Crystal & Company

Integrated Environmental Risk Management Strategies: Funding Environmental Cleanup from Pre-existing Insurance Policies

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Courtesy of Courtesy of Crystal & Company

One of the terms used to describe the newest environmental risk management strategies, is the term 'Integrated Environmental Risk Management.' This involves evaluating and 'integrating' both new and traditional resources to help clients manage, control, avoid and ultimately transfer environmental risks.

Environmental Services Group & Dispute Resolution Management, Inc.

At the Environmental Services Group (ESG) we are working harder than ever to keep our clients updated on the newest environmental risk management strategies. In today’s market place, there is more pressure than ever to clean up, manage and transfer environmental liabilities associated with contaminated sites. Especially with sites that have a long-term history of old contamination that are either being purchased, sold and/or redeveloped. Whether these sites fit the pure definition of a Brownfield or are merely part of a larger transaction, the environmental issues and the cost associated with the environmental issues must be addressed.

ESG is pleased to announce a new working relationship with Dispute Resolution Management Inc. (DRM) and Dispute Resolution Management UK Limited (DRM UK). DRM, collectively, specializes in designing and executing non-litigious insurance recovery for its clients. With nearly two centuries of collective claim settlement experience and a multi-disciplinary team of seasoned attorneys, MBAs and former insurance claim managers and professionals, DRM employees’ experience allows them to look through the lens of the insurer. Coupled with the unique DRM process their experience enables them to accurately predict insurance company settlement strategies and develop effective proposals and counter proposals.

Case Study: Minerals & Chemical Company

Minerals and Chemical Company (MCC) is a major privately held corporation with diversified holdings in the Mineral and Chemical industries. MCC is one of two primary PRPs at a Superfund site in the Pacific Northwest. MCC is also exposed to a number of other remediation liabilities and environmental damages, including natural resource damages, and retains certain exposures arising from the 1980 acquisition of a bankrupt California fertilizer manufacturer. More than two dozen clean-up sites are located in California, Iowa, Washington, Oregon, Wyoming, Utah and Idaho. The company filed a coverage action against its insurance carriers in the summer of 1993, but did not serve the complaint. In early 1994 MCC engaged the professionals at DRM to assist in efforts to resolve its claims prior to full-blown litigation. The DRM professionals conducted several months of research, and uncovered additional insurance coverage dating from 1950 to 1986. They then prepared claims presentations for the primary carriers and commenced negotiations towards a mutually acceptable resolution for settlement. By the fall of 1995, Minerals and Chemical Company, working with the DRM team, had achieved settlements totaling nearly $22,000,000. The recovery effort cost MCC less than 8% of its total recovery to date.

Finite Environmental Risk Management

Drawing on the example above, once damages have been recovered, these same funds can be used to construct a financial mechanism for pre-paid project costs and risk transfer. The finite program is a policy form that, similar to a closure/post-closure policy, is used by an insured to fund for anticipated future expenses, protect against unknown potential losses and satisfy prescribed regulatory agency financial assurance requirements. The finite program modifies the Cost Cap policy by adding a coverage line that anticipates, funds and pays for the projected construction costs as bid by a contractor.

Concentrating directly on the needs of the insured site, the finite program would collect the money necessary for the construction work as well as the premium for the associated Cost Cap coverage under one lump sum. Should the timeline of the project be long enough, the money collected for the construction costs would be discounted to a net present value. The finite program then assumes the responsibility of making payment to the contractor on a work completed basis and verifies status reports as prepared by the contractor. The assets of the insurance company are pledged back to the insurance instrument and thus assure the regulatory agencies that finances will be available for the construction project. Following is a sample depiction of a Finite Environmental Insurance Program structure:

  • Estimated clean up: $15,000,000 over 5 years – Net Present Value of Cleanup is: $12,000,000
  • Estimated premium cost for $50,000,000 environmental insurance policy: $ 750,000
  • Total Insurance Premium Paid to the Insurance Company: $12,750,000
  • The Insurance Company would issue an Environmental Insurance Policy that provides policy limits of $50,000,000 for coverage of certain cost overruns associated with the insured remedial project. Coverage could be provided for cost overruns arising from new found contamination, under-estimation of contamination, migration of contamination, remedial technique failure, disposal related cost overruns, work order changes, regulatory changes or re-openers at or emanating from the insured site for up to a 10 year policy term.

The goal of a Finite Program is very simple; it is intended to assist the insured in removing as many environmental liabilities as possible from the corporate balance sheet.

Benefits include:

  • The ability to address and quantify specific environmental project reserves on the corporate financial statements by pre-funding the project costs and capping the potential cost overruns.
  • Payments made towards the Finite Program can be fully expensed in the year of the contribution; thereby allowing accelerated expense reporting.
  • Enhances client’s ability to negotiate a fixed price project, or O&M plan, from qualified contractors.
  • Address investor/lender concerns of accurate project or O&M cost disclosure.
  • Decrease, eliminate or appropriately footnote balance sheet reserves that might otherwise be set aside for potential cost overruns.
  • Transfer the risk of changing EPA regulations that may affect the O&M costs.
  • Satisfy financial assurance requirements imposed internally by Superfund site Respondents or externally by regulatory agencies and judicial consent decrees.
  • Allow clients to dedicate resources to their respective businesses and concentrate on growth rather than closure.
  • Pre-funded project expenses and cost-cap insurance secure each Superfund site Respondent’s allocated share of liability in case of insolvency of one or more Respondent(s).
  • Realization of a net savings over the use of letters-of-credit for internal Superfund site Respondent Group financial assurance requirements.

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