ENVIRONMENTAL REVIEW AND INSURANCE ANALYSIS

Transcription

1 ENVIRONMENTAL REVIEW AND INSURANCE ANALYSIS FOR CONTAMINATED PROPERTY IN PREPARATION FOR TRANSFER For consideration as a published paper by the Surplus Property Roundtable, in partnership with JLT Specialty USA JLT Specialty USA 1520 Market Street, Suite 300 Denver, CO

2 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 2 TABLE OF CONTENTS Preliminary Evaluation & Available Information...2 Risk Analysis...4 Assumptions...5 Contract / Agreement Review...6 Property Transfer Strategies Utilizing Environmental Insurance...7 Environmental Insurance as a Transaction Management Tool...9 Case Study...12 Conclusion...17

3 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 1 As companies continue to assess divestments of owned properties, more sophistication is needed in dealing with the increasing number and magnitude of the environmental uncertainties associated with larger and more complex transactions. The potential liabilities associated with these transactions can correspondingly increase in both volatility and severity, with buyers and sellers exposed to these risks from a multitude of standpoints. In every transaction there will be some level of known and unknown environmental liability. To address these concerns, there are insurance products offered by many insurers that can be very efficient in providing solutions to mitigate or transfer environmental risks, assisting the transaction by closing the gap between the perceived risks of both the buyer and seller. In addition, financiers of these transactions often impose their own risk management requirements, and commonly require environmental insurance as a component of the strategy. Surplus Property Roundtable (SPR), in partnership with JLT Specialty USA (JLT), has authored this paper to assist in the evaluation of the use of environmental insurance during the course of a potential sale of an owned asset. There are a number of considerations to be made when making this assessment and one of those is most notably the amount of information available regarding the environmental conditions of the target site. This paper will help to guide you through the various options of environmental risk management tools, including the availability of insurance, based on the varying levels of information that is available regarding the site. There is a method to follow in any evaluation and this paper will outline that process. As part of the process, the following deliverables should be included: a high-level environmental risk analysis of the target facility (the site) review of the contract agreements (PSA and indemnity provisions, etc.) discussion around potential risk transfer strategies related to the environmental liabilities associated with the site(s) cost estimates related to environmental insurance solutions based on review of provided data. The analysis and the corresponding recommendations may then be incorporated into the site s for sale marketing strategy. To best facilitate the analysis it is important to review all of the available information regarding the target site. However, sometimes very sparse information is available and in those cases certain assumptions can be made regarding the site and its potential future use. Depending on the level of understanding regarding the site s environmental conditions, one can work with environmental insurers to provide coverage based on or supported with similar assumptions. Often the analysis proves that while the site may have a number of liabilities associated with known pollution conditions, there are environmental risk management tools for the company to consider which can assist in minimizing the various environmental risks to the

4 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 2 company, ranging from those that arise from the conditions at the site(s) itself, to the credit risk from a prospective buyer. There are a number of ways to limit environmental exposures by using certain types of contract provisions that can be added to the indemnity language in agreements. After exhausting contract language techniques, the remaining risks can be transferred through environmental insurance. Insurance can transfer perils for both the company and/ or the buyer (both can be insureds on a policy), thereby reducing the company s exposure to the credit risk of the buyer and at the same time aligning the interests of both parties to minimize liabilities associated with environmental hazards. Usually a combination of these risk management tools proves to be most effective, compared to resorting to the use of escrow accounts and unlimited indemnities to address the environmental risks associated with a property divestiture. In addition to the outline of the evaluation process, we have provided an actual case study where this process was implemented at the end of the paper. There are a number of ways to limit environmental exposures by using certain types of contract provisions that can be added to the indemnity language in agreements. PRELIMINARY EVALUATION & AVAILABLE INFORMATION During the course of a site divestiture, environmental site characterization information is imperative along with an understanding of the historical and future use of the site. Depending on the exposures presented (e.g., industrial, commercial, or residential), the company should have varying levels of environmental site data available. of detail pertaining to the site(s), the more likely risk management solutions can be created to ease the transference of the site(s). If the company has extensive information available, a firmer understanding of the site(s) is possible which provides greater comfort to underwriters. Preferred information includes, but is not limited to, the following: (1) Phase I Environmental site Assessments; (2) supplemental Phase II subsurface investigations; (3) available purchase-sale agreement and corresponding indemnifications (refer to CONTRACT / AGREEMENT REVIEW); (4) plans for any re-development, capital improvements, and / or future use; (5) prior / ongoing litigation or regulatory notices related to pollution or environmental liabilities; etc. The greater the level

5 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 3 If the company does not have access to significant stores of environmental data, it becomes more challenging and will require certain assumptions to be made in regards to the potential outcomes of the environmental risks associated with any site. The uncertainties regarding the site conditions can place a company in a more difficult position with any potential buyer and may require less favorable contract terms or reduced pricing to be imposed on the property transaction. Many of the uncertainties will be in regards to losses which can result from on and offsite cleanup costs, third-party toxic tort claims, and damage to public reputation, and could impinge upon the financial results of the company. However, certain assumptions can be made by a qualified environmental risk consultant (environmental insurance broker expert) to best determine those particulars about the risk associated with the target site(s). The evaluation process of the site(s) can include a number of assumptions and will depend on the nature of operations or future uses. These assumptions could include, for example, that institutional controls will be implemented, such as deed restrictions or caps on certain areas of the site. The assumptions could also include restricted activities such as no voluntary site investigations of the property. In addition, discussions with site managers or those familiar with the operations at the property will often shed additional light on historic operations, spills or leaks, etc., and thus allow for a better understanding of what may have contributed to any potential concerns that should be identified, assessed and transferred to an insurance policy. Based on these assumptions, an experienced environmental risk consultant should be able to obtain favorable terms for insurance or recommend other risk transfer mechanisms. The uncertainties regarding the site conditions can place a company in a more difficult position with any potential buyer and may require less favorable contract terms or reduced pricing to be imposed on the property transaction.

