Case Studies

Case Study No. 8 – Resolution of Historic Liabilities and Recovery of Environmental Costs

An electric and gas utility company has identified environmental liabilities that are associated with its past operations. It expects to spend $75 million to clean up contaminated sites. Of this amount, $40 million has been incurred to date. It also expects to pay $75 million in third party tort liability claims, of which only $10 million has been incurred to date. General and excess liability policies were purchased during the period in which releases of contaminants took place that have given rise to these environmental liabilities. Substantial limits were purchased with the bulk of it coming from Lloyds and Aegis. Some of the policies had no pollution exclusions. Others excluded gradual but not sudden and accidental pollution.

The utility is merging with another energy company and it wants to clean up its balance sheet with respect to these liabilities for historic pollution. In addition to recoveries from CGL underwriters, the utility expects to be able to pass all or a portion of these costs through to ratepayers.

Exploring Risk Management Considerations for Case Study No. 8

Insurance archaeology work has been completed that indicates as much as $250 million in limits could be available for environmental claims from old CGL and excess liability policies.  All identified contaminated sites have been characterized and the estimates for remediation expenses are believed to be accurate to within 15% of the projected amounts.  Third party liability claims have been estimated by a law firm that has been handling litigation for the utility for the past fifteen years.  These estimates are believed to be accurate to within 50%.

The utility commission requires the utility to seek recoveries of liabilities from insurance companies before it will allow costs to be passed through to ratepayers.  The insurance companies are willing to discuss settlements for environmental liabilities.  The utility is considering taking the recoveries from CGL insurers, but it is concerned about risks that may remain after a settlement has been completed and the policies are commuted.

Insurance Settlement Possibilities for Case Study No. 8

The first step in evaluating a possible settlement of liability claims with insurers is to review the data that describes the environmental condition at each of the contaminated sites.  Planned remediation measures and projected costs must also be evaluated.  Third party tort liability claims associated with releases of contaminants are also evaluated.  Incurred costs are reviewed to determine their accuracy and applicability to insurance claims.  Projected costs are verified by the use of empirical models – remediation cost models are run by engineers and tort liability models are run by law firms and jury verdict consultants.  Once these costs have been projected, a separate model is used to allocate claims costs among insurers and individual liability policies.

A settlement strategy is developed with target recoveries specified for each insurance policy where coverage has been triggered.  Negotiations with individual insurers are assigned to expert outside legal counsel.  The strategy includes alternatives for commutation of insurance policies as well as settlement of only environmental liability claims.

Use of Insurance in the Settlement of Environmental Claims in Case Study No. 8

Environmental consulting risks will be insured by the purchase of professional errors and omissions insurance.  Contractors pollution liability insurance will provide protection against releases that might occur during the remediation process.

Once the settlements with insurers have been approved, environmental insurance will be used to:

1. Cap cleanup costs at expected values with a self-insured retention of 15% on individual sites or with no SIR in the aggregate.
2. Cap third party tort liability costs at expected values with a self-insured retention of 25% in the aggregate.
3. Replace non-environmental liability coverages in policies that are being commuted
4. Insure environmental risks from continuing operations

Recoveries form CGL and excess insurers are maximized through this process that takes approximately 36 months to complete.  The costs that are not recovered from underwriters are passed through to ratepayers.  The premiums for the insurance coverages purchased in conjunction with this program are also passed through to rates as allowable business expenses.