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abcd. General Insurance Spring Seminar 19-20 May 2003 Scarman House. Session G (Plenary). Assessing, Managing and Insuring Pollution Risk Dr Simon Johnson Dale Lee (FIA). Introduction and Agenda. The Pollution Problem and How Insurers have been caught Legal Background - UK

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general insurance spring seminar 19 20 may 2003 scarman house


General Insurance Spring Seminar

19-20 May 2003

Scarman House

session g plenary

Session G (Plenary)

Assessing, Managing and Insuring Pollution Risk

Dr Simon Johnson

Dale Lee (FIA)

introduction and agenda
Introduction and Agenda
  • The Pollution Problem and How Insurers have been caught
  • Legal Background - UK
  • Underwriting Practices
  • FRS12 and pollution liabilities
  • Case Studies
  • Summary and Questions

The Pollution Problem

  • Gradual Seepage of pollution into the environment over many years
  • Headline problems such as Love Canal increased public awareness and prompted action
  • In late 1970\'s claims began to hit premises/operations coverage under Comprehensive General Liability (CGL) policies
  • In USA CERCLA passed in 1980 - \'polluter pays\' strict and retro, joint and several liability on PRP\'s
  • Superfund tax where no PRP or emergency clean up
  • London market hit on excess layers and reinsurance
  • Insurance risk not assessed and legal environment changed

Claim Triggers and Components

  • Triggers - Exposure, Manifestation, Continuous, Injury in Fact - \'All Sums\'
  • Remediation costs - Design and implementation of (normally) long term clean up scheme. NB - scheme could fail
  • Third party bodily injury and property damage
  • Defence costs. Primary policies often costs in addition with \'duty to defend\'.
  • Coverage disputes leading to Declaratory Judgement (DJ) costs

Insurance Market Reactions

  • Do not write pollution business - absolute pollution exclusions - most common reaction
  • Design a separate new policy to cover pollution risk - i.e. a new insurance product
    • Consult experts to understand the risk technically and legally - each site is unique
    • Assess the risk financially
    • Historical - Ongoing differentiation
      • Pollution present as at date of inception - historical risk
      • Pollution deposited after date of inception - operational risk
      • Clear policy wordings - claims made clear triggers
uk environmental legislation
UK Environmental Legislation
  • Some key dates:
    • Upto 1990
      • miscellaneous Acts e.g, Alkali Act & Public Health
      • Statutory Nuisance etc.
    • Environmental Protection Act 1990 (EPA)
    • Environment Act 1995
    • Implementation of Part IIA of EPA 1990 in April 2000
    • 2003+ - influence and impact of ‘new’ EU Regulations

Framework of Contaminated Land Law in England & Wales

EU Draft Directiveon Environmental Liability




Waste Management



(Change of Use)

T&CPA 1990



WIA 1991

WRA 1991

(Amendments due)



Part I EPA

(PPCA 1999)


Liability &

Human Rights


contaminated land a lawyer s definition
Contaminated Land - A Lawyer’s Definition

“Land which appears to the Local Authority to be “contaminated” because:

1. Significant Harm is being caused or there is a significant possibility of such harm being caused; or

2. Pollution of controlled waters is being or is likely to be caused

part iia epa 1990
Part IIA EPA 1990
  • First time Contaminated Land has been specifically legislated
    • Remediation Notice served on ‘Appropriate Person’
    • Appropriate Persons fall in two categories
    • Class A - Caused or Knowingly Permitted

If no Class A can be found then

    • Class B - Current owner/occupier
  • Complex rules for exclusion and allocation of liabilities
  • Few Sites Classified (so far) - about 50
underwriting philosophy
Underwriting Philosophy
  • Gradual Pollution risks
    • experience rating - site specific assessment
    • use of experienced qualified environmental professionals
    • information intensive - adherence to industry good practice
    • site specific consequence analysis
    • assumed maximum event probability over policy period
environmental policies
Environmental Policies
  • EIL - new and old gradual and sudden and accidental pollution conditions
  • CLI/PLL/PARLL - site specific contaminated land insurance (some new as well as old pollution conditons)
  • CPL - Contractors Pollution Liability
  • Cost-Cap/Stop-Loss - for clean-up schemes
  • Property Portfolio and secured lenders
policy cover triggers cli
Policy Cover & Triggers (CLI)
  • Claims made Policy
    • typically up to 10/12-years
  • Policy responds to:
    • Notice under Part IIA of EPA 1990
    • any other Regulatory or third party notice alleging liability
  • Policy indemnifies insureds against:
    • Regulatory liability - clean-up costs (including own site)
    • Third Party liability - including bodily injury
    • Legal and Technical Defence costs
    • Loss of rent receivable/Business Interruption

