Environmental Liability Management Emerging Issues and Trends

1. Environmental Liability ManagementEmerging Issues and Trends Presented by: Kate Dodge, Aon Reed Stenhouse Inc.

2. AGENDA • Historical Coverage is the P&C marketplace; • Traditional application of Environmental Insurance; • Coverage, Exposures, Claims • New External Drivers; • What’s on the horizon…..emerging risks.

3. Pollution Coverage in the P&C Marketplace • Historical Perspective: • Pre 1966: No pollution specific exclusions • Late 1960s: Accident to occurrence (CGL) • 1970s: Absolute Pollution Exclusion (CGL) • Mid 1970s: Sudden & Accidental • Mid 1980s: Hostile Fire • Early 1990s: Limited First Party Clean-up (Property) • Mid 1990s to present: Development of dedicated environmental products

4. Pollution Coverage in the P&C Marketplace • Limited coverage provided under the following “standard” lines of coverage: • Automobile • Property • Boiler & Machinery • Marine • Directors & Officers • General Liability/Umbrella/Excess

5. Pollution Coverage in the P&C Marketplace • Common Pollution Liability Exclusions in a CGL: • Bodily Injury or Property Damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants 1. at or from premises owned, rented or occupied by an Insured; 2. at or from any site or location used by or for an Insured or others for handling, storage, disposal, processing or treatment of waste; 3. which are at any time transported, handled, stored, treated, disposed of, or processed as waste by or for an Insured or any person or organization for whom the Insured may be legally responsible; 4. at or from any site or location on which the Insured or any contractors or subcontractors working directly or indirectly on behalf of an Insured are performing operations: a. if the pollutants are brought on or to the site or location in connection with such operations or • if the operations are to test for, monitor, clean-up, remove, contain, treat, detoxify or neutralize the Pollutants Bolded subsections above do not apply to BI/PD caused by: • Heat, smoke or fumes from a hostile fire; • Unexpected or unintentional discharge, dispersal, release or escape of Pollutants provided there is an injurious presence in/upon land, the atmosphere, drainage or sewage system, watercourse, AND the condition is detected within a certain period after commencement AND its reported within a certain period after discovery AND the condition does not occur in a quantity or with a quality that is routine to the business of the Insured.

6. Pollution Coverage in the P&C Marketplace • Areas of concern • No on-site clean-up; • “Property Damage” is not redefined in the context of “Clean-Up”; • Broad Waste Management exclusions; • No coverage for “expected” losses (i.e. wear & tear); • Watch out for Products and Completed Ops exclusions; • Occurrence based policies (asset recovery efforts complicated); • Appreciate the direct damage implications of the Hostile Fire exception; • Inconsistent language: “any loss, cost, or expense arising out of any direction or request that an Insured test for, monitor, clean-up, remove, contain, treat, detoxify or neutralize pollutants”

7. Dedicated Environmental Insurance Products • Fixed Site “Pollution Liability” • Contractors Pollution Liability (CPL) and Combined CPL/E&O Forms • Blended Casualty Programs • Remediation Stop Loss/Clean-up Cost Cap • Finite Programs • Lender Liability

8. Traditional Environmental Exposures • Discovery of lingering legacy liabilities and historical contamination • “Pass through” contamination • Aboveground/Underground Storage Tanks, bulk storage, distribution channels (pipelines) • Waste management (landfills, lagoons, pits) including transportation and disposal • Contracting operations (demo, excavation, mechanical/electrical, utility, restoration, environmental, geotechnical) • Midnight dumping • Indoor Air Quality – Mould • Asbestos and Lead Based Paint • Air emissions and operational water discharges • Hostile Fire

9. Claims – Example One • Client (REIT) purchased a former gas station – Clean Phase I/II done by qualified/national consulting firm; • Secured a Pollution Liability policy to provide senior management comfort with purchasing a “high risk” site; • Tanks replaced shortly after acquisition and standard groundwater sampling showed elevated petroleum hydrocarbon levels; • Consultant had not sampled to a reasonable depth - $800,000 + clean-up.

10. Claims – Example Two • Residential sites purchased based on results of a clean Phase I; • Developer marketing site to large retail outfit; • Due diligence on buyer’s end showed elevated levels of zinc resulting from Mink hobby farm; • Anticipated Clean-up Costs - $1MM;

11. Claims - Example Three • In July 2007, a BC municipality hired a road contractor to perform routine maintenance; • During the course of performing the road repair, the contractor ruptured a pipeline, resulting in a crude oil geyser discharging product into the nearby Burrard Inlet and surrounding residential community for 30 to 60 minutes before being capped; • Who’s liable?

12. Claims – Example Four • A paving contractor was preparing to lay asphalt down on a newly built Hospital parking lot. • As they graded the site the contractor unknowingly ruptured the underground fuel line running into the hospital furnace. As the leak went unnoticed for a couple of days, product was allowed to build up under the foundation. • The paving contractor is placing blame on the mechanical contractor for installing the pipeline too close to the surface. On the flip side, the mechanical contractor is arguing that the underlying geology of the site didn't allow for the pipeline to be entrenched any lower and the paving contractor should have taken better read of information and maps provided at the onset of the project. • Depending on whether a full clean-up or risk assessment is allowed by regulators, clean-up costs range from $5MM to $23MM.

13. Claims – Example Five • Agri-Chemical & Fertilizer distributor was storing bulk 28% in a 400m ton lined silo; • Complete failure of the liner and total loss of product; • Product travelled down an adjacent rail road line into a tile drainage system under a corn field and migrated 3 miles from Insured site; • Traced to a creek whereby the culverts leading out of the area were blocked; • Costs in excess of $1.5M to date (does not contemplate long-term Natural Resource Damages); • Five employees are under MOE investigation.

