Risk Management and Insurance Issues for Lenders and Environmental ConsultantsContractors

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Risk Management and InsuranceIssues for Lenders
and Environmental Consultants/Contractors

• Presented by
• Kenneth E. Anderson, ARMManaging Director,
  Gallagher Environmental Risk Insurance
• Arthur J. Gallagher Risk Management Services,
  Inc.
• July 19, 2005

2
Disclaimer

• The discussion herein is general in nature and is
  not to be relied upon as either legal counsel nor
  insurance coverage advice.
• Insurance coverage descriptions herein are for
  discussion purposes only. Specific reference and
  review of applicable insurance policies and all
  endorsements/amendments must be made for a
  complete description of coverage terms,
  conditions and exclusions.

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Overview

• Risk Contractual Issues
• Hold harmless
• Indemnity
• Reliance letters
• Insurance Issues
• Claims experience
• Coverage concerns
• Premium notes
• Use of insurance as a business tool

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Potential Exposures

• Lender
• Unknown/Unexpected Cleanup Costs
• Impairment to Collaterals (i.e. the Propertys)
  Value
• Loss of Rents
• Borrowers income
• Anything that negatively affects being paid on
  time, with interest

• Consultant/Contractor
• Negligent Phase I/II Work
• Third Party Bodily Injuries
• Third Party Property Damage
• Business Interruption Expenses
• Diminution in Value to Property
• Cleanup Costs of Unknown/Unexpected Pollution
• Rework
• Natural Resource Damages
• Fines and Penalties

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Risk Control

• Lender
• Loan Types
• Contract Clauses
• Vendors
• Loan agreements
• Internal Phase I/II Reviews

• Consultant/Contractor
• Contractual Clauses
• Project Management
• Safety Plans
• QA/QC Protocols
• Job site and work product

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Contractual Risk Allocation

• On Whom Does/Should the Risk Lie?

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Scope of Service Concerns

• Lender
• Basic Services
• Broadly defined
• Additional Services
• All-inclusive
• Excluded Services
• None

• Consultant/Contractor
• Basic Services
• Clearly defined
• Additional Services
• Identify what is for additional fee
• Excluded Services
• Potentially needed services not in scope

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Standard of Care

• Lender
• Consultant represents that the services will be
  performed in a manner consistent with the highest
  standards of care, diligence, and skill exercised
  by nationally recognized consulting firms for
  similar services.

• Consultant/Contractor
• Consultant will perform its services using that
  degree of care and skill ordinarily exercised
  under similar conditions by professional
  consultants practicing at the same time in the
  same or similar locality.

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Warranties and Guarantees

• Lender
• Seek them Whenever Possible
• Examples
• warranted that ground water plume would be
  reversed within specified number of months
  following construction of system.
• If warranty not met, Consultant agreed to
  redesign and continue remediation indefinitely
  until system accomplishes performance
  requirements

• Consultant/Contractor
• No Warranties nor Guarantees, express or implied

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Indemnification

• Lender
• all damages arising from acts, omissions,
  errors or negligence of the consultant,
• all damages arising from the performance of the
  services, and/or
• all damages caused in whole or in part by
  Consultants negligence.

• Consultant/Contractor
• Indemnity to Lender for only damages arising from
  its negligence

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Limitation of Liability

• Lender
• No Limitation of Liability (LoL) on Any
  Damage/Obligation

• Consultant/Contractor
• LoL to apply to all damages and obligations,
  including the indemnification obligation
• LoL limited to
• fixed dollar amount
• the contract fee, or a percentage thereof
• Limit of insurance required by the Contract

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E-Mail Risk Management

• Lender
• Write Carefully, not Informally
• Spell Check
• Get Concurrences
• Dont Substitute E-mail for Other Documentation
  Required by Contract
• Organize into Electronic Folders
• Print Paper Copies as Appropriate for Files
• Delete Unnecessary E-mail
• Dont Delete Discoverable E-mails in Pending
  Claims

• Consultant/Contractor
• Write Carefully, not Informally
• Spell Check
• Get Concurrences
• Dont Substitute E-mail for Other Documentation
  Required by Contract
• Organize into Electronic Folders
• Print Paper Copies as Appropriate for Files
• Delete Unnecessary E-mail
• Dont Delete Discoverable E-mails in Pending
  Claims

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Documentation and Reports

• Lender
• Get Written Response(s) to Requests
• Non-response create paper record to document
  lack of response
• Make Written Confirmation of Oral Communications
• Follow up in writing

• Consultant/Contractor
• Get Written Response(s) to Recommendations
• Non-response create paper record to document
  lack of response
• Make Written Confirmation of Oral Communications
• Follow up in writing

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Reliance Letters

• Lender
• Avoid Phase I/II Rework/Update Costs
• Satisfies Due Diligence?
• Privity of Contract Issues?

