Cliff WarmanMARSHEnvironmental Practice Leader for EMEA

Managing Environmental Risks and Liabilities –Environmental Impairment Liability Insurance

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Agenda

Environment & business

Environmental risk management

Environmental Insurance

Emerging environmental risks

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Environment & businessThe business lifecycle

LiabilitiesLiabilities

OperationsOperations

GovernanceGovernance

StrategyStrategyWhat is the environmental strategy?

What is the environmental strategy?

How are resources used?

What is the waste from the

process?

How are resources used?

What is the waste from the

process?

Are liabilities estimated?

What decommissioning

or remediation will be needed?

Are liabilities estimated?

What decommissioning

or remediation will be needed?

How are environmental risks assessed, managed and reported?

How are environmental risks assessed, managed and reported?

Product commercialityClimate changeMergers & AcquisitionsProcess change

Permits and licensesRecyclingEnd-of-life obligationsCO2 emissions reductionProcess efficiencyEnergy and water useWaste management

DecommissioningContaminated land remediationAsbestosEmployee and contractor healthPollution (uncontrolled emissions)

Environmental KPIsCorporate ResponsibilityReportingEMS

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Environment & businessEnvironmental risks and opportunities

LiabilitiesLiabilities

OperationsOperations

GovernanceGovernance

Quantify liabilities for remediation and

decommissioning

Quantify liabilities for remediation and

decommissioning

Manage remediation and decommissioning

Manage remediation and decommissioning

Map processes for utilising raw materials, energy and water

Map processes for utilising raw materials, energy and water

Process optimisation for resources, energy and water

Process optimisation for resources, energy and water

Environmental information systems

Environmental information systems

StrategyStrategy

Risk management procedures, & responsibilities

Risk management procedures, & responsibilities

Define commercialposition with respect toregulations & markets

Define commercialposition with respect toregulations & markets

Assess environmental risks and opportunities

Assess environmental risks and opportunities

Prioritise keyenvironmentalprojects

Prioritise keyenvironmentalprojects

Reduce waste & emissions, and increase recycling

Reduce waste & emissions, and increase recycling

Manage long term liabilities for aftercare

Manage long term liabilities for aftercareEnvironmental reporting and

disclosures

Environmental reporting and disclosures

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LEGAL

FINANCIAL

Environmental Risk ManagementSources of environmental information

TECHNICAL

Compliance with environmental legislationThird party claimsContract reviewWarranties & indemnitiesSale & Purchase Agreements

Environmental AssessmentEnvironmental Impact AssessmentEnvironmental auditPhase I – Desk studyPhase II – Site investigationQualitative / quantitative risk assessment

Operational Risk ManagementDischarge monitoringEmissions monitoringEnergy and water efficiency

Environmental ManagementEnvironmental Management SystemBest Available Techniques

LEGAL

FINANCIAL

Accounting provisions for decommissioning or clean-upFinancial provisions – Bonds, Escrows, Parent Company GuaranteePerformance bondsCapital and operational expenditure budgets

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Environmental risk managementTaking a Strategic Approach

Strategic

Environmental

Risk

Management

Technical

Financial

Legal

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

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Environmental Risk ManagementRisk management options

Technical

Financial

Legal

Accept

Mitigate / m

anage

Transfer

Insure

Strict liabilityThird partyOperational

Uncertainty

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Environmental risk managementStrategic use of insurance

Business Interruption

Product liability

Environmental Impairment

Delay in start up

GrowthEfficiencyComplianceProtection

Str

ate

gy

Op

era

tion

s

Lia

bili

ties

Go

vern

an

ce

Insurance cover required:

Insurance cover required:

Insurance cover required:

Insurance cover required:

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 theEnvironmental regulator covered?- Bartoline Ltd v Royal Sun Alliance plc (2006)

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What is insurable?

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

2) - Contractor’s 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

Contractor’s 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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Carbon Emission Credit Delivery Guarantee

Emerging environmental risks “Climate friendly”

Feasibilityand financing

Issue ofcredits

Verification andcertification

Carbontransaction

Commissioning

Construction

Validation and registration

Carbon reduction assessment

CDM Project

Political risk

Eligibility and approval

Business interruption

Validation and Reporting

Technology risk

Counterparty credit

Delay in Start Up

Natural hazards

Resources and supplies

Pro

ject

risks

Ca

rbo

n

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