14. And then what? • External Drivers changed….. • Legal System & Regulations; • D&O Accountability • Financial disclosures • Lender requirements • Un-precdented shifts in contractual liability

15. Environmental Side Bar – Provincial Environmental Regulations • British Columbia Regulations: • Environmental Management Act (Chapter 53) Part 4 – Contaminated Site Remediation; Division 3 – Liability for Remediation; • Persons responsible for remediation of contaminated sites including migration to an adjacent site: • Current owner or operator of the site; • A previous owner or operator of the site; • A person who: • Produced a substance, and • By contract, agreement or otherwise caused the substance to be disposed of, handled or treated in a manner that, in whole or in part, caused the site to become a contaminated site; • A person who: • Transported or arranged for the transport of a substance, and • By contract, agreement or otherwise caused the substance to be disposed of, handled or treated in a manner that, in whole or part, caused the site to become a contaminated site; • A secured creditor (if they exercised control or imposed waste handling requirements)

16. Environmental Side Bar – Canadian Environmental Regulations • British Columbia Regulations: • Environmental Management Act (Chapter 53) Part 4 – Contaminated Site Remediation; Division 3 – Liability for Remediation; • General principals of liability for remediation: • A person who is responsible for remediation of a contaminated site is absolutely, retroactively and jointly and separately liable to any person or government body for reasonably incurred costs of remediation of the contaminated site, whether incurred on or off the contaminated site

17. Environmental Side Bar – Ontario Environmental Regulations • Ontario Bill 133 (June 2005/Aug 2007) • Amends the EPA and OWRA – “You Spill You Pay” • Environmental penalties which differ from fines in that liability without fault or trial can be imposed • Broader due diligence and reverse onus for Directors and Officers • Municipalities and the province can recover costs associated with clean-up efforts without court action • New requirements for pollution prevention plans • Higher fines and longer jail sentences • “Pollution” and “Impairment” more broadly defined and consequently easier to prove • Ontario Reg 511/09 (December 29, 2009) • Amends Brownfield Regulation 153/04 • Revised Soil, Groundwater and Sediment Standards • Revised Environmental Site Assessment Requirements • Changes to the Record of Site Condition Process • Streamlined Risk Assessment • Transition Rules

18. And then what? • External Drivers changed….. • Legal System & Regulations; • D&O Accountability • Financial disclosures • Lender requirements • Un-precdented shifts in contractual liability

19. Contract Management – Construction Site • Who has liability for pollution conditions on the job site? • Property Owner (Corporation and Individuals) • Property Manager • Tenants • General Contractor/Project Manager • Sub contractors • Lenders • Unprecedented shift in contractual liability being placed on others in Canada – especially in the public sector (P3) • Types of Contracts with Environmental Clauses: • Purchase and Sale Agreement (acquisitions/divestitures); • Lease Agreements; • Right-of-Way/Access Agreements; • Service Vendors.

20. Contract Pitfalls • Renewing contracts without re-evaluation • Lack of central verification process & consistency in language • Indemnification & Hold Harmless Provisions • New Conditions (arising from Covered Ops or otherwise) & Pre-existing (Known or Unknown) • Direct & Indirect Damage • Definition of Hazardous substances • Inconsistent with regulatory definitions • May not encompass “non hazardous” such as storm water, sediment etc. • Site conditions – Establishing Baselines • Appropriate Due diligence • Insurance Provisions • Not consistent with indemnity obligations • Gaps in standard GCL/Wrap-Up • Certificates Obtained & Qualifying extent of Pollution Liability coverage evidenced

21. Environmental Specialty Marketplace • $2B + Premium Industry in NA • The Canadian Marketplace: • Chartis • Zurich • Chubb • ENCON • Elliott Special Risks • XL • ACE • Liberty • Great American • Ironshore • Competitive marketplace • Flexibility of coverage design/tailored programs • Multi-Year Programs • Streamlined underwriting process

22. Environmental Liability – Emerging Risks & Trends • Bio-contaminants • Facility-borne infectious diseases, viruses and other bacterial based contamination • Bed Bugs??? • Bio-Terrorism; • Products Liability; • Contaminated drinking water • Construction Products • Regulatory re-openers and evolving legislation • Reg 511/09 - Ontario • Bill 89 - Quebec • Known Conditions • Third Party BI & PD • Off-site remediation • Excess of Indemnity

23. Environmental Liability – Emerging Risks & Trends • Construction Related Losses • Delay in Start-up • First Party Property Damage • Disruption of Known Conditions • Anthropogenic Disasters • BP Gulf Incident (Petroleum Migration) • Contingent Business Interruption • Natural Disasters (earthquakes, windstorms) • Mould • Tank ruptures • Climate Change • Carbon Credit Trading & Off sets • Green Building Extensions • Carbon Capture & Sequestration • Global risks • EU – Environmental Liability Directives (“Biodiversity”)

24. Aon’s Environmental Practice Group Kate Dodge, CRM, ERM, BA Adrian Pellen, M.Sc Vice President, National Practice Leader Risk Consultant, National 416-868-2414 416-868-5782 Kate.Dodge@aon.caAdrian.Pellen@aon.ca Colin Wight, B.Comm, CRM Heather Meldrum Broker, Western Canada Associate Broker, National 780-423-9485 416-868-5865 Colin.Wight@aon.caHeather.Meldrum@aon.ca

25. QUESTIONS & ANSWERS?