Risk Assessment - Sources, Pathways and Receptors

From ICE Design and Practice Guide - Contaminated Land 1994

is land contaminated
Is Land Contaminated?
  • Published guideline levels
    • background levels
    • target levels
    • intervention levels
  • Quantitative Risk Assessment
    • RBCA - partly quantitative
    • models - e.g. Risc Human, CLEA, etc.
common contaminants of concern
Common Contaminants of Concern
  • Organic materials
    • fuel oil, petrol, diesel, tars, phenols
    • solvents e.g. TCE
  • Metals
    • e.g. lead, arsenic, mercury
    • coper, chromium, nickel, zinc
  • Others
    • PCBs, pesticides, dioxins/furans, cyanide, corosives
information and documentation
Information and Documentation
  • Phase 1: Desk Study
    • hazard identification (potential for contamination)
  • Phase 2: Site Investigation
    • intrusive sampling, testing and analysis
    • risk evaluation
  • Phase 3: Remediation
    • design of remedial startegy, setting objectives
    • remedial works
    • validation
known contamination long term risk
Known Contamination - Long-term Risk
  • Missed Hot Spots
    • require both a pathway and receptor - low risk /cost events
  • Residual concentrations
    • residual levels recorded, land assessed (risk) as suitable for specified use in the insurance contract
    • principal sources removed, reduced at clean-up
    • residual levels and risk of contamination for many common contaminants should reduce with time
    • low probability of retrospective clean-up being required
    • can re-assess suitability for use
    • any residual contamination requires pathway and receptor to complete the pollutant linkage
unknown contamination long term risk
Unknown Contamination - Long term risk
  • Unknown, unidentified and unexpected
  • Identificati post-inception of insurance unlikely:
    • expert assessment minimises unknown risk
    • re-development risk excluded
    • no known problems to date (many sites have been in a contaminated condition for many years)
  • Unknown contamination risk - low as most investigations test for a wide range of expected or possible contaminants
approaches to remedial action
Approaches to Remedial Action
  • The Source e.g. removal, treatment or neutralsation
  • The Pathway e.g. interception or removal
  • The Receptor e.g. modification or removal

Most remediation schemes address either the Source and/or the Pathway

introduction to frs12
Introduction to FRS12
  • New accounting standard effective for accounting periods ending on or after 23 March 1999
  • Specific guidance on when / how to set up provisions
  • Potential for major impact on the balance sheets of many companies : some additional provisions likely to be required; some existing provisions may be disallowed
  • Extensive disclosure requirements
  • Specific relevance to companies with contaminated land and other pollution liabilities and exposure
frs 12 provisions
FRS 12 Provisions

A provision should ONLY be recognised when:

  • An entity has a present obligation (legal or constructive) as a result of a past event (an “obligating event”); and
  • it is probable (more likely than not) that a transfer of economic benefits will be required to settle the obligation; and
  • a reliable estimate can be made of the amount of the obligation (extremely rare that this is not the case) - but may be difficult where costs are volatile
the obligating event
The Obligating Event

Key points:

  • Constructive obligation arises where the event creates valid expectations in other parties ( through an established pattern of past practices, published policies etc) that the obligation will be discharged
  • No provision allowed for costs required for futureoperations i.e. the past event must exist independently of an entity’s future actions
  • Changes in law or public company announcements may create an obligation that did not previously exist. Trigger point for new law is when enactment is “virtually certain”

FRS12 Insurance

  • FRS12 provides insurance opportunities
  • Long term protection against:
    • Inadequate provisions
    • Emergence of contingent liabilities as FRS12 provisions in future
    • Other liabilities
  • Insurance provides support to long term management of balance sheet provision over time

FRS12 Case Study

  • UK chemical company purchased a US company with a polluted site
  • Site requires long term management of pollution problem
  • Clean-up costs represent a balance sheet provision
  • Company wanted to control provision over time
  • Detailed environmental consultant reports including initial cost estimates and annual cost estimates for planned activities
  • Consultants reports used to build a model of costs during the policy period

FRS12 Case Study continued

  • Likelihoods, timing and amounts modelled to give a distribution of the cost of the liability
  • Long term real rates of investment return modelled using Vasiceck model based on historical investment data
  • Deductible adjusted annually - a key feature
  • Deductible can be set at e.g. 80%, 100%, 150% of the provision
  • Client set deductible at confidence level at which prefer to retain risk
  • Pricing provides for premium structure - risk premium, capital loading, expenses, investment risk
  • Client benefits from valuation control over time
case studies1
Case Studies

