Cost Cap Lives

Posted on April 24, 2013 by Brian Benn

After a decline and apparent death over the past few years, cleanup cost cap insurance (aka remediation stop loss or fixed price remediation insurance) for cost over-runs on environmental remediation projects is alive, but different.

Limits up to $10 million for 10 years are available, subject to very strictly defined application and underwriting parameters. Insurers are very selectively considering projects by environmental consulting firms with demonstrated technical expertise and strong regulatory relationships. Insurers have established a gauntlet of screens, checks and controls ranging from a fee-based application process to coverage terms giving underwriters sole discretion over approval of any changes in remedial plan costs.

For those interested in pursuing coverage, your projected costs should be in the range of $3m to $10m, and you should expect considerable co-payment requirements with premiums at rates much higher than the previous iterations of cost cap. The new version may have narrow appeal initially, but at least a cost cap option lives and, if successful, may expand into a more balanced and broadly appealing approach.

Endocrine Disrupting Chemicals: A Special – and Alarming – Form of Toxicity

Posted on February 22, 2013 by Brian Benn

A recent study, ‘State of the Science of Endocrine Disrupting Chemicals – 2012′, by the World Health Organization (WHO) and the United Nations Environment Programme (UNEP) describes the latest scientific understanding of the adverse health effects of EDCs on humans and wildlife. The report notes:

Of special concern are effects on early development of both humans and wildlife, as these effects are often irreversible and may not become evident until later in life.

Where are EDCs found? There are many hundreds, possibly thousands, of chemicals that may disrupt the healthy functioning of endocrine systems. Such EDCs include certain metals, solvents and other chemicals used in cosmetics, personal care products, plastics (food containers, toys, kitchen utensils), surface coatings, flame retardants, pesticides, herbicides, fungicides, antibacterials, and more.

What are the common adverse health effects of EDCs? Many endocrine-related diseases and disorders are on the rise, including reproductive problems, neuro-behavioral disorders, global rates of breast, endometrial, ovarian, prostate, testicular, and thyroid cancers, obesity and type 2 diabetes.

Why is wildlife health an important indicator? Endocrine systems, which produce hormones that control major physiological processes from embryonic development and organ formation to the control of tissue and organ function in adulthood, are very similar across vertebrate species. This means that endocrine system disruption has serious health consequences, and we must be highly attentive to wildlife health for the sake of ecosystems as well as what we can learn about the effects of EDCs on human health.

Why is exposure to low concentrations of EDCs a problem? Very low concentrations of hormones can initiate important biological effects. There are various U-shaped dose-response curves indicating dynamic ranges in which hormone dosages have much greater effects. It follows that lowering but not eliminating exposure to EDCs may actually increase disruptive effects.

How long might the effects of EDC exposure during development persist? Hormone actions during development may be considered irreversible ‘programming events’ that will influence the functions of physiological systems throughout (and perhaps not visibly until) adulthood, with possible effects on offspring. Fetal programming events from exposure to EDCs can predispose the adult to a number of chronic diseases, and may plausibly affect the health of several subsequent generations that were never directly exposed.

Why are the adverse health effects of EDCs so diverse? In addition to specialized endocrine glands such as the pituitary, thyroid, adrenal and gonads, many other organs that are part of other body systems, such as the heart, body fat, muscle, liver, kidneys, and intestines, have secondary endocrine functions and produce hormones. EDCs are thought to affect physiological systems ranging from development and function of reproductive organs to adult onset diabetes and cardiovascular disease.

We’re causing this threat, in large part, so we can and must solve it – soon! EDCs pose a global threat to human health and ecosystems that appears as serious, complex and challenging as climate change. Let’s re-think the chemicals we use, pursue green chemistry, improve product labeling to inform consumers about all products, develop immediate preventive approaches to protect the most vulnerable, examine our healthcare strategies, enhance ecological protections, introduce environmental risk pricing as an economic incentive to drive sustainable practices, and continue to advance the type of research described in this illuminating study.

My key take-aways from today’s National Underwriter Environmental Issue

Posted on February 4, 2013 by Brian Benn

There were many excellent observations and opinions expressed in today’s Environmental Insurance Issue of National Underwriter. Here’s my speed read of key points:

70% to 80% of companies with environmental exposures are uninsured or self-insured.
Consensus is that rates have fallen by a third in recent years, but have been flat over the past 12 months, with a modest increase expected this year.
Capacity remains abundant, with generally broad coverage terms, but insurers are increasingly cautious with policy duration and coverage for complex risks. Expect aggressive terms on annual policies for common operational risks, and less appetite for longer term brownfield transactions.
Insurance buyers are increasingly interested in coverage for exposures such as products pollution, first party diminution in value, viral and bacterial contaminants, contingent business interruption, indemnity backstops, and lender-investor protections.
Asbestos-related losses now stand at about $85 billion!

