THE DEPARTMENT OF DEFENSE, THE ENVIRONMENT AND YOUR CONTRACT RISKS

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1 THE DEPARTMENT OF DEFENSE, THE ENVIRONMENT AND YOUR CONTRACT RISKS A U.S. Departmet of Defese (DOD) performace-based cotract (PBC) has a uique structure, ad cotractors should cotemplate several issues ad potetial challeges before eterig ito oe. The objective of the PBC program is to reduce life cycle costs for the DOD while maximizig the umber of site closures. The cotracts typically prescribe the desired outcome of the work without specifyig the methods or techologies to be used to achieve the goals. The performace objectives must be met prior to a established deadlie ad demostrate best value to the DOD. The Willis Evirometal Practice has the experiece ad the expertise to help you avigate the rocky terrai of performacebased cotracts for the U.S. Departmet of Defese. ISSUES AND CHALLENGES PBC CONTRACT EXPOSURES I additio to requirig that a cotractor meet the broader goals of site closure for a reduced ad guarateed cost, the DOD PBC cotracts typically require that the cotractor be resposible for kow ad ukow cotamiats o ad emaatig from kow (covered) sites as well as ay regulatory chages. These requiremets result i sigificat exposure for offerors relative to remediatio cost overrus, regulatory reopeers ad potetial third-party property damage ad bodily ijury exposures associated with pollutats migratig off-site.

2 These exposures are somewhat tempered by the fact that cotractors are typically ot resposible for ukow sites (sites with pollutio coditios outside of the sites covered withi the scope of the cotract). The liabilities associated with each cotract vary ad should be carefully evaluated, ad where possible, isured to limit the cotractor s fiacial exposure. Whe choosig to compete i the DOD PBC area, cotractors must be aware that they will be assumig balace sheet risk, whether they self-isure the Cotractors Guaratee or purchase commercial evirometal isurace. The balace sheet risk remais ad ca be cosiderable for larger projects eve whe usig evirometal isurace to support the Cotractors Guaratee. This risk icludes deductibles (per each icidet o Pollutio Legal Liability (PLL) policies) ad fudig potetial gaps betwee the Project Price ad the Attachmet Poit of the Cost Cap coverage. The risk also icludes the coisurace provisio o Cost Cap policies that madates the cotractor share i the covered losses. Fially, there ca be the risk of uisured or uder-isured exposures due to policy coverage limitatios ad exclusios or the purchase of isufficiet limits. U.S. AIR FORCE (USAF) 2-STEP EVALUATION PROCESS The USAF recetly iitiated a 2-Step Evaluatio Process for evaluatig, amog other thigs, the meas by which cotractors (or offerors) choose to support their Cotractors Guaratee Limit. This ew approach ivolves: STEP 1 STEP 2 USAF evaluatio of all proposals specifically focusig o how the offeror will fiacially support their Guaratee USAF verificatio of the offeror s fiacial capabilities, ad the assistace i egotiatig ad purchasig ay ecessary isurace for the Apparet Successful Offeror (ASO). Offerors ca elect to support their Cotractors Guaratee by self isurig or by usig commercial evirometal isurace, specifically Cost Cap (remediatio project overru isurace) ad/or Pollutio Legal Liability (PLL). The USAF will closely evaluate how offerors support this guaratee. They typically require: Offerors who are self isurig to provide audited fiacials ad/or SEC 10K forms for the three most recet years for which such documets are available Offerors who ited to use evirometal isurace to support their Guaratee must provide descriptios of the followig: (1) The offeror s experiece with usig evirometal isurace over the past five years (2) Ay evirometal isurace claims made by the offeror or for projects with which the offeror was ivolved over the past five years (3) Other iformatio the offeror deems relevat to the offeror s experiece with evirometal isurace The 2-Step approach is mostly i respose to cotractio i the Cost Cap market ad the desire of the USAF to use their exteral cosultat to work with the ASO to joitly approach the evirometal isurace markets ad egotiate ad procure evirometal isurace, if elected, to esure optimal protectio of the USAF s iterests. 2 Willis North America 7/11