• Consultant/Contractor
• Accommodation vs. Liability Exposure
• Original Scope of Work
• Original Intent
• Datedness of Work

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An NowInsurance!!
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Transferring Liabilities

• Contractual
• Insurance

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Insurance Coverage Types

• General Liability Insurance
• Third-party claims for bodily injuries and
  property damage related to the insureds work
  and/or location
• Typically excludes pollution, mold, professional
  liability
• Defense costs in addition to the policys limits
• Workers Compensation and Employers Liability
• Injuries to the insureds employees, including
  contract employees
• Third-party claims against the insured related to
  the employees injury

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Insurance CoverageTypes (continued)

• Professional Liability (a.k.a. Errors
  Omissions, EO, Insurance)
• Pays for third party claims for acts, errors, or
  omissions in professional services rendered
• Claims made and reported coverage
• Defense coverage provided within the policys
  limits.
• Contractors Pollution Liability Insurance
• Pays for third-party claims of bodily injury,
  property damage and cleanup costs that result
  from a pollution condition caused by a
  contractors work
• Occurrence coverage is available
• Defense coverage provided within the policys
  limits.

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Insurance CoverageTypes (continued)

• Lender Environmental Liability
• Protects lender from cleanup costs and/or
  third-party BI/PD claims
• Pays lesser of cleanup costs or outstanding loan
  balance
• Loan balance only coverage on very limited basis
• Usually written on a portfolio of loans
• Per Loan Sublimit and a Policy Aggregate Limit
• Typical insureds include Banks, Specialty Lenders
  and Real Estate Investment Trusts (REITs)
• A Supplement to, not a Replacement for, Due
  Diligence

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Insurance Terms Concepts

• Additional Insured
• Defense and/or indemnity for claims caused by
  Insureds work/negligence
• Additional Named Insured
• Direct rights to the policy including coverage
  for own caused loss/claims
• Waiver of Subrogation

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Insurance Terms Concepts(continued)

• Severability of Interest
• Limits of Liability
• Each incident and policy aggregate
• Deductibles vs. Self-Insured Retention

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Environmental Liability Insurance Overview

• Early Forms and Limits (1980 to early 1990s)
• Restrictive coverage regulatory driven
• Low limit availability
• Relatively expensive
• Todays Market
• Flexible coverage
• Cost-effective
• Significant limits
• Strong underwriting

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Environmental Liability Insurance Overview
(continued)

• Major Insurers
• Top 7 (Arch, AIG, XL, Quanta, Zurich, Chubb,
  Liberty)
• Have well over 95 market share
• Very Competitive Pricing and Terms
• Underwriting Expertise with Environmental Risks
• The broker must speak their language
• 2004 Premiums Were Estimated at 2 Billion

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Environmental Coverage Expectations

• Schizophrenia Still Exists
• Market Entries and Exits
• Mold
• Most discussed coverage topic today
• Difficult but not impossible
• Cleanup cost cap
• Worst loss ratio of all environmental coverage
• Coverage being written with tougher underwriting
  standards and pricing

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Environmental Insurance for Property Transactions

• Fixed-Site Pollution Coverage
• Cleanup/Remediation Cost-Cap Coverage

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Environmental Insurance for Property Transactions
Before

• Fixed-Price Remediation Contracting
• Brownfield Redevelopments
• Liability Buyouts
• Balance Sheet Smoothing

After
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Claim Examples Engineering and Environmental
Consultants

• Landfill Cap Commercial Redevelopment
• Cap failure and engineers negligence alleged
• 26.5 million loss
• Limit-loss for professional liability insurer
• Phase I
• Failure to find potential environmental concerns
• 4.5 million remediation expenses
• 10 million in business interruption expenses
• Failure to find potential environmental concerns
  park construction
• Abandoned UST
• Asbestos bricks in buried pit
• Negotiated remedy with insurer for 600,000

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Claim Examples Environmental Contractors

• Waste Disposal
• Movement of contaminated soil (unknown) at a site
  leads to 2 million additional cleanup
• Improper Asbestos Abatement
• Alleged mismanagement of abatement causes
  third-party bodily injury and property damage
  claims
• Improper Well Drilling
• Alleged drilling of sampling wells penetrates
  into a previously uncontaminated lower aquifer
• Over 5 million of additional testing and deep
  aquifer remediation costs

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Summary

• Proper Risks Management Needed
• Environmental Risks are Potentially Significant
• A Balance of Contractual and Insurance Risk
  Transfer is Necessary
• Insurance Is Used to Manage Financial Concerns

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Questions?

• Kenn Anderson
• 312.803.7406 Kenn.Anderson_at_AJG.com