1. US Inward Investor

2. Regeneration: Cokeworks

3. Former Industrial Site

4. Retail Development

5. Retail Portfolio

6. European Chemicals Company

case 1 american inward investor
Case 1 - American Inward Investor
  • Distribution Depot
  • US investor
  • UK FTSE 350 vendor
  • £7.5m Indemnity by vendor - 12 years
  • Contamination risks
  • Legal exposure
  • Solution : Indemnity back to back Risk Transfer
case 2 regeneration cokeworks
Case 2 - Regeneration: Cokeworks
  • Setting: Former colliery/cokeworks
  • Objectives: Regeneration of site to produce a development platform for light industry. Remediation involved excavation and disposal on-site into a number of engineered cells leaving the rest of the site ‘clean’.
  • Problem: Need to provide protection to future site owner against failure of engineered cells. Area of cells to be subjet to monitoring but otherwise used as managed public open space.

Solution: a long-term bespoke transferable environmental insurance policy for the current owner

case study 3 former industrial site
Case Study 3 - Former Industrial site
  • Setting: Site cleared but residual contamination from fill materials across site plus hotspots. Fill heavily contaminated with metals, hot-spots of hydrocarbons.
  • Problem: Proposed redevelopment for warehousing and distribution. Remediation of hot spots plus encapsulation (engineered cover) of fill. Residual contamination from fill and any ‘missed’ hot-spots.
  • Deal Driver: Transfer of liability. Funding requirement. Deal stalled.

Solution: Environmental Insurance to protect ‘new’ owner having bought with information and facilitate the deal and allowed ‘new’ owner to obtain institutional funding

case study 4 retail development
Case Study 4: Retail Development
  • Setting:Former gasworks site - South of England Town Centre. Non-food and food retail development, multiple occupancy.
  • Problem: Residual contamination both known and unknown in a highly sensitive groundwater environment.
  • Deal Driver: Indemnity required of purchaser from seller (and original polluter). Residual liability as new owner/occupier.

Solution: Bespoke Environmental Insurance covering the Indemnity risk as well as the liability of the new owner. 12-year policy, £5m Limit of Indemnity

case study 5 retail portfolio
Case Study 5: Retail Portfolio
  • Setting: Portfolio of both in-town and out-of-town retail outlets across the UK.
  • Problem: potential exposure to environmental liabilities, particularly on older sites and out-of-town sites on remediated brownfield land.
  • Driver: Protection of asset value; corporate governance; corporate reputation; and balance sheet protection.

Solution: Bespoke Portfolio Environmental Insurance for a 3-year fixed term allowing new properties subject to agreed due diligence to be added automatically to the policy


Case Study 6: Chemical Plant

  • International chemical company selling a business in Germany
  • Located on large polluted industrial complex with numerous other businesses
  • Transaction involved sale of factory
  • Site ownership remained with client
  • Client was contributing to on-going clean up costs across the whole complex
  • Under Sale and Purchase Agreement Client retained liability for long term environmental exposures
  • Client required professional valuation of liabilities for tax purposes

Case Study: Chemical plant (2)

  • Client is exposed to the following liabilities
    • Clean up costs arising from buyer choosing to increase the capacity of the business
    • Business interruption costs arising from increasing capacity of the business
    • Volatility of client contributions to scheme costs including increases arising from insolvency of other contributers
    • Failure of buyer to meet financial obligations as specified in the Sale and Purchase Agreement
    • Client\'s contingent liabilties under the Sale and Purchase Agreement

Case Study: Chemical plant (3)

  • Provision was assessed using a model of the exposures including:
    • Volatility of long term clean-up costs
    • Economic factors
    • Credit risk of other businesses on the complex
  • Added Value to client approximately E20m
  • Insurers have been caught in the past as the pollution risks were not assessed on a site or project specific basis and by experts
  • Uncertainty about contaminated land liabilities and exposure gives rise to unacceptable risks to companies, organisations and individuals - change of law and risk perception
  • Risk Management is key to maximising environmental and pollution opportunities
  • Aim to maximise value and minimise long-term environmental exposure
  • A multi-disciplinary strategic management approach is recommended, using technical, legal, financial, insurance and commercial management skills
  • Effective Risk Management requires broad Environmental Consultancy and Insurance Service support