pollution Liability Also known as: – – – – – Pollution Legal Liability (AIG/Liberty) Environmental Impairment Liability (Zurich/ESR) Environmental Site Liability (Chubb) Premises Pollution Liability (ACE) Pollution and Remediation Legal Liability (XL) It is a site-specific policy that allows the Insured to design a program suitable for the transferring the environmental risks of a single property or portfolio of properties; Can add multiple parties as “Insureds” – Directors & Officers, Employees, Lenders, Tenants, municipalities, province etc. It is a claims-made form; Covers pollution conditions on, at, under or migrating from a covered location (regardless if source is off-site); Insuring agreements are set out in “menu” format for easy customization but each market sets up insuring agreements differently; Defense expense is within the limits Presentation Title 19

Environmental Insurance 101 Pollution Liability Terminology: New Conditions, Pre-existing Conditions & Known Conditions – New Conditions commence after the inception date – Pre-existing Conditions commence prior to the inception date but are not discovered until after inception – Known Conditions are identified and disclosed by the Insured prior to inception Timeline of Coverage Pre-existing conditions commenced prior to the continuity/delineation or inception date Presentation Title Continuity Date New conditions commenced on or after the continuity/delineation or inception date 20

Environmental Insurance 101 Pollution Liability – Clean-up Costs Clean-up Costs/Remediation Expense for both On-site and Off-site Pollution Conditions; – Coverage is triggered by: 1. Insured’s Discovery; 2. Government Mandate; or 3. Third Party claim; Includes investigation, removal, remediation and monitoring, disposal costs to the extent required by environmental law (or that have been incurred by the government/Third Parties); Includes “Replacement Costs” (damage to Insured’s property sustained during the course of remediation); Presentation Title 21

Environmental Insurance 101 Pollution Liability – Bodily Injury & Property Damage Policies cover Third Party claims for Bodily Injury and Property Damage arising from conditions on, at, under or migrating from an Insured Site; Bodily Injury includes: – Physical injury, sickness, mental anguish, emotional distress, shock, building related illness, death Property Damage includes: – Natural Resource Damages (injury/destruction and loss of value of land, fish, wildlife, biota, air, water, groundwater, water supplies and other resources owned/controlled by the government or any Indian band); – Loss of use (whether the property has been physically impaired or not); – Diminution in Value Presentation Title 22

Environmental Insurance 101 Pollution Liability – Defense Expense Defense expense is within the limits and erodes the policy aggregate (with the exception of Quebec – civil code); Some forms extend to insure the Insured’s associated legal expense – others only provide defense expense in support of a Third Party claim; In the event of uninsured claims, defense is provided until such time that the claim is demonstrated by the insurer to be excluded. At that point reimbursement by the insured to the Insurer for any payments advanced is required. Presentation Title 23

Environmental Insurance 101 Pollution Liability – Coverage Extensions First Party Diminution in Value; (Transported Cargo (Third Party/First Party); Non-Owned Disposal Sites; Punitive/Multiplied Damages & Civil Fines/Assessments/Penalties; Terrorism; Mould; Asbestos & Lead Based Paint; First Party Business Interruption, Extra Expense and Rental Value; Presentation Title 24

Environmental Insurance 101 Pollution Liability – Known Conditions All conditions known to a “Responsible Insured” must be disclosed to the insurer; Different approach to carving out Known Condition Exclusions taken by insurers; Depending on how well the condition is delineated/characterized, many insurers will provide coverage for Third Party claims of BI/PD arising out of these identified conditions; Clean-up costs for conditions above standards are obviously excluded EXCEPT if a condition is being managed through a Risk Assessment – can sometimes get the policy to “wrap around” the remedy and insure against any government required changes. Presentation Title 25

Environmental Insurance 101 Pollution Liability - Exclusions Employer’s Liability Prior Knowledge/Non-Disclosure Contractual Liability (unless the contract has been reviewed by Insurer) Insured vs Insured Known Underground Storage Tanks & Piping (unless scheduled) Punitive Damages and Fines/Penalties* Intentional & Illegal Acts (committed by a partner, director, officer) Asbestos & Lead* Transportation beyond the site boundaries* War/Terrorism* *except to the extent broader coverage is purchased. Presentation Title 26

Dedicated Environmental Products REMEDIATION COST CAP

Environmental Insurance 101 Remediation Cost Cap Program Also known as Clean-Up Cost Cap and Remediation Stop Loss Covers First Party cost overruns associated with the remediation of a known condition (no Third Party liability coverage); Min. thresholds of 1MM (usually north of 2MM to 5MM is targeted) AIG, XL, Zurich and ACE Basic Structure – Coverage attaches above the expected cleanup cost (estimated in a Remedial Action Plan) – Premium discounts may be available if the insured elects to have the coverage attach excess of a “buffer: layer – Additional premium discounts are available if the insured shares in the cost overruns (coinsurance) Presentation Title 28

Environmental Insurance 101 Remediation Cost Cap Program – Simplified Program Structure Cost Overrun Coverage Coinsurance NOTE: Pricing range for Remediation Cost Cap programs are between 6 to 12% of the Estimated Original Clean-up Costs Limit of Liability Buffer (anywhere from 10 to 25% of Estimated Original Clean-up) Selfinsured Retention Presentation Title Expected Cleanup Costs 29

Dedicated Environmental Products LENDER LIABILITY

Environmental Insurance 101 Lender Liability Protects the lender for loss arising from a default on a commercial real estate loan accompanied by the discovery of a pollution condition (contamination does not have to be the default trigger – any technical default satisfies the policy); Also Known as: – Secured Creditor Liability – Collateral Impairment Liability Pays the lesser of the clean-up costs OR outstanding loan balance Also protects the lender from Third Party Liability associated with Bodily Injury/Property Damage claims and associated defense expense; Borrower can not be added to this policy – intent is to insure the contingent liability of the lender only; Only two markets (XL/Zurich) are actively underwriting this product; Limited appetite for sites that are known to be contaminated at the time of policy inception; Best applied for single sites only (as opposed to portfolio programs). Presentation Title 31

Environmental Insurance 101 Innovative “Green” Insurance Solutions & Initiatives Products and services specifically designed to insure the manufacture, assembly, construction and or operation of wind, solar, geo-thermal, bio-fuel, hydro, waste to energy and alternative energy sources; Discounts linked to Quantification of Environmental Benefits: – Pollution Liability Premium Credits for LEEDS properties; – Discounts for Low Emitting vehicles “Upgrade to Green” Property Insurance Products to bring Damaged or Destroyed Property up to a “Green certified” standard – Responds to partial or total losses to allow insureds to upgrade building to the next level of LEED standard, or a silver LEED standard for buildings which are non LEED – Coverage focuses on energy efficiency, water efficiency, indoor air quality and sustainability. – In Canada, buildings account for 33% of all energy consumption and about 30% of GhG emissions. Currently only about 4-5% of new construction in North America meets any kind of Green standard. 5 Presentation Title 32

Questions & Answers?