2005 Environmental Insurance Market Review€¦ · provide insurance buyers, professional advisers, financiers and other interested parties with the following: • An update on market

Environmental Insurance Market Review 2005

Willis Group Holdings Limited is aleading global insurance broker,developing and delivering professionalinsurance, reinsurance, risk management,financial and human resource consultingand actuarial services to corporations,public entities and institutions aroundthe world.

With over 300 offices in more than 100countries, its global team of 15,800associates serves clients in some 180countries. Willis is publicly traded on theNew York Stock Exchange under thesymbol WSH.

Additional information on Willis may befound on www.willis.com.

Willis Environmental Insurance Market Review 2005 1

Contents

Foreword

Introduction

Corporate Environmental Risk Management

A Lawyer's Perspective

Review of Merger and Acquisition Activity

Environmental Insurance Market Commentary

Key Environmental Risk Financing Products

Principal Applications of Environmental Insurance

Effective Use of the Insurance Markets

Current Developments in the US Environmental Insurance Market

Key Contacts and Biographies

2

5

8

10

13

15

21

31

42

49

52

Foreword

enabling complex risks and liabilities to betransferred to the specialist insurancemarket. Willis has seen this risk transfermechanism used in a range of scenariosfrom operational management ofcommercial and industrial portfolios tobacking environmental warranties andindemnities in land transactions. Increasedmerger and acquisition (M&A) activityacross multiple industry sectors andcountries continues to stimulate the use ofenvironmental insurance as transaction

Since Willis published the last MarketReview in 2002, the environmentalinsurance market has continued to evolvesignificantly. The markets have continuedto grow and this growth has gatheredmomentum with the development of newproducts and applications across a widerange of industry sectors.

Environmental insurance is playing anincreasingly important role inenvironmental risk management strategies,

2 Willis Environmental Insurance Market Review 200503

Foreword continued


parties and their professional advisors seek solutions for pollution related deal-breakers.

Within the wider insurance market, 2005has been a year of major change. Publicscrutiny of the insurance industry instigatedby the New York Attorney General servedto heighten clients' concerns regarding theintegrity of the insurance community. Willishas maintained its position of opennessand clarity of approach in its business

transactions demonstrated by thepublication of the Willis Client Bill of Rights.

In addition, changes in the UK insuranceindustry regulation came into force on14 January, 2005 when the FinancialServices Authority (FSA) took overresponsibility for the regulation ofinsurance mediation activities. It becamea criminal offence for a person or entityto undertake such activities unless they

have been authorised by the FSA or arean Appointed Representative of a FSAauthorised firm or are exempt under theterms of the Financial Services andMarkets Act 2000. Willis' application forauthorisation by the FSA was successful.

Willis has faced these new challenges andwe have continued to develop our WillisExcellence Model and standards ofpractice in addition to completing aninternal review of operations. In response

to our clients' concerns, we were the firstto abolish all contingency agreementswith underwriters and issued the WillisClient Bill of Rights to demonstrate ourcommitment to client focused service.

Exciting times lie ahead for theinsurance industry; we look forward tothe anticipated continued developmentof the environmental market from aspecialist niche area to a mainstreamline of insurance.



Introduction

Environmental risk related issues are stillmoving up the corporate agenda drivenby, for example, liabilities associatedwith existing legislation, environmentalreporting requirements and corporategovernance responsibilities. As a result,organisations are developingenvironmental risk managementstrategies for their ongoing businessoperations. This approach applies acrossa range of industries including thefinancial, private and public sectors.

The ever-changing environmentallegislation has kept environmentalliabilities and risks to the fore in landtransactions, redevelopmentopportunities and M&A deals. Within thelast year, the UK has seen the firstprosecution by a Regulatory Authorityagainst a land developer under the UKContaminated Land Regime. It is widelyconsidered that this will be the first ofmany such prosecutions in the nearfuture. In addition, the implication on

brownfield redevelopment and the waste management industry of the newEU Landfill Directive together with theVan de Walle vs Texaco ruling in theEuropean Court of Justice (7 September,2004) have ensured environmentalissues remain in the public eye. Theenvironmental insurance market hasresponded with the development ofbroader coverage, the availability of significant levels of indemnity and awide range of products.



Introduction continued

As insurance brokers, one of our roles isto monitor these changes and developnew approaches and products with theinsurers, such as liability buy-outs andcombined programmes, which blend anumber of the principal environmentalcoverages into one flexible offering.

The UK environmental insurance marketremains a niche area but a dynamic one.

By the end of 2003 the number ofinsurers in the market reduced by 50%and those remaining were restricted intheir offering. However, environmentalinsurance was still recognised as agrowth market by insurers. Their appetitefor business did not wane and by thesecond quarter of 2004 the market wasback to a position of strength with anexpansion of operations and products,

personnel recruitment and new insurersentering the market. In addition, therehas been a growth in European businesswith insurers developing a presence in anumber of European countries anddeveloping local policies which can bemore effective and competitive thanlocal "pollution pool" facilities.

The aim of this Market Review is toprovide insurance buyers, professionaladvisers, financiers and other interestedparties with the following:

• An update on market conditions.

• An overview of recent productdevelopment.

• An insight into how these productsare being applied.

• A review of developing trends.


Today's operational risk managers needto look beyond traditional boundariesand identify, understand and managetheir organisation’s potentialenvironmental risk exposures. These risksmay be associated with historic, currentor future operations and procedures,inappropriate management systems, thebuying and selling of properties and landor development projects.

Effective environmental riskmanagement techniques, such asintroducing pollution controlprocedures and equipment, or thecontinual improvement of managementsystems, will obviously reduce theprobability of a major environmentalloss. However, in spite of riskmanagement plans and procedures, therisk of potential significant pollutionand contamination cannot beeliminated entirely.

Corporate Environmental Risk Management

The potential for historic contaminationliabilities often comes into focus duringproperty sale negotiations and M&Atransactions. Environmental Due Diligence(EDD) has become an important featureduring pre-transaction negotiations, oftenleading to price and/or contractadjustments. Whilst EDD can reduce therisk of incurring a nasty post-transactionenvironmental surprise, it should certainlynot be considered as a definitiveassessment of all the potential materialenvironmental issues, no matter howcomprehensive the study undertaken.

Notwithstanding the above, a recentsurvey on EDD carried out by KPMG1

provided some alarming findings. Nearlya third of all companies interviewed forthe study discovered significantenvironmental issues after completing atransaction. Of these, 60% had carriedout EDD. But perhaps most significantly,


liability policies provides very little, ifindeed any, cover for land contaminationliabilities. For example, a Public Liabilitypolicy will normally provide cover for athird party loss arising from "sudden andaccidental" events only and not for"gradual" pollution or for first statutoryclean-up costs.

Businesses are increasingly turning tospecialist environmental insurancepolicies to plug the uncertainties andgaps that exist in general insuranceprogrammes and, during the course oftransactions, help to unlock deals whichare otherwise at stalemate over landcontamination issues. Risk transfersolutions can be designed for thefortuitous risks associated with both"known" and "unknown" environmentalissues, meaning that the insurancemarket can offer companies a soundenvironmental risk management tool.

1 KPMG Transaction Services May 2004. Impact – A survey onenvironmental due diligence. Available at www.kpmg.co.uk

where an issue was discovered post-completion, 42% of companies found itresulted in higher operating costs and21% found they had financial liabilitiesdirectly attributed to the issue.

New accounting rules have changed theway that companies can provide forenvironmental issues, meaningcompanies now need to establishreserves and capital budgets forenvironmental liabilities andimprovement programmes. However, thefinancial uncertainties which are aninherent part of environmental exposuresmean that it is almost impossible topredict whether such provisions andbudgets will be adequate.

