Managing Environmental Risks and Liabilities Environmental Impairment Liability Insurance

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Managing Environmental Risks and Liabilities
Environmental Impairment Liability Insurance
Cliff Warman MARSH Environmental Practice Leader
for EMEA
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Agenda

• Environment business
• Environmental risk management
• Environmental Insurance
• Emerging environmental risks

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Environment businessThe business lifecycle
How are resources used? What is the waste from
the process?
Operations
Permits and licenses Recycling End-of-life
obligations CO2 emissions reduction Process
efficiency Energy and water use Waste management
Product commerciality Climate change Mergers
Acquisitions Process change
What is the environmental strategy?
Strategy
Business lifecycle
Are liabilities estimated? What decommissioning
or remediation will be needed?
Liabilities
How are environmental risks assessed, managed and
reported?
Environmental KPIs Corporate Responsibility Report
ing EMS
Governance
Decommissioning Contaminated land
remediation Asbestos Employee and contractor
health Pollution (uncontrolled emissions)
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Environment businessEnvironmental risks and
opportunities
Map processes for utilising raw materials, energy
and water
Assess environmental risks and opportunities
Process optimisation for resources, energy and
water
Define commercial position with respect
to regulations markets
Operations
Strategy
Reduce waste emissions, and increase recycling
Prioritise key environmental projects
Liabilities
Quantify liabilities for remediation and
decommissioning
Governance
Risk management procedures, responsibilities
Manage remediation and decommissioning
Environmental information systems
Manage long term liabilities for aftercare
Environmental reporting and disclosures
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Environmental Risk ManagementSources of
environmental information
TECHNICAL
Compliance with environmental legislation Third
party claims Contract review Warranties
indemnities Sale Purchase Agreements
LEGAL
Accounting provisions for decommissioning or
clean-up Financial provisions Bonds, Escrows,
Parent Company Guarantee Performance
bonds Capital and operational expenditure budgets
FINANCIAL
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Environmental risk managementTaking a Strategic
Approach

• Develop a risk based understanding of potential
  impacts from adverse business events
• Recognize that environmental risks do not respect
  borders (operational or geographical)
• Monitor for changes in Regulation, Liability
  Framework, Developing Case Law and Shareholder
  Expectations
• Understand how risk are being managed at a local
  level and drive consistency across geographies
• Develop robust risk identification,
  quantification, and management protocols
• Understand the limitations of the various risk
  management processes and insurance arrangements
  and
• Identify the gaps

Strategic Environmental Risk Management
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Environmental Risk ManagementRisk management
options
Accept Mitigate / manage Transfer Insure
Strict liability Third party Operational Uncert
ainty
Financial
Legal
Technical
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Environmental risk managementStrategic use of
insurance
Insurance cover required
Insurance cover required
Growth
Efficiency
Compliance
Protection
Business Interruption
Delay in start up
Product liability
Environmental Impairment
Strategy
Insurance cover required
Operations
Liabilities
Insurance cover required
Governance
Insurance cover required
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Environmental InsuranceWhat is insurable?

• 1) - Compliance costs are NOT insurable
• 2) Cover may be available under General or
  Public Liability insurance for pollution
• Usually GL PL policies have pollution
  exclusions
• Total pollution exclusion
• Sudden Accidental cover only

What is sudden and accidental
pollution? Unlikely to cover own-site clean-up
costs Is off-site clean-up mandated by
the Environmental regulator covered? - Bartoline
Ltd v Royal Sun Alliance plc (2006)
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Environmental InsuranceEnvironmental Impairment
Liability insurance

• 1) - Site Specific Pollution Legal Liability
  insurance
• Covers unknown pre-existing /or future
  contamination.
• Losses / liabilities covered can include
• Statutory and third party clean-up costs on- and
  off-site.
• Third party property damage (including loss of
  use, diminution in property value, and nuisance).
• Third party bodily injury
• Biodiversity Damage / Natural Resource Damage /
  Protected Species.
• First party business interruption losses.
• Associated legal and technical defence costs.
• Policy periods of up to 10 years available for
  pre-existing pollution
• Policy periods of up to 3 or 5 years for new
  pollution

What is insurable?

• 2) - Contractors Pollution Liability insurance
• For liabilities arising from new pollution (or
  the exacerbation of historic pollution) caused by
  contract / project works.
• Broadly the same coverage triggers as for
  site-specific policies.
• Can be combined with a PI section / coverage to
  also cover the design errors omissions risk.

• 3) - Clean-Up Cost Cap insurance
• Cap the cost of known remediation obligations.

• Use 1), 2) and 3) in Combined programme
• Clean-up Cost Cap on remediation works
• Contractors Pollution Liability cover for
  remediation contractors
• Site Specific Pollution Legal Liability cover for
  site post-remediation

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Emerging Environmental RisksEnvironmental damage
and biodiversity

• European Union - Environmental Liability
  Directive
• EU wide framework to prevent and remediate damage
  to the environmental based on the Polluter Pays
  principle
• Derives an inherent value to the environment,
  defined as protected species and natural
  habitats, soil and water
• Prevention, remediation, complementary and/or
  compensatory action are required
• Unlimited liability subject to proportionality
  principle
• Requires risk assessment and quantification of
  potential environmental damage
• Not retroactive (start date is May 2007)

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Emerging environmental risksClimate Change

• Climate Change Potential effects
• Weather
• increased property damage due to increased
  severity (higher winds, bigger floods, longer
  droughts)
• more frequent severe weather events
• Economy
• Damage to critical (social and supply chain)
  infrastructure
• Loss of business due to change in behaviour
  (tourism, geographical avoidance)
• Disruption to supply chain
• Agriculture
• Shorter growing seasons
• Crop failure
• Forest fires
• Increased pest incidence

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Emerging environmental risksClimate Change

• What is the insurance industry doing to assist ?
• Raise awareness of climate change related risk
  issues to clients
• Detailed risk analysis
• Research and forecasting (weather, flood,
  catastrophic incident, epidemics, business
  interruption, supply chain)
• Development of focussed risk management
  strategies
• Provide specialist insurance products
• Inform public policy making
• Reduce the impact of business on the environment
• Ref Association of British Insurers

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Emerging environmental risks Climate proofing

• Catastrophic weather risk cover
• Property damage
• Business interruption
• Non catastrophic weather risks
• Parametric loss of revenue

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Climate Change Climate friendly

• Renewable energy projects
• Construction phase
• Construction All Risks
• Delay in Start-up
• Third Party Liability
• Operating phase
• Property Damage
• Business interruption
• Third Party Liability

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Emerging environmental risks Climate friendly

• Carbon Emission Credit Delivery Guarantee

Issue of credits
Carbon transaction
Construction
Carbon reduction assessment
Feasibility and financing
Verification and certification
Commissioning
Validation and registration
CDM Project
Political risk
Business interruption
Counterparty credit
Natural hazards
Resources and supplies
Project risks
Eligibility and approval
Validation and Reporting
Technology risk
Delay in Start Up
Carbon risks
Carbon Emission Credit Delivery Guarantee
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Managing environment risks and liabilities Summary

• Environment is a real issue and requires Board
  Room attention
• Risk assessment and active risk management,
  including the use of insurance, is needed
• Environmental insurance market is mature and has
  meaningful capacity
• New products are developing in response to
  emerging environmental issues