Why do some lenders act against their own economic interests (and those of their clients too)?

Posted on February 1, 2013 by Brian Benn

In response to a client’s question about refinancing requirements, a lender recently said it would not accept any environmental insurance in lieu of updated Phase I Environmental Site Assessments on the existing collateralized properties. Why not, the client wondered, as it considered an opportunity to purchase broad environmental insurance for 3 years for less than the cost of an updated Phase I ESA on each of its properties.

We know that many lenders have procedures designed for themselves rather than their clients, and since lenders are generally more familiar with Phase I ESAs than insurance, it is easier for them to reject insurance. But is it intelligent?

The lender’s position would be equivalent to saying to a borrower, ‘We require an updated fire safety inspection and will not accept any fire insurance instead.’ Although that sounds absurd, lenders routinely take that position on environmental risks.

What would a lender (and its client) obtain from insurance that it cannot obtain from updated Phase I ESAs on the client’s existing collateralized properties? Insurance can provide protection of the underlying collateral value that an ESA cannot by covering remediation expenses, third party claims for damages, legal defense expenses, business interruption losses, and more.

In addition to protecting the lender’s collateral value, insurance also helps protect a borrower’s ability to repay the loan. Meanwhile, an ESA is only a ‘snapshot’ in time, cannot address new leaks or spills, and offers no financial protection (while recourse against the consultant may be difficult).

So, it appears some banks reject protection that would make its loans safer, apparently for purposes of making its lending procedures easier for the bank. Hmm… does that sound familiar?

C-Suite Emotion: What’s Driving Corporate Perspectives on Environmental Risks?

Posted on April 13, 2012 by Brian Benn

Soon after experiencing a $90m loss, client “A” was referred to us, seeking to triple its environmental insurance coverage limits from $50m to $150m. In contrast, talking recently with client “B” who had never purchased any environmental insurance, we described how our data indicated that, if he needed to implement remediation of a property he was planning to buy, his cleanup costs might be expected to fall within a range of $3m to $5m.

B had discovered chlorinated solvents in groundwater about 1000 times the regulatory threshold, but the plume had not yet been discovered by the agencies. Since the contamination already extended beyond the boundaries of the subject property, there are many ways the plume could appear on a regulatory radar screen.

We described environmental insurance options to protect B from claims or risks including any regulatory order to remediate the environmental conditions. Based on potential remediation costs, and since the value of his investment exceeded $5m, we recommended limits of at least $5m. Having not yet experienced a claim, B determined that $1m would be enough protection, where the cost comparison was equivalent to paying $1 each or $2 for 5.

One client buys $60m in coverage above its largest loss ever, while another buys coverage at a small fraction of its risk exposure. It’s human to make risk decisions based on personal experiences and emotions, but shouldn’t empirical data and probabilistic risk analysis, combined with a rigorous risk management strategy, drive corporate decisions like these?

If the C-suite is open to it, an independent environmental risk analysis can broaden its perspective and help chart a course between risk aversion and complacency based more on analysis than emotion.

Welcome to ER&FS!

Posted on April 13, 2012 by Brian Benn

We welcome you to our redesigned website. Our intent is to illustrate more case studies and describe in more detail key environmental risk issues we are frequently asked about.

Why “clean financials” as our new URL? While we think of a clean balance sheet as one with little or no debt, our practice focuses on the intersection of environmental risks and financial objectives. To us, ‘clean financials’ convey intelligent, robust management of any environmental liabilities.

As we increasingly see risk management functions shift into the C-suite and garner attention of boards of directors, we want to communicate to senior executives and directors that there are better strategies and methods of managing environmental risks than what is typically offered today.

Unfortunately, in many companies, the C-suite only pays serious attention to environmental risks after a major loss makes management acutely aware of them. Think BP’s Macondo well disaster…

Progressive companies with excellent corporate governance are seeking better approaches: boards want to see independent environmental risk evaluations and proactive strategies, not the old process of obtaining “free” and superficial risk reviews from parties trying to sell something.

We plan to share our environmental risk stories here regularly, and hope to start a dialogue with you about the environmental risks that could impact your financials – before they do!