Insurance can be a key risk managementtool for a wide range of companies andorganisations. However, the pollutioncover typically provided by general

Corporate Environmental Risk Management continued


New legal initiatives like the Operatingand Financial Review1 coupled with amore stringent enforcement of existinglegislation such as the ContaminatedLand Regime have contributedsubstantially to this continued anddynamic change. The mix of ourindustrial past and the complex technicaldemands of a fast moving industrialisedworld have resulted in an ever wideningdemand for options and solutions, suchas insurance, to address new andexisting environmental liabilities.

When considering the importance ofenvironmental insurance in themarketplace, it would be a mistake tofocus solely on current and futureproducts. Old Public Liability insurancepolicies issued prior to 1991 arepotentially extremely valuable becausethey do not exclude coverage forpollution liability. The insurancearchaeologist, R.M. Fields International,

Eleven years ago, the statement"mention industrial pollution to someinsurers and risk managers and you willbe about as popular as a seepingcesspit" reflected a common attitude.However, increased awareness ofenvironmental issues in the interveningperiod has now moved the subject firmlyinto the economic mainstream.

A Lawyer’s Perspective

for example, claims to have recovered inexcess of $1 billion to date under suchpolicies on behalf of grateful clients!However, whilst old policies can appearto be a panacea, their efficacy may besomewhat reduced on subsequentapplication. This is in part because theburden of proof in establishing coveragerests with the policyholder, and in reality,ascertaining which insurance policy wasin force when pollution occurred mayprove difficult, especially where therelevant documents have been lost ordestroyed.

Continued competition within theunderwriting market is criticallyimportant to the success ofenvironmental insurance generally, as itresults in more flexible coverage beingoffered. In particular, we are seeingincreasingly diverse policies tailored tomeet the needs of specific transactions.In 2003/4, for example, we saw the first

environmental Structured InsuranceProgramme deals entering the market –these combine conventionalenvironmental insurance programmes(for unknown risks) with manuscriptedcoverage for pre-funded limits (forknown risks). This increasing productdiversity will continue to gainimportance as environmental legislationbecomes ever more stringent.

Looking forward, a new and excitingdimension is being introduced to themarketplace as the UK looks to the USexperience in order to develop and applyenvironmental liability assumptionsolutions to the UK scenario. For example,an environmental consultancy agrees, for afixed, one-off fee, to assume responsibilityfor contamination at a given site which theconsultancy then remediates to an agreedstandard. As part of the deal, theconsultancy obtains insurance via a brokerto offset its exposure.


A Lawyer’s Perspective continued

New products, however, bring their ownlegal challenges. In particular, changesto the law came into force in the UK on14 January, 2005 in order to give effectto the EU Insurance MediationDirective. These changes mean thatconsultants will need to be authorisedby the Financial Services Authority for,inter alia, "arranging deals" incontracts of insurance. This couldinclude introducing customers to anintermediary either for advice or to helparrange an insurance policy.

In conclusion, an increasing awarenessof environmental issues and greatercompetition in the marketplace isencouraging the development of newproducts. Indeed, there is a greaterwillingness than ever before to tailorproducts for a particular transactionwhich, in turn, increases the popularityof insurance as a solution to what isoften a unique set of circumstances.

Environmental insurance is here to stay!

Paul Davies, Partner, Macfarlanes

1The Operating and Financial Review ("OFR") isintended to promote greater corporate accountability byrequiring companies to disclose socio-economicinformation, including information relating to acompany's impact on the environment. Regulationsintroducing the OFR came into force on 22 March, 2005.



Review of Merger & Acquisition Activity

Activity over the past 12 months hasbeen dominated by a number oflandmark buy-outs, coupled with anincreasingly competitive secondary buy-outs and asset backed deal environment.

The Buy-out MarketA number of high profile buyouttransactions have created an increasinglyleveraged environment for the pan-European and global private equityfunds. Whilst once considered thedomain of the multi-national tradebidders who created value synergies tooutbid their financial investorcompetitors, private equity has foughtback with increasingly aggressiveleverage provided by the equallycompetitive and obliging lender markets.Notable transactions within the last 12 months have included the AutomobileAssociation, Saga, and (in Italy) Wind,where the borrowing levels required to

win the competitive bid process launchedthe market into a new sphere. Theimplications for risk and retention arethat the capital strain impact on thebusiness has become tighter, a "Chineseburn" effect, requiring increasing levelsof certainty in the risk assessment andfinancial modelling.

The implications for providers of duediligence and products alike is thatcertainty comes with a price and theinsurance market is underpinning anincreasing number of these transactions.This trend is set to continue with acommon estimate of $40 billion availablein the European private equityinvestment pot at present. This value islikely to increase as the cross-border'super-funds' raise sums in excess of Eur 5 billion in their current fundraisingactivities.

The Secondary MarketThe number of secondary buy-outs hascontinued to grow as investment housescome under increasing pressure torealise investments in advance of theirneed to raise new funds. With the equitymarkets remaining tough, despite alimited rally in the IPO arena earlier in2004, many portfolio companies havebeen either been refinanced or exited torealise the value and return necessaryequity to their limited partners; indeedsecondary buyouts have matched buyoutdeals during 2004 showing thedetermination of the funds to realisetheir gains.

The secondary market has beencharacterised by hugely competitiveauctions, the mid-market being awashwith transaction activity.

Asset Backed/InfrastructureTransactionsInterest in asset backed and infrastructuretransactions has grown significantly.Dedicated infrastructure funds have beendeveloped by private equity and banks alike.Whilst private equity models of investmenttypically look to 3–4 year investmenttimeframe, the banks with specialisedinfrastructure funds look for a much longerterm investment approach, considering aninvestment of 15–20 years as a morerealistic timeframe to manage the asset. Thisis a shift from short-term cash generationthrough exit to inflation linked cash flowson an annual distribution basis.

The M&A market has continued itscompetitive run into 2005, with anumber of funds and corporates alikeseeing the use of insurance solutions asa valuable tool in their ever increasingsophistication in deal structuring.



Much has changed in the environmentalinsurance market since our review in2002. Insurers have continued to build onthe successful foundations laid downduring the late 1990s, broadening themarket offering in line with clients'requirements. Although the UK marketremains small compared to its NorthAmerican counterpart, it is now host tomore environmental insurers than at anytime, and a steadily increasing portfolio ofspecialist risk transfer products that canbe tailored to individual requirements.

The market in Europe, of which Londonremains the dominant centre, is wellplaced to respond to the growingdemand for environmental insurancesolutions outside of North America.

Environmental Insurance MarketCommentary

At the time of writing, the principalinsurers active within the UKenvironmental insurance marketcomprise the following:

AIGAs with other insurers, AIG has expandedits London team within the last twoyears and continues to offer a range ofpolicies to cover historic and operationalpollution risks. They have significantcapacity in the market and can draw ontheir experience in the US to providemore specialist insurance solutions.

AIG has certainly shown commitment tothe wider opportunities by being the firstinsurer to establish dedicatedunderwriting capabilities in other

territories, most notably France,Germany, Sweden and Australia.

ACE EuropeWithin the last quarter of 2005, ACEEurope has entered the Londonenvironmental insurance market, seekingto draw on their experience gained inthe US.

Chubb Environmental SolutionsDespite suffering the loss of theirenvironmental risk underwritingresources in 2003, Chubb hasdemonstrated its continued commitmentto the environmental service line by re-structuring and recruiting experiencedstaff to create a new environmentalteam. Chubb continues to provide

on improved service delivery as well aswidening policy coverage and its overallappetite for risks.

Perhaps the most notable feature of 2004was the withdrawal of Allianz Cornhillfrom the market. It had been acceptingenvironmental business since 1996through an underwriting agency held byCerta. After helping the environmentalmarket establish itself through an effectivemarketing strategy, 2004 also proved tobe the end of Certa. The entry of Quantaand the re-emergence of Chubb hasgenerated renewed vigour andcompetition within the market.