6 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 4 RISK ANALYSIS As the company identifies locations for divestment, a risk analysis is warranted to characterize and quantify exposures. A qualified environmental risk consultant should be able to provide an analysis whose sophistication will depend on the level and amount of information available. The analysis should consider the current and historical operations of the site(s), operations of adjacent property owners that may impact the site(s), and the company s past and current risk management strategy for environmental risks. This evaluation should include consideration of a full range of potential hazards, including regulatory, legal, technical, and risk management factors. Once the perils have been classified, risk management solutions can be tailored and proposed to meet the desired terms of the transaction. Insurance is typically a part of the response because it provides cost-effective protections against a variety of first- and third-party liabilities, and can include coverage for both preexisting and new conditions, all the while covering both the seller and buyer under the same policy. Insurance also provides valuable legal defense protection and coverage for indemnity payments in the event of failure by the indemnitor. To evaluate environmental exposures, one needs to understand the historical and ongoing operations with the associated hazards that may arise as a result of a potential divestiture. This evaluation may be further challenged due to known remediation responsibilities at the site(s). The known or on-going remediation responsibilities will likely result in some legacy liability for the seller or in a cost to the transaction. However, in either case, these can be addressed by a properly structured insurance policy. Some examples of operational exposures that will be reviewed in an evaluation would include any number of the following: Spillage, leak, explosion, etc. as a result of day-today operations Including gradual leaks which result in large loss Historical usage of the site(s) (manufacturing, storage, processing, water treatment or discharges, etc.) or anything that can result in significant pollution releases that contaminate groundwater aquifers and subsurface soil Raw material production, transportation, and storage Insurance is typically a part of the response because it provides costeffective protections against a variety of first- and third-party liabilities, and can include coverage for both pre-existing and new conditions, all the while covering both the seller and buyer under the same policy. Insurance also provides valuable legal defense protection and coverage for indemnity payments in the event of failure by the indemnitor.

7 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 5 Historical operational exposures associated with product production including manufacturing Waste accumulation, transportation, and disposal related to manufacturing process that must be handled, stored, and disposed. This includes the use of onsite storage tanks, impoundments, degreasers and settling ponds for the storage of waste materials. Hazardous waste stream also generated at facilities and disposed at offsite locations through third-party handling and storage services, creating potential liability for the generator. When the disposal facility improperly disposes of the waste or does not have the economic capacity to deal with an environmental issue, the liability reverts back to the generator in the United States and other industrial nations. In the United States, the Federal Water Pollution Act prohibits discharges to waters of the United States unless those discharges are allowed under a facility-specific National Pollution Discharge Elimination System (NPDES) permit. Typically, an NPDES permit sets numeric limits and other specific conditions, such as compliance schedules. When a permit violation occurs, whether intentionally or accidentally, the US Environmental Protection Agency or the state (if it has NPDES authority) will require compliance and perhaps apply a penalty. If a return to compliance does not occur in a timely manner, the oversight agency may seek administrative or criminal penalties against the violator. The penalties can include fines of $10,000 per day per violation and/or imprisonment up to one year, or both; for serious or persistent violations, the penalties increase dramatically. The exposures above have the potential to cause adverse environmental impacts to each of the four environmental pathways: soil, groundwater, surface water, and atmosphere and therefore environmental liabilities. ASSUMPTIONS A thorough analysis may need to make certain assumptions regarding the site and its conditions to fill in data gaps. Where there is plentiful environmental data, few assumptions, if any, will be required. However, where less data is available, more assumptions will have to be applied to support the insurance underwriting process. In the event there are data gaps, a number of factors can be of significant importance in formulating these assumptions: 1. thorough understanding of the nature and extent of the operations of the site; 2. number of years in operation at the target location, 3. discussions with site managers or those with work history at the property;

8 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 6 4. future plans for site (e.g., same use or will there be some development, capital improvements, etc.?), 5. any use of institutional controls such as deed restrictions or building foundations, 6. contract terms in the PSA. Qualified assumptions can provide significant guidance in procuring insurance solutions and can help in addressthe overall environmental risks associated with the property and its sale. In some cases when there is an understanding that insurance can transfer much of the risk, recommendations can be made to the contract terms to eliminate or greatly reduce the seller s responsibilities. CONTRACT / AGREEMENT REVIEW As a part of the risk analysis a contract review should be included. The contracts which require review would include those related to the transaction such as the purchase sales agreement (PSA), easement, access, development plan or agreements, