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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

General insurance spring seminar 19 20 may 2003 scarman house

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

General insurance spring seminar 19 20 may 2003 scarman house

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

General insurance spring seminar 19 20 may 2003 scarman house

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

General insurance spring seminar 19 20 may 2003 scarman house

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

General insurance spring seminar 19 20 may 2003 scarman house

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”

General insurance spring seminar 19 20 may 2003 scarman house

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

General insurance spring seminar 19 20 may 2003 scarman house

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

General insurance spring seminar 19 20 may 2003 scarman house

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

General insurance spring seminar 19 20 may 2003 scarman house

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

General insurance spring seminar 19 20 may 2003 scarman house

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

General insurance spring seminar 19 20 may 2003 scarman house

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