In addition to ACE, it is anticipated thatfurther carriers may enter the market inthe near future, with a number of USand European based insurers known tobe looking into the possibility. Someinsurers believe that an increasednumber of insurers in the market couldcreate a reduction in premium levels.


insurance for historic pollution andforesees annually renewable operationalpollution risks as a potential growtharea, in addition to an increase inopportunities throughout Europe.

Quanta EuropeA Bermudan based insurer thatestablished itself in 2004 as a specialtylines insurer including environmentalinsurance in its coverage offerings.Having underwritten from their Bermudaand Dublin offices, Quanta obtained itsLondon license in February 2005 and isnow underwriting out of their City office.As relative new-comers in the marketthey are rapidly establishing themselvesas competitive and innovative in theirapproach.

XL EuropeSince 2003 there has been a considerableexpansion in the environmental team atXL Europe’s Limited's London office.Within the last two years XL has focused

Environmental Insurance MarketCommentary continued


Insuring environmental risk has alwayspresented a challenge to underwriters.Indeed this has been one of the factorslimiting the number of insurersspecialising in environmental coverage inthe market place. Environmental insurershave, however, responded positively tosuch challenges, with each investingsignificant resources in growingunderwriting teams. It is noticeable that,as a direct result of such investment, both

the timeliness and quality of insurers' responses have improved significantlyover the past year. This has been of greatbenefit, particularly when there is a needto work within demanding timescales oftransactions. Whilst technical assessmentremains the cornerstone to underwriters'approach, they are increasingly takingaccount of commercial aspects of dealsand the local legal and regulatory regimewhen preparing a quote.

It is estimated that around £60 millionof premium was written within the UKenvironmental insurance market in2004. This represents a significantgrowth from the estimated £25 millionof premium written during 2000. Therate of premium increase over the pastfew years appears to have been lessrapid, this is in part a feature of theincreased competition helping to keep premium levels down, rather

than suggesting any let up in the levelof activity.

A much smaller amount of premium iswritten through the specialistenvironmental markets operatingelsewhere in Europe. Premiums throughEuropean "pollution pools" are hard toquantify, but is thought to total aboutEur 70 million annually.


Recent years have seen the emergence ofcombined environmental risk transferprogrammes and 'liability buy-out'products in Europe, building on asuccessful track record in the US. Suchprogrammes have broadened theapplication of environmental insurance,by combining the principal environmentalinsurance coverages with a fundedelement to cover 'known' remediationcosts as well as 'unknown'environmental liabilities.

As highlighted in our 2002 review, thepayment of valid claims forms animportant part in the evolution of theenvironmental insurance market. In Willis'experience, the tight drafting of policywordings and good understanding of thetechnical, legal and commercial issues areessential ingredients in the negotiation ofan effective environmental insuranceplacement and the subsequent payment ofclaims. In the near future, insurers expect

an increase in the number of claims onexisting policies as, amongst other issues,regulatory action in relation to the Part IIAContaminated Land Regime and otherenvironmental legislation gathers pace.

In addition to aggressive premiumpricing, competition within the markethas brought coverage benefits to clients.Whilst wholesale changes to policystructure and wording are typically notavailable, we have noticed an increasingwillingness by insurers to modify andbroaden coverage for certain risks. Thishas been of particular value where thereis a need to craft wording to thesatisfaction of both buyer and seller.

Capacity remains strong within themarket, with a global combined capacityin the region of $200 million available,and individual insurers typically able tooffer limits of between $30 million and $40 million. In common with other

markets, environmental insurers havepulled back from offering policy periodsbeyond 10 years coverage for historicalrisks, but coverage which incorporates afunded element for known remediationobligations can sometimes be anexception to this rule.

So what is the outlook? Key drivers todate for clients obtaining environmentalinsurance has clearly been the need tomanage historic liabilities within propertytransactions and contractual requirementssuch as warranties and indemnities andsale and purchase agreements. Althoughmanaging these historic liabilities willremain important, there is an evidenttrend away from the environmentalinsurance market being used solely forM&A based risks. There is growing interestin shorter term policy periods foroperational risks i.e. focus on operational/new pollution liabilities and coverage forenvironmental "gaps" in general liability




insurance programmes. In this way,insurance is being used as part of theongoing risk management strategy of anorganisation and not just a means of risktransfer in a one-off transaction. Inaddition, it is anticipated that the trend inapportioning environmental liabilitiesbetween parties in contractual scenarios,such as construction, joint ventures, privatefinance initiatives (PFI) and public privatepartnership (PPP) projects will continue aswill the role of environmental insurance torespond to these contractual risk issues.

As the market continues to mature andgrow in experience, it is likely that wewill see an increased level ofsophistication and flexibility in insurers'approach to and appetite for risks.Insurers anticipate that long term policieswill continue to be limited to 10 years.

In summary, 2005 sees the insurancemarket in a very different condition

than recent years. Increasedcompetition within the market hasdelivered both pricing and coveragebenefits to clients, whilst increasedinvestment in resources by insurers hasimproved underwriting capabilities andresponse time of insurers. Regardless ofthe territory of interest, Willis is wellpositioned to provide clients with aglobal specialist service forenvironmental risk transfer solutions.



Key changes in the environmentalinsurance market since 2002

• Increased competition from a largernumber of underwriters.

• More experience.

• Increased resources in insurer teams.

• Flexibility and innovation in approachby insurers.

• Shorter policy terms for historiccontamination i.e. 10 year limit.

• Increased European coverageavailable.

• More renewable business onoperational risks.

• Realistic information requirementsand commercial awareness.

Insurers perspective ondevelopments in the futureenvironmental insurance market

• Closer integration of environmentalinsurance market policies with othergeneral liability insurances.

• Specialisation in niche-sectorenvironmental insurance marketsolutions.

• Continued growth of Europeancoverage and use of environmentalinsurance market.

• Increase in claims as legislationgathers pace throughout Europe.

• Impact of EU Liability Directive likelyto influence policy coverage.

• Rise in use of combined insuranceprogrammes.



Environmental insurance is not a singleproduct but a flexible solution to specificand non-specific environmental riskconcerns. Environmental risk varies fromsituation to situation and the nature ofthe exposure is defined by many factorsincluding the physical and chemicalcharacteristics of the contamination, theenvironmental sensitivity of the area, theunique liability profile of the individualparties, any contractual liabilityapportionment and the prevailing legalframework.

In response to this, the specialistenvironmental insurance market hascontinued to apply a highly adaptableapproach to the design of risk transfersolutions for these complex exposures.

Insurers are able to produce bespokeinsurance solutions which are tailored tocover the specific risk exposuresassociated with a given scenario.

Key Environmental Risk Financing Products

However, insurers first tend to offer theirstandard wordings. To get the mosteffective solution from the market, aspecialist broker who can draw oninternal expertise related to legal,financial and technical exposures, iscrucial to translate liability allocationconcepts into an insurance contract.

The crafting of policy wordings caninvolve a number of techniques. They can

be designed to incorporate the wordingand triggers of relevant indemnitycontracts or lease agreements, dovetailwith general liability programmes andreinsure existing captive insurancecompany programmes.

Policies can also be further modified toprovide additional cover for first partyconsequential losses (such as thosearising from business interruption caused

during the course of a clean-up project)or the individual exposures of directorsand officers to liabilities.

The various insurers all have different riskappetites and preferences. To complicatematters further, they all use differentnomenclature and the coverage detailsvary from insurer to insurer. It is thereforenot helpful to pigeonhole the differentproducts offered by each carrier.


It is possible to set out broad categoriesof the main policy types offered by thespecialist market. It should not beassumed that all the specialist insurersoffer all the product categories listedbelow.

Main Coverage Options

Pollution Liability InsuranceAlso known as EnvironmentalImpairment Liability ("EIL") and byproprietary insurer names such asPollution Legal Liability ("PLL"), Pollutionand Remediation Legal Liability("PARLL"), Environmental Site Liability("ESL") and Environmental SiteProtection ("ESP").

Pollution Liability Insurance typicallyprotects the insured against lossesassociated with 'unknown' pollutionconditions.

In particular, the cover generally extendsto the following:

• Third party claims for property damage(including loss of use and diminution inproperty value) and bodily injury.

• Clean-up costs mandated by aregulatory authority – on or off-site.

• Legal defence costs.

• Costs of investigation.

This class of environmental insurance canbe further sub-divided into operationalpollution coverage and historiccontamination coverage.

Operational Pollution RisksMany commercial and industrialoperations present an on-going risk ofpollution or contamination (e.g. leakagefrom underground fuel storage tanks).

Key Environmental Risk Financing Products continued


Policies structured for operational risksprovide cover for liabilities arising fromon-going pollution risks such asunanticipated and anticipated dischargesto the ground, water or air, leakages orspillages. These policies can be extremelyeffective in plugging pollution cover gapsin general liability policies.

Historical Contamination CoverInsurance can be arranged for liabilitiesassociated with pre-existing historiccontamination. Cover can also bearranged for contingent liabilityexposures. For example, risks associatedwith sites sold in the past by one orother party in a transaction.

It is possible to combine both operationaland historic pollution cover into a singlepolicy.

The policies can be extended to covercontingent risks such as businessinterruption or economic loss associated

with contamination (e.g. loss in rentalincome, or increased cost of working as a result of the need to carry out siteremediation work).

Pollution Liability Insurance can coverrisk exposures with land that is already,or is likely to be, contaminated due tohistorical operations. Whilst land can be known to be impacted withcontamination, if such contamination isnot at levels which knowingly exceed therisk-based assessment criteria imbeddedin environmental legislation, then itshould be possible to get cover for theseexposures. Known contamination doesnot mean known liabilities!

The negotiation of warranties andindemnities forms a significant part ofstructuring corporate transactions.Such contractual mechanisms areregularly used to allocate liability forenvironmental risk. Often this canbecome a deal breaker.




Pollution Liability Insurance can be designedto cover contractual liabilities flowing fromenvironmental indemnities and warranties.The definitions and provisions of thecontract are, as far as practicable, includedwithin the policy wording, which minimisesthe possibility for potential gaps in cover.

Depending on the wording, such policystructures do not automatically includecover for any liability that the insured

might have outside the terms of therelevant contract.

This form of cover can be used to unlocknegotiations and protect the balancesheet of the indemnifying party.

Contractors' Pollution Liability (generally known as "CPL" cover orProject Pollution Liability)This is a specialist form of pollutionliability insurance designed specifically toprovide cover for liabilities arising fromproject pollution risks, whether associatedwith a construction or remediationproject, or a contract to provideoutsourced services to an employer (e.g. under a PFI/PPP contract).

Such contracts and projects can give riseto differing environmental risk concerns,which give rise to the potential forliabilities for statutory or third party clean-up and third party property damage and

bodily injury. Some contracts will mainly beconcerned with the risk of introducing newpollution (e.g. a leaking mobile fuel tankor the operation of facilities which use orprocess hazardous substances), whilstother projects will primarily be concernedwith the mobilisation or exacerbation ofpre-existing contamination (e.g. brownfieldland redevelopment projects orremediation contracts).

CPL insurance can be designed to coverall of these risks and can be structured toinsure the employer, contractors, sub-contractors and, if applicable, funders.Cover can be extended to include firstparty business interruption risks such asthe financial consequences of delayedstart-ups in construction projects. It isnotable that CPL insurance can, in certaincircumstances, be extended to includeclean-up and third party bodily injury risksassociated with asbestos removal andasbestos management projects.



funds necessary to complete the clean-up works in the event of a cost overrun,for example, resulting from the discoveryof additional contamination or underperformance of the remedial technologyor the requirement for more onerousclean-up by the regulators.

Specialised Covers

Some of the insurers offer specialisedpolicies which are based on the abovemain categories but which have beenrefined for specific purposes such aswaste management operations,underground fuel storage tank portfolios,asbestos removal projects etc.There is also the capacity to tailor non-conventional programmes which providerobust and effective solutions for sites orportfolio of sites which have knowncontamination clean-up obligations.

Professional Indemnity Insurance(PI, also known as ProfessionalConsultants Liability)Most PI policies contain similar pollutionexclusions to general liability policies.Specialist environmental insurers offer PIpolicies with no pollution exclusions andwhich indemnify professional advisers forclaims and liabilities resulting from errorsand omissions in their professional services.

Companies engaged in bothenvironmental contracting and consultingoperations can purchase combined CPLand PI cover, which can be set up on aportfolio or project-specific basis.

Remediation Cost Cap Insurance (also known as Stop Loss cover)Cost Cap Insurance is designed tominimise the uncertainty associated withclean-up projects by providing the extra



Combined EnvironmentalInsurance ProgrammesCombined environmental risk transferprogrammes blend remediation cost-capcover with pollution legal liabilityinsurance and, sometimes, with anefficient funded element.

The funded element, where incorporated,is structured to provide the anticipatedfinance necessary to undertake theclean-up of known pollution.

However, the scoping of work and costsassociated with clean-up projects, nomatter how well a site has beeninvestigated, are notoriously inaccurate.This leaves a very real risk of exposure tovast unforeseen cost-overrun expenses.There is also the potential for further


liabilities arising in the future from anyunknown pollution that may exist,residual contamination remaining post-remediation and claims from exposure tothe pre-remediation condition of the sitewhich have been slow to manifest.

The insurance element of a combinedenvironmental risk transfer programme isdesigned to wrap around the fundedlayer, where applicable, and providecover against the fortuitous risksassociated with the site clean-up project,whether they are financial or temporal innature. The remediation cost cap is a"stop-loss" insurance which mitigatesthe financial risks associated with costoverruns and project delays insured as aresult of dealing with the knownpollution.

Pollution LiabilityInsurance

Cost Cap

Funded Cost

/Exp

osur

e

Known/identified remediation obligations(below red line)

Unknown/unforeseen exposures(above red line)




The pollution legal liability element of theprogramme provides cover for any on-sitestatutory clean-up, liabilities for thirdparty property damage and bodily injuryand associated legal defence expenseswhich arise as a result of any"unknown" contamination that mayexist. It also provides cover for futureliabilities arising from the residual riskspost-remediation (e.g. if the site becomesthe subject of renewed regulatory interestthrough a change of law, or there is therecognition that the remediationstandards originally set out to beachieved have not actually been met).

The flexibility created by combiningenvironmental insurance with a fundedelement means that risk transferprogrammes can sometimes be designedand placed with policy periods in excessof 10 years.

Liability Assumption and Buy-Out Schemes These provide a comprehensive solution tocompanies seeking a long-term or evenpermanent exit from environmentalliabilities, without affecting the ownershipand control of the relevant property assets.

The liability for pre-existing contaminationissues, both known or unknown, iscontractually transferred to anothercompany (commonly an environmentalconsultancy or special purpose vehicle) byway of a guaranteed fixed priceremediation contract combined with anenvironmental warranty and indemnityprovision. For a one-off fixed cost, theclient achieves a release from its legacyliabilities and associated uncertainties andallows a buyer to take the asset (or theexisting owner to retain the asset)without assuming any groundcontamination liabilities.

The liability buy-out company iscontractually obliged for the period ofthe indemnity to manage thecontamination issues and carry out thenecessary clean-up works in an efficientmanner to a requisite standard.

To provide security to all parties, thecompany would look to underpin thecontractual exposures with a long-termenvironmental insurance programme,incorporating some or all the elementsdetailed above under the CombinedEnvironmental Insurance Programmessection.