3 COST CAP INSURANCE MARKET The Cost Cap Isurace Market has chaged cosiderably over the past few years. Some of the issues most relevat to isurig PBC projects are: COVERAGE AVAILABILITY. The poor loss history experieced by the limited umber of Cost Cap isurers over the last several years has resulted i a further shrikage of the market to a eve smaller umber of carriers who are cotiually evaluatig ad further restrictig their capacity ad coverage terms to attempt to achieve profitability. CONTRACTOR EXPERIENCE. Isurers prefer to write Cost Cap coverage for parter cotractors who have a prove track record of success with the isurers o fixed price cotracts. Coverage may be difficult to obtai for a cotractor who has ot performed/isured such work i the past. CONSERVATIVE UNDERWRITING. Isurers ow wat to oly cosider projects that have a regulatory agecyapproved remedial actio pla. DOD PBC cotracts typically iclude multiple areas of cocer, some of which may ot have reached the regulatory approved pla stage. Additioally, uderwriters are avoidig ucertaity. Where there is t a high degree of cofidece i the existig characterizatio iformatio, there has bee a tred to exclude specific cotamiats or sites from coverage. As a result, some specific tasks, sites or cotamiats could be excluded from the policy, ad the risk would revert to the cotractor. Also, uderwriters are applyig larger cotigecies to their clea-up cost estimates, resultig i higher attachmet poits. POLLUTION LEGAL LIABILITY (PLL) MARKET Ulike the Cost Cap product lie, the market for PLL is very competitive. Cosiderable ew capacity has etered the market i recet years, resultig i expaded coverage terms ad coditios ad extremely competitive pricig. The market for PLL icludes close to 40 isurers; however, a much smaller umber of isurers would have a appetite for coverig PBC cotracts at DOD sites. Amog the isurers who would etertai coverig a PBC project, there is ample capacity available ($25M $50M per idividual market), the ability to layer capacity from multiple isurers, great flexibility for egotiatig terms ad coditios, flexibility with program structurig ad 10-year terms readily available for pre-existig coditios. However, the cosideratio of participatig markets may be affected by the eed to utilize a Cost Cap i cojuctio with a PLL program. SURETY BONDS Some of the PBC cotracts require paymet ad performace bods for the traditioal costructio portios of the task order. This ca be a challege, as some sureties are reluctat to provide bodig for the costructio portio of a project, which icludes a sigificat evirometal compoet. 3 Willis North America 7/11

4 THE WILLIS APPROACH ENVIRONMENTAL SURETY SOLUTIONS. Willis has a Evirometal Surety Workig Group comprised of 14 Evirometal ad Costructio Surety professioals across the coutry with expertise i placig evirometal surety bods. These specialists are available to assist our local surety teams i complex evirometal project surety placemets. PRESENTATION OF CONTRACTOR S CAPABILITIES AND EXPERIENCE TO INSURERS AND THE AIR FORCE. Whe pursuig Cost Cap coverage for a PBC project, both the USAF ad the evirometal isurers will be evaluatig the cotractor s experiece with fixed price cotracts, evirometal isurace ad DOD PBC projects. Willis has cosiderable experiece i this area icludig workig with cotractors to best positio their experiece to address the cocers of the Air Force ad the isurace markets. We arrage itroductory meetigs with Cost Cap ad PLL isurace markets ad advise the cotractor how to best represet their capabilities ad experiece (icludig claim maagemet) relative to fixed price remediatio ad govermet cotracts. I additio, we ca trai project maagers, estimators, cotract admiistrators, attoreys ad other persoel ivolved i quotig these projects with Cost Cap ad PLL isurace ad provide them with the kowledge of available coverages ecessary to develop a accurate risk profile for projects. ONGOING MANAGEMENT OF INSURANCE PROGRAMS. I additio to the isurace coverage ad proposal traiig for persoel ivolved i quotig PBC cotracts, we ca provide istructio for persoel ivolved i the ogoig maagemet of isured PBC projects. We ca assist you i idetifyig provisios of the isurace cotract that require attetio throughout the course of the project, icludig a basic review of the coverage ad policy requiremets for progress reportig, claim otificatios, scope of work modificatios ad eeded amedmets to coverage as work progresses. WILLIS QUALIFICATIONS The complexities of the PBC cotracts, the ew two-step evaluatio process ad the challeges of the Cost Cap market require a experieced broker with established uderwriter relatioships. The evirometal isurace market is a very specialized, iche market place ad credibility, experiece ad history with the carriers is crucial. Willis kows what cocers isurers ad the Air Force have; we kow the issues that both eed to have addressed, ad we have the experiece ad skill to preset our cliets i a maer to achieve the desired results. Willis has broad experiece with govermet clea-up projects, icludig the Base Realigmet ad Closure (BRAC) program, DOD PBC ad similar projects. We uderstad the specific risk factors ad techical challeges associated with military clea-up projects, icludig UXO, MEC, emergig or uique cotamiats, such as perchlorate ad chemical weapos material (CWM) ad their breakdow products ad other hazardous, toxic ad radiological wastes (HTRW). Willis helped pioeer the developmet of may of the isurace solutios to these uique exposures. For example, we placed oe of the first Cost Cap programs to iclude coverage for MEC clea-up cost overrus. 4 Willis North America 7/11

