Insurance Archeology (and Why You Should Do It)

Transcription

1 Insurance Archeology (and Why You Should Do It) John L. Malanchuk, Ph.D. Richard D. Siegel, Ph.D. 10 th ACI-NA Insurance & Risk Management Conference The Ritz-Carlton, New Orleans January 14-16, 2009

2 Question: Why Bother to Reconstruct Your Historical Insurance Asset? Answer: Adding $1 or $2 million or more to your budget would be a good thing You have real or potential environmental liabilities originating from pre-1985 operations There is no downside 2 2

3 Observations You have an insurance asset It is not being utilized It is disintegrating before your eyes Soon it may be worth nothing Bar dates continually come and go for insurance companies in liquidation 3 3

4 The Suggestion Insurers of the site during and after the period when contamination occurred are significant stakeholders in the site clean up Failure to evaluate the possibility of insurance recovery ignores a major funding source 4 4

5 New Approaches to Environmental Coverage Claims General theory is to match old insurance policies covering liabilities due to property damage with remedial obligations for environmental clean up So long as the contamination stems from operations during the policy period, the claim can be filed decades later Some regulatory driver is needed, but there need not be any legal action 5 5

6 Negotiating Coverage Claims Traditionally environmental coverage cases were litigated, at large expense and over many years With years of experience in the courts, litigation no longer is the preferred option While many issues remain unresolved, patterns of court decisions have emerged on a State-by-State basis Enough cases have been settled or tried so as to provide benchmarks for how a new case should be valued Both sides benefit from savings of time and expense without litigation While many environmental claims are still litigated, few should be 6 6

7 Negotiating Coverage Claims Resolution of claims requires creation of a winwin situation Insurers seek release of all pollution exposures, or all policy exposures In return, policyholders obtain money toward past and future expenditures Also eliminates solvency and litigation risks 7 7

8 The Process Corporate History Insurance Information Liabilities 8 8

9 Reconstructing the Coverage You may have policy rights to predecessor insurance policies Look at the flow of liabilities Focus on start of operations or exposure up through

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14 Insurance Archeology Airport coverage generally was issued by US companies in the 1940 s and 1950 s, with Lloyd s of London more involved in the 1960 s Key US insurers include: United States Aviation Insurance Group Independent insurers unrelated to AIG Associated Aviation Underwriters Historically managed by Chubb and CNA now part of the Global Aerospace Group Because of a limited number of insurers and forms, airport liability programs may be easier to reconstruct and subject to less uncertainty 14 14

15 Insurance Archeology The most valuable coverage to find is from the 1970 s and earlier Pollution exclusions first appear in the early 1970 s For example, many airports have an Environmental Disturbance Exclusion which excluded liability from pollutants released into the earth, air, water or any disposal system except if such release is sudden and accidental Absolute pollution exclusions generally are seen starting

16 How Do You Construct Your Coverage Chart? Insurance Archeology Make a complete list of all relevant business names Obtain lists of your known insurance carriers Review your internal records insurance records/accounting records including board minutes, ledgers Identify/interview old-timers There are clues everywhere 16 16

17 Contact Your Broker(s), Carriers, Etc. Gain access to any records you can from current or former brokers Contact State Insurance Commissions or other entities to ascertain the existence of any insurance records 17 17

18 Contact your former carriers to obtain evidence and documentation of your coverage Be persistent: if you ask for old policy information, carriers and brokers may be suspicious You are the client, so they should give you any information they have pertaining to your account 18 18

19 Goal Acquire the best level of evidence that you can You may only have carrier names or policy numbers If possible you should have at least the carrier name, the policy number, the policy period and the limits of coverage You may be able to acquire form policies that resemble your coverage 19 19

20 Insurance Information: The Asset is Diminishing 20 20

21 Insurance Information: The Asset is Diminishing 21 21

22 What To Do With Your Insurance Coverage Asset Match your insurance coverage to your liabilities, and cash in your coverage asset while you still can The best approach is to negotiate a settlement as a business transaction without litigation 22 22

23 Presenting Environmental Liabilities to Insurers Normal Environmental Thinking If I don t know about it, it s not a problem Argue the least cost alternative until regulators say no NFRAP means you re done Sending waste offsite means you re done Insurance Recovery Thinking If I don t price the risk now, I never will get to price it Argue what the regulators may require you to do Assume that contamination will have to be cleaned up eventually Sending waste offsite creates third-party disposal site liabilities 23 23

24 List of Future Cost Items Environmental Site Investigations: Collection of soil and groundwater samples Analysis for VOCs, PNAs, RCRA metals, PCBs, and glycols Underground and Aboveground Storage Tanks and Fuel Lines: USTs require removal and remediation of impacted soils Removed USTs and 7 open LUST incidents require remediation Pyrogenic PNA-Impacted Soil: Impacted soil along runways requires removal and off-site disposal Storm Water Basins and Conveyances: Impacted soil and sediments in storm water basins require removal and off-site disposal Berms: Contaminated soil in the berms requires removal and off-site disposal Landfill: Contaminated soil requires removal and off-site disposal Maintenance Buildings, Hangars, and Terminal Buildings: Contaminated soil requires removal and off-site disposal Contaminated groundwater requires remediation 24 24

25 Negotiating Coverage Claims Environmental Liability Allocation Theory Legal Discounts Negotiations can succeed when the parties become actively engaged in a dialogue on the valuation of the claim 25 25

26 Why the Process Works Litigation is avoided Transaction costs are minimized Insurers avoid future exposure Insurers have reserves for future claims Insurers have reinsurance Funds are made available to the policyholder for needed remediation It costs nothing to evaluate your claim 26 26

27 The steps in the process 1 Month 6 Months 12 Months Is there a case? Corporate history - Stock or asset purchases - Flow of liabilities - Policy rights Liabilities - Past costs - Future costs - Regulatory compulsion Policies - Existence/evidence - Terms - Exclusions - Solvent carriers Determine whether sufficient coverage exists to support a claim Build the claim Provide details of transactions to demonstrate coverage is proper Prepare an analysis of each site in the claim describing the site, the nature of the problem, the proposed solution for risk transfer purposes, the costs to date and the future costs for the proposed solution Perform allocations according to various theories to determine how much each policy/carrier should pay of the total damages Complete the detailed insurance coverage chart and policy language analysis Implement standstill and confidentiality agreements with each carrier Negotiate the claim Develop settlement strategy Prepare targets and demands for each carrier Hold principal to principal meetings with each carrier to settle the claims 27 27

28 Are there any disadvantages to taking the first step If you have not evaluated the benefits of insurance recovery, you should do so at this time There is very little down side No new data are collected No new reporting requirements are triggered The time investment is minimal The cost is low 28 28

29 Questions/Concerns Confidentiality Relationships carrier regulator community No new reporting requirements No new data collected 29 29

30 Eisenstein Malanchuk LLP 1048 Potomac Street, N.W. Washington, D.C (202)