The benefits of liability assumption andbuy-out contracts are fully assignableand transferable to future purchasers,thus provide a warranty indemnity andinsurance based solution which forms anextremely flexible and robust commercialtool.

Lender Liability PoliciesThese policies protect lenders who haveloans or investments backed with realestate collateral. The value of the lender'ssecurity could be affected byenvironmental impairment or moresignificantly the lender may have a directliability if it takes possession onforeclosure or receives an equity stakevia mezzanine financing mechanisms.

In the event of environmental impairmentand subsequent loan default, these policieswill typically pay off the outstanding loanvalue or the estimated clean-up costs,whichever is the lesser amount. They alsoprovide cover for any third party propertydamage or bodily injury liabilities that couldattach to the lender. The policies can bestructured to cover existing loan portfoliosor new loans going forward – covering thelenders' position directly and enablingbanks to lend on higher risk deals.



Environmental insurance and riskfinancing mechanisms can be used in awide range of applications. 2004 saw agreater demand for the use ofenvironmental insurance in moreinnovative ways, including risksassociated with Private FinanceInitiatives (PFI) and Public PrivatePartnership (PPP) projects, pension trustportfolios, contingency exposures andhigher environmental risk scenarios.And of course, environmental insurancecontinues to play a crucial role in themanagement of environmental risksassociated with mergers andacquisitions.

It can be used to:

• Eliminate/mitigate potentialenvironmental deal breakers bytransferring responsibility for potentialliabilities to an insurer.

• Reassure lenders and investors, soenabling acquirers to raise financeand assist with obtaining optimumborrowing terms.

• Protect buyers from long-tailenvironmental liability exposures aftercompletion of transactions.

• Provide security against buyer/sellercreditworthiness concerns.

• Enhance negotiating positions anddeliver more favourable terms.

• Quantify and cap actual or potentialremediation liabilities or environmentalobligations.

• Replace the need for discounting thesale price and so maximise return forthe vendor.

• Replace indemnities or warrantiesand ensure “clean exits” for vendorsor equity partners.

• Wrap around and underpin existingwarranties and/or indemnities.

• Help manage the greater exposuresorganisations have to incurringenvironmental liabilities and costsfrom rapidly evolving legislation.

• Assist in the management of increasedexpectations of stakeholders in relationto corporate responsibility.

• Maximise value and minimise riskduring property acquisitions ordisposals.

Principal Applications of Environmental Insurance


The specialist environmental insurershave demonstrated a willingness todevelop new insurance solutions and toconsider an increasingly diverse range ofapplications for existing products.

There is also a greater demand forenvironmental insurance to form part ofa company’s annual insuranceprogramme designed for on-going risks.This is in recognition of the restriction, orindeed absence, of effective pollutioncoverage under property and generalliability policies.

This section aims to provide a selectionof case studies to demonstrate theapplication of environmental insurance inmore specific and innovative ways.

Principal Applications of Environmental Insurance continued

Property andCorporate Transactions

Significant uncertainty typicallysurrounds the extent of environmentalliabilities associated with property. As aconsequence, the allocation ofenvironmental liabilities can become asignificant point of contention betweentransaction counterparts, potentiallyjeopardising company and propertydeals. By transferring such liabilities,

environmental insurance can remove theissue from negotiations, enabling bothbuyer and seller to maximise value fromthe transaction.

Case Study 1 Property Deal

Environmental insurance unlocked a £15 million property transaction whenconcerns over potential environmentalliabilities looked set to thwart the deal.

An environmental assessment identifiedcontamination beneath the property, aformer electricity transformer station,although no remedial works appeared tobe necessary.

However, due to access restrictions, ithad not been possible to investigatemany areas of the site, and as a result itwas possible that contamination couldbe more severe and widespread thaninitially identified.


The vendor, a major UK utilitiescompany, was to be indemnified by thepurchaser for all liabilities arising fromground contamination. The vendor wasconcerned that, as the original polluter,they could face such liabilities if thepurchaser was not able to fund futureclean-up works that may be required.

This was of particular concern as thepurchaser was a special purposecompany (SPC) with no asset base,

established to develop the site for aresidential end use. The SPC's parentcompany refused to offer a parentcompany guarantee, whilst the vendorwas adamant that the indemnityoffered insufficient protection. Theresult was deadlock.

Willis successfully placed 10 yearsenvironmental insurance cover for both the vendor and purchaser,providing backing to the vendor's

contingent liability without the need for the purchaser to provide a parent company guarantee. Both partiesgained considerable value from thepurchase of insurance, which cost lessthan one percent of the deal value.The vendor gained a clean exit from thesite sale whilst maximising the saleprice, and the purchaser gainedcertainty that any future losses whichcould arise from the indemnity wouldbe covered.



Case Study 2 Company Acquisition

A US corporation was concerned that itmight inherit significant environmentalliabilities following the share purchase ofa UK target company. Previousinvestigations had identified soil andgroundwater contamination beneath oneof the company's sites, as a result ofhistoric landfilling as well asmanufacturing activities. Furtherinvestigations commissioned by thepurchaser confirmed that remedial workswere needed in order to mitigate risks toan adjacent watercourse.

By working closely with the preferredinsurer, our client and theirenvironmental consultants, Willissucceeded in placing insurance to coverthe 'known' pollution as well as theunknown. Full cover was achieved byapplying an increased self-insured

retention to the known pollution untilthe remedial works had beencompleted.

This flexible approach enabled the dealto proceed within the required tighttimescale, allowing the purchaser to fixits maximum future exposure toenvironmental liabilities and factor thisinto the negotiations.

Case Study 3 Indemnity Cover for Seller

A company had sold a number oftimber yards from its portfiolio. Uponselling the sites, it provided anindemnity to the purchaser forenvironmental liabilities that could arisewithin seven years of sale. The sellerwas concerned that potentialcontamination issues at a number ofthe sites could present significantliabilities within this period.



The seller benefited from an environmentalliability indemnity when it bought the sitesseveral years earlier. However, the limit andperiod of this indemnity were not asextensive as the indemnity it subsequentlyprovided to the new purchaser.

Willis structured an insurance policy totransfer this residual risk, with avariable policy limit to match theresidual exposure over the duration ofthe indemnity provided to thepurchaser. With compatible policy andindemnity wording, the seller gainedcertainty that any future claim underthe indemnity would be fully covered.

Case Study 4 Seller’s Contingency Cover

A global manufacturing companyundergoing restructuring was seeking torelocate its operations from its UKheadquarters, from which it had operatedover a period of some 100 years.

The company's majority shareholder, aprivate equity firm, required a 'clean exit'from the site sale; however the purchaserwould not provide an environmentalindemnity. As an original polluter, theseller therefore retained principal liabilityfor losses that could occur as a result ofhistoric contamination.

Although limited environmental data wasavailable, it was considered inevitablethat ground contamination would bepresent beneath the site, given the longperiod of industrial activity there. Theseller was concerned that it could alsobecome liable for funding the clean-up ofthe site during redevelopment worksplanned following vacation of the site,for example if the purchaser was unablefully to fund such works.

Willis succeeded in placing a 10 yearinsurance policy to cover the seller'scontingent exposure, providing it with a"cleaner" exit from the site sale.


Case Study 5 Agricultural Business Acquisition

An agricultural supplies company seekingto acquire a competitor was concernedthat the target company's portfolio ofsome 22 properties could presentsignificant environmental liabilities as aresult of both historic and currentoperations. A warranty provided by theseller was limited in scope, and obviouslydid not cover on-going activities, so thebuyer required further protection fromsuch liabilities.

No environmental surveys had beenundertaken by the seller and the buyerwas unwilling to pay for extensive duediligence. Despite these restrictions, Williswas successful in placing environmentalinsurance to cover both historic and newcontamination, on the basis solely of non-intrusive due diligence surveys.