5 A represetative list of BRAC & DOD projects icludes: FORT MCCLELLAN, ANNISTON, ALABAMA. Oe of the most visible curret BRAC projects is Ft. McClella, Alabama. Willis placed both a site-wide Pollutio Legal Liability policy (icludig coverage for cocussive effects of MEC) for approximately 10,000 acres of FOST ad FOSET base property trasferred to the local re-use authority, as well as a clea-up Cost Cap policy for oe phase of MEC, Chemical Weapos Materials (CWM) remediatio. The clea-up Cost Cap program was the first such program writte for MEC remediatio o a pure risk trasfer basis. The base was closed i the 1995 BRAC roud ad the facility has become oe of the highest profile federal clea-up ad redevelopmet projects i North America. A $50 millio remediatio agreemet represets the largest privatized clea-up of a BRAC site to date ad the first time the Army has trasferred ad privatized a uexploded ordace removal actio. NAVAL AIR WARFARE CENTER (NAWC), WARMINSTER, PENNSYLVANIA. Nie lad parcels were trasferred to the Federal Lad Reuse Authority (FLRA) of Bucks Couty uder Ecoomic Developmet ad Public Beefit Coveyaces i The trasfer occurred as part of the Departmet of Defese s closure of the base. Evirometal cotamiatio was idetified at NAWC i late 1979, a CERCLA prelimiary assessmet/site ispectio was completed i 1985, ad the site was placed o the Natioal Priorities List i CERCLA Remedial Ivestigatio ad Feasibility Studies (RI/FS) were performed at eight sites throughout the 1990s ad were completed i A groudwater pumpig ad treatmet system is i place ad will remai active for the foreseeable future. The FLRA retaied Willis to obtai a 10-year term evirometal liability policy that respods excess to the existig policy. This policy also drops dow to provide primary coverage through at least 2017 whe the curret policy expires i The ew suset policy was boud at the completio of the redevelopmet. FORMER CHANUTE AFB, RANTOUL, ILLINOIS: PERFORMANCE-BASED TASK ORDER. This base was closed i 1993 ad the Air Force has bee workig to clea the site to allow for its redevelopmet. The goal of this performace-based, firm fixed price task order was to reduce Air Force life cycle costs for the remediatio by maximizig the umber of sites achievig site closure ad/or regulatory closure. Other goals were to develop ad implemet a optimized exit strategy toward site or regulatory closure for the remaiig sites ad iclude iterim property trasfer for the 47 sites at the former Chaute AFB. Evirometal isurace was required by the task order to cover the risks associated with work to be performed at the 47 sites, which had a history of waste fuels, solvets ad oil disposal i ope dumps across the facility. Willis placed a combied evirometal policy form that provides cost overru ad site pollutio liability coverage with limits i excess of $32 millio for the eight-year, multi-millio dollar remediatio cotract. Willis worked closely with the cotractor ad the Air Force to structure a policy that cotais several uique ehacemets desiged to protect the Air Force s iterests as well as those of the cotractor. The Willis Evirometal Practice backgroud ad experiece i this area provides a broad ad i-depth arseal of solutios to alig with your DOD PBC risk maagemet strategies. CONTACT For additioal iformatio, cotact your local Willis Evirometal Practice professioal, visit our website at or cotact: Rick Hawkiberry Evirometal Practice Leader rick.hawkiberry@willis.com 5 Willis North America 7/11