The entire placement process, includingthe due diligence was undertaken withina rapid timescale enabling theacquisition to proceed as planned. For apremium of approximately 1% of thepurchase price of some £11 million, thebuyer gained certainty that it would beprotected from future environmentalliabilities as a result of the acquisition,whilst the seller was able to maximise itssale price.

Property Portfolios

Property portfolios have long been anattractive asset base for funds, offering arelatively "safe" investment, generatingsteady and reliable returns. Propertyportfolios are not without their riskshowever, as economic trends willinevitable affect asset value and revenuereturns. Environmental risks can presentpotential liabilities to stakeholders,


including property owners, fundmanagers and lenders and, ultimately,investors.

Increasingly, insurance is being used tomanage environmental risk on aportfolio basis. Willis has placed policieson a number of different types ofproperty portfolio from housing stocktransfers to retail portfolios and pensiontrusts investments.


environmental liabilities arising fromhistoric liabilities through the terms oflease agreements, change of law (or moreonerous interpretation of existing law)during the policy period and residualenvironmental liabilities that could arisefrom being a former leaseholder/owner ofdisposed sites. The client also wanted asolution that was cost-effective, flexibleand one that supported the overallmanagement of environmental issues and


Case Study 6Retail Property Portfolio

Willis placed an environmental insurancesolution for a major UK-based retailerwith a mixed property portfoliocomprising over 2,000 individual freeholdand leasehold sites, including warehouseand distribution facilities. In addition tostatutory and third party legal liabilities,the client was concerned about


risks across the European portfolio withminimal administration requirements.Willis was able to arrange environmentalinsurance to cover the entire portfolio,that provided protection for all the clientsconcerns, on the basis of a 3–yearrenewable policy, with automatic cover formid-term acquisitions subject to a simpleannual self-declaration. The cover wassuccessfully placed without the need for aburdensome data collection exercise.

Case Study 7 Property Unit Trust

A property fund was launched to offerinvestors the opportunity of holdingequity interest in property assets througha tax efficient offshore vehicle. The fundwas securitised via tradable bonds, asignificant proportion of which were debtfinanced by a major bank.

The fund portfolio comprisedapproximately 60 tenanted industrial,retail and mixed use propertiesthroughout the UK, which weretransferred from an existing portfolioowned by several life funds.Environmental due diligence concludedthat environmental issues at five of theproperties within the portfolio presentedsignificant potential liabilities. Upontransfer of the properties to the trustees,

the life funds were required to indemnify the trustees for environmental liabilitiesassociated with such properties. It wasagreed, however, that the indemnitywould be cancelled in the event thatenvironmental insurance was placed forthe five sites.

Despite the known or anticipatedpresence of contamination at each of thefive sites, Willis was successful in placingenvironmental insurance to cover the lifefunds, the trustees and the bank. In thiscase, a separate policy was placed foreach property, thus providing a "ring-fenced" limit of insurance for eachproperty, which correlated with theenvironmental consultant's estimates of"the worst case" remedial costs.Furthermore, this approach enabledpolicies to be transferred upon possiblefuture sale of individual properties. As the

properties were all tenanted, a keyrisk exposure was the potential loss ofrental income in the event of clean-upworks, for example due to the need torelocate tenants. Coverage was expandedto cover such losses, with Willis workingclosely with lawyers representing lifefunds, trustees and the bank to negotiatepolicy wording with the insurer.

Cover for “Known”Contamination

One of the many misconceptions aboutenvironmental insurance is that you cannotobtain cover if there is contaminationalready present at the insured site i.e.known contamination. Time and again ourexperience combined with our knowledgeof the approaches of key insurers hasshown this to be far from the truth.

Case Study 8Former Gas Works

A UK property company was concernedthat ground contamination issues at oneof its properties could present significantfuture liabilities. The premises, now thesite of a prestigious leased officedevelopment, had previously formed partof a major gasworks facility.

Although remedial works had beenundertaken in the mid 1990s to thesatisfaction of the planning authority,these works would almost certainly nothave met current remediation standards.It was evident that residual tars andcontaminated groundwater had been leftbeneath the site, potentially requiringfurther clean-up to satisfy environmentalregulators in the future.




Willis succeeded in placingenvironmental insurance to cover thecurrent owner for a period of 10 years,even in the event that they undertookminor development works or groundinvestigations at the site. In addition thepolicy included an option to continueextending the policy annually beyond theinitial 10 years.



Through the use of insurance, the ownergained comfort that the costs of anyfuture additional clean-up as a result ofincreasingly stringent legislation or thirdparty action would be met. In addition, thebroad coverage negotiated by Willis wouldbe attractive to a potential purchaser andthus help maximise the property valueduring future sale negotiations.

Government Stock Transfers

In recent years the UK has seen anumber of large scale voluntary stocktransfers (LSVT) where governmentowned housing stock is transferred to aprivate landlord/housing association.This transfer is accompanied by variouswarranties and indemnities includingenvironmental issues. Willis has workedon a number of such deals includinginvolvement in investigating the role of

environmental insurance in one of thelargest stock transfers involvingapproximately 88,000 properties.

Case Study 9Housing Stock Transfer

A local authority was to provide anenvironmental warranty to a housingassociation upon transfer of its remainingstock of houses and associated land. Thewarranty, which covered a period of 20years, comprised a typical format used instock transfers, stating that the council hadcomplied with all applicable environmentallaws and obtained all necessary approvals,that none of the properties were listed ona Local Authority Contaminated LandRegister, and that there were nodangerous substances present on or underthe properties, or any current or pendingenvironmental claims.

Working closely with the council andtheir legal advisors, Willis was successfulin placing coverage for the properties foran initial period of 12 years, with anoption to extend the policy periodannually for the full 20 year warrantyperiod. Despite the limited nature ofenvironmental data, typical of housingstock transfer surveys, Willis was able tosecure extensive coverage within a tighttimescale and well within budget, byfocusing policy negotiations with insurerson perceived 'high risk' sites.

PPP and PFI Projects

The PPP (Public Private Partnership) andPFI (Private Finance Initiative) schemescontinue to develop and grow with newinvestment streams and developmentprogrammes evident in the last twoyears. Continued growth in such

schemes is anticipated with risk transferfrom public to private sector a significantfeature of these projects. Changingneeds in various sectors means PFI dealsare also increasing in size in sectors suchas healthcare, education, transport andwaste.

Willis have been environmental insuranceadvisers for both the public and privateclients in a range of PFI and PPP projectsin housing, waste and constructionrelated projects in UK and wider EUcountries.

Case Study 10 Project Aquatrine

Project Aquatrine is a water and waste-water scheme across the UK Ministry ofDefence (MoD) properties around theBritish Isles.

Under the contracts, the MoD transferthe responsibility and risk for theoperation and maintenance of theMoD's UK water and waste water assetsand infrastructure to private serviceproviders. The assets and associatedinfrastructure are located in more than3,000 UK sites which vary between largemilitary establishments, including navalbases and former airports, to firingranges, residential estates and cadethuts. This diversity of sites presents arange of potential environmentalliabilities related to both historic andoperational risks.

Along with the on-going operation andmaintenance, the service provider alsoassumes responsibility for any futureenvironmental liabilities which may arisefrom the historic operation of the waterand waste water assets and

infrastructure. The project agreement laysdown a requirement to underpin thiscontractual apportionment of liabilitiesthrough the use of environmentalinsurance to a wide-rangingspecification.

Willis advised and placed environmentalinsurance for one of the service providersawarded an Aquatrine contract. Williswas at the forefront of the developmentof a bespoke policy wording whichcompletely overhauled the approach thathad been previously applied to similarprojects. The resulting insurance solutionprovided the service provider with long-term protection which not only satisfiedthe contractual requirements, but alsobenefited from a significant saving to thepremium levels initially budgeted forenvironmental insurance.



considered submission to insurers candamage underwriters' perceptions andundermine the potential for futurerefinements to achieve a moreappropriate solution.

Willis works with its clients to draw up arisk transfer strategy. This involvesassessing all the potential risk exposures(including contingent risks), determiningthe risk management objectives and thenevaluating the various insurance options.The next stage is to determine theinformation requirements and then preparean appropriate underwriting submission.

Insurer Selection

Many considerations need to be borne inmind when selecting a preferred insurer.It is important to identify a suitableinsurer panel on the basis of clearprequalification conditions (e.g. territorialcapability). Once relevant insurers have


Effective Use of theInsurance Markets

The design and placement process of anappropriate environmental risk transfersolution involves the expertise of a numberof parties. The process needs carefulmanagement to ensure the final solutionprovides the greatest value to the client.

In order to obtain maximum benefit fromthe policy and the best possible dealfrom the insurance market, the role of anobjective, professional and suitablyexperienced insurance broker should notbe underestimated.

There are a number of key considerationswhich should be taken into accountwhen designing a risk transfer solution.

Risk Transfer Objectives

It is very important that the objectivesfor an insurance solution are clearlymapped out before any approach to theinsurance market is undertaken. A poorly


responded with insurance proposals,selection of a preferred carrier should bebased on a set of clear criteria.

These selection considerations will include:

• Proposal terms – e.g. breadth ofcoverage.

• Length of policy.

• Insurer capacity.

• Insurer security (insolvency risk).

• Reinsurance arrangements.

• Established claims record.

• Proposal pricing.

Selection of the insurer against carefullyconsidered criteria is key to achieving aneffective result.

Project Management

Many projects and enquiries, especiallythose relating to commercialtransactions, are extremely time-sensitiveand require tight planning andmanagement to ensure that anappropriate policy is ready to bind by therequired deadline.

It is important therefore to identifyproject milestones, determine potentialfailure points and interdependencies andfacilitate effective communication. Thiscan be especially challenging if the dealinvolves many different countries, morethan one insurer (e.g. specialistenvironmental insurer and a captiveinsurance company) or otherprofessional advisers (e.g. lawyers,environmental consultants).

Policy Negotiation

The negotiation of the insurance contractinvolves three main considerations:

• Legal liability.

• Technical/scientific aspects.

• Applicable insurance options.

The process will therefore involve inputfrom the broker, the legal advisers andpotentially the environmental consultants.

The insurer will produce a preliminarywording which will serve as a startingpoint for negotiations. The wording willinvariably require amendment andmodification to fit the specificrequirements of the project.

Effective Use of the InsuranceMarkets continued

Some of the most important issues whichneed to be analysed in depth are:

• Insuring agreement – this is theoperative clause for the entirecontract and therefore needs tobe as tight as possible.

• Exclusions – many insurers havespecific issues (such as undergroundstorage tanks) which they routinelyseek to exclude. Where relevant theseexclusions have to be negotiatedindividually.

• Disclosure – there is both acontractual and common law duty todisclose all information that mighthave a material impact on the riskcovered by the policy. It is crucial tomanage this disclosure processeffectively.

• Cancellation conditions – it isimportant to match the policycancellation conditions with the bestinterests of the insured parties.




• Severability/non-vitiation – ifthere is more than one insured party,it is crucial to build in robustseverability provisions so that theactions or omissions of one party arenot imputed on the other parties.

• Claims management – some ofthese policies will run for many years;it is important to agree practicalclaims notification procedures andthen implement policy management

procedures to ensure that the insuredparties can comply with theseobligations.

The value of the insurance solution willbe determined by the outcome of thesenegotiations so it is important to relyon an adviser with the right skillsand experience.


The Role of a Broker

The dynamics of the insurance marketcombined with its cyclical nature result inan ever-changing environment, with newinsurers entering the market, insurerslaunching new policies (or adaptingexisting products) and new precedentsconstantly being set.

Companies with the opportunity to utiliserisk transfer mechanisms to transferliability can explore their best optionsthrough insurance advisers, whoconstantly track these changes and canexploit developments to obtain the bestterms for their client.

The insurance broker's role should not beconfused with that of an underwritingagent who may be tied to a singleinsurance company and whose solefiduciary obligation is to that insurancecompany. With the introduction of therecent FSA regulations, it is now vital touse an approved broker, rather thanassociated adviser; contravention ofthese regulations is seen as a seriousbreach of the Law.

Recent events have led to a highlyregulated market which favours the clientand gives comfort that the insurance brokerhas to act in the client's best interests,responding to the client's demands andneeds by obtaining the best terms and

conditions available from the insurancemarket at the most competitive price.

The role of the broker usually extends farbeyond the placement of a risk in theinsurance market. With M&A deals, thebroker often sits as part of an integratedproject team, constructed from a numberof key professional advisers, thus thebroker needs to be comfortable with, andexperienced in, working closely withlawyers and consultants.

The Willis Environmental Practice hasbenefited from continuing investmentwith the addition of environmentalexperts from a number of specific fieldsresulting in a highly experienced team



with both broad capability and a depthof practical experience. This level ofresource is essential to meet the manyinteresting challenges which arise acrossthe globe when structuring and placingenvironmental insurance.

Insurers are quite happy to offer theirstandard products to any enquiries theyreceive. However, Willis find, almostwithout exception, that policy wordingamendments are crucial to ensure clientsare getting a policy which delivers thebreadth of cover that is required at acompetitive premium level. Getting theright result demands the use of aspecialist environmental risk insurancebroker.

The Willis Environmental team inLondon is a part of the Willis M&APractice. This Practice provides clientsand advisers with a wide range ofinsurance services related to M&A andother transactional deals.

M&A Consultancy/Due Diligence

Specialist consultants are available toconduct a risk and insurance due diligenceexercise on the target company tosupplement the client's owninvestigations. By identifying potentialareas of exposure, we can assist bothvendors and purchasers to plan for futurecontingencies.

Key areas reviewed include:

• Financial impact of the cost ofinsurance risk.

• Statutory compliance.

• Identification and quantification ofcontingent liabilities.

• Accrual evaluation.

• Sale and purchase/successor liabilityissues.

• Appropriateness of post closingprogramme.



Bespoke TransactionSolutions

The Practice continues to develop thetraditional Warranty & Indemnity cover aswell as seeking new and innovative waysto mitigate risks arising out of corporatetransactions. We provide "tailor-made"policies to incorporate any aspects ofthe following:

• Warranty and indemnity (W&I).

• Successor liability.

• Loss mitigation/loss capping.

• Prospectus liability.

• Opinion based contingent risk.

• Corporate tax indemnity.

Contingency Risk Transfer

The ability of the insurance market toprice and transfer low probability, highseverity contingent risks can result in theability to smooth portfolio companiesbalance sheets in the lead up to apotential exit.

Such issues may include:

• Litigation buy-outs.

• Tax opinion indemnity.

• Defective/restrictive title.




Businesses have witnessed anunremitting demand for greatercorporate transparency resulting in morestringent governance obligations andmore onerous financial disclosures. Inthe US specifically, the stakes have risensharply with the passage of theSarbanes-Oxley Act and its implicitdemand for greater transparency withrespect to corporate risk exposures. Withenvironmental liabilities more visible thanever, corporations are under morepressure to manage, contain, andtransfer these risks.

In response to these drivers, the USenvironmental insurance markets havecontinued to grow and, for manymainstream insurance companies, thishas become a significant line of business.

Willis estimates the worldwide premiumincome from environmental insuranceexceeded $2.75 billion for 2004, anincrease of over 10% from the previousyear. This does not include premiumflowing into various European pollutionpools or the limited pollution cover underthe general liability offered in someterritories. At least 90% of the premiumflow into the speciality environmentalinsurance market is generated in the USwhere market conditions in 2005 remainbuoyant.

In terms of pricing and capacity,environmental premium increases haveremained fairly constant with most recentproduct lines showing average increasesfor 2004 under 20%. This situation hasnot changed significantly in 2005.

Current Developments in the USEnvironmental Insurance Market


Total market capacity available from theprimary environmental markets hasreduced to $500 million in the past fewyears. Some insurers are able to offerlimits of $100 million on a singleplacement and as very few projectsrequire limits greater than this, thereduction in market capacity has notbeen problematic.

Some new products have been launchedin the past year including a new"internet" based storage tank programmeand a number of combined programmes(combination of existing products) aimedat providing more cost effective solutionsin single policy form. Liability transfer andguaranteed fixed price remediationprogrammes are playing an increasinglyprominent role in the management oflegacy liabilities as organisations seek topresent clear and credible evidence thatthese liabilities are being efficientlymanaged, funded and transferred.

US Insurer developments are summarisedbelow:

ACE EnvironmentalNow into its third year, ACE offers arange of pollution products and worksclosely with the traditional primary andexcess casualty units of ACE USA to offera whole-account approach toenvironmental risk.

AIG EnvironmentalAIG remains the largest environmentalinsurer leading the market in the use ofblended finite risk programs that supportlong-term, multi-year policies. In 2005,AIG aims to increase its use of its"EAGLE®" product, a combined generalliability and pollution legal liability form.

Arch Insurance GroupArch is in its second year of providingenvironmental products. It offerscoverage on both a primary or excess

basis for most products with limits up to$25 million. Product offerings includePollution Liability, EnvironmentalConsultants Professional and PollutionLiability, Contractors Pollution Liabilityand Combined Pollution Products.

Chubb EnvironmentalChubb has re-structured following theloss of a significant portion of itsunderwriting resources in 2003. It hasadded new staff and retained its existingrenewal book demonstrating itscommitment to writing environmentalbusiness.

GulfWith the purchase of Gulf by St PaulTravelers, Gulf has exited theenvironmental insurance market place.

Current Developments in the USEnvironmental Insurance Market continued


LibertyLiberty continues to be an importantenvironmental market for morestraightforward placements. It willcontinue to emphasize annuallyrenewable business although it willconsider multi-year terms.

QuantaBermudan based Quanta CapitalHoldings Ltd, established in 2003.Quanta has a capacity of $50 millionwith the ability to increase this to $100 million on specific deals. Officesare in Bermuda, London and Dublin.

XL EnvironmentalXL offers multi-year programmes but isaggressively pursuing annually renewablepollution business, especially with themanufacturing sectors. XL's capacityremains at $50 million. In 2005 XLplaned to increase availability of itsRemediation Cost Cap product.

Zurich North AmericaZurich is continuing its strategy ofstraightforward protection to corporations,municipalities and local governments forthe full range of potential environmentalliabilities. In 2004 Zurich's biggest growtharea was its storage tank product pluscasualty lines; they expected this trend tocontinue in 2005.

Current Developments in the USEnvironmental Insurance Market continued


Practice Leadership

Nathan SewellCo-Head International M&A Practice,Nathan leads the Environmental Team,bringing substantial experience gainedwithin the financial products insurancesector.+44 (0)20 7975 [email protected]

Alistair LesterCo-Head International M&A Practice,Alistair has experience in the majority ofinsurance related specialties associatedwith M&A including due diligence, entryand exit transactional products andportfolio company requirements.+44 (0)20 7975 [email protected]

UK

David BarrDavid's extensive experience ofenvironmental risk assessment,remediation planning and financialmodelling gained in environmentalconsultancy provides an invaluabletechnical resource enabling the design ofinnovative insurance solutions.+44 (0)20 7975 [email protected]

Fiona GrayWith a background in the constructionindustry and environmental consultancy,Fiona is highly experienced in providingrisk management and insurance adviceat both a strategic and local level toclients across a range of industry sectors.+44 (0)20 7975 [email protected]

Key Contacts and Biographies

William BookerWill completed a BSc in Geography at theUniversity of Birmingham in June 2004and joined Willis on the graduate scheme.Now a Project Executive working withinthe Environmental Team of the M&APractice, Will conducts insurance duediligence studies and has involvement inplacing business with the London Market.+44 (0) 20 7975 [email protected]

Antoine ParmentierAntoine has a Masters in InternationalBusiness (CERAM Sophia Antipolis) and aMasters in European Business Law(University of Paris). Antoine joined Willis'M&A Practice in December 2004, havinggained previous specialised risk andinsurance experience from another majorbroker.+44 (0)20 7975 [email protected]

Sweden

IngaBritt HookHaving graduated in and practicedcontractual law, IngaBritt transferred toinsurance in 1984 focusing on productdevelopment and underwriting. Sincejoining Willis in 2000, IngaBritt hasspecialised in both environmental andprofessional risks insurance.+46 8 463 [email protected]

Charlotte LagergrenBefore joining Willis in 2004, Charlottespent eight years as a Senior Vice Presidentat a major insurance broker withresponsibility for building the M&A Practicein Sweden and the Nordic region as awhole. Charlotte draws on more than 18years of experience of the insuranceindustry.+46 8 463 [email protected]


Key Contacts and Biographies continued


Italy

Sebastiano DoriaSebastiano has experience of both theLondon and Continental EuropeanInsurance Markets and now leads theM&A Practice in Continental Europe forWillis. Sebastiano has been heavilyinvolved in the private equity sector forthe last six years having joined Willis froma major international insurance brokerwhere he headed up the Italian M&APractice incorporating responsibility forPan-European relationship management.+39 02 4778 [email protected](Also in London)

Andrea BonoOn his return from a number of years inLondon working for the Willis ItalianProperty & Casualty desk, Andreainitiated the marketing of environmentalinsurance products in Italy for the WillisItalia Major Account Division.+39 02 4778 [email protected]

Sarah De Rocco After a degree in Economics of FinancialInstitutions and Financial Markets andexperience with a major financialinstitution based in Paris, Sarah joinedthe Financial Lines Department of WillisItalia in 2003. At the beginning of 2005,Sarah became part of the Major AccountDivision with a specific focus on theenvironmental sector.+39 02 4778 [email protected]


Germany

Sandra Garfia HumanesSandra joined Willis Germany in 2005having finished the studies of BusinessAdministration and Civil Engineering atthe Darmstadt University of Technologystudying Economics, Law as well as theEnvironment. Sandra had previouslyworked for a leading environmentalconsultancy for a number of yearsworking in environmental due diligence.Originally from Spain, Sandra has lived inGermany since 1995.+49 (0) 69 959 31 [email protected]



Jurgen ReinschmidtHaving been with Willis since the mid1990's, Jurgen now leads the Liabilityand Financial Lines Department inFrankfurt office. Since returning fromworking in the London office, he hasconcentrated on M&A related projectbusiness for both large domestic andcomplex international clients.+49 (0) 69 959 31 [email protected]

For information on North America,please contact:

Michael Balmer +1 617 351 [email protected]


Notes

Willis Limited

One Camomile StreetLondon EC3A 7LATelephone: +44 (0)20 7488 8111

website: www.willis.com

GMK/2846/10/05

Copyright © 2005 by Willis Limited

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording or

otherwise, without the prior permission of the copyright owner.

Willis Limited, Registered number: 181116 England and Wales.Registered address: Ten Trinity Square, London EC3P 3AX.

A Lloyd’s Broker. Authorised and regulated by the Financial Services Authority.

Designed by the Willis Global Design Centre and printed by the Astron Group.

Documents

2005 Environmental Insurance Market Review€¦ · provide insurance buyers, professional advisers, financiers and other interested parties with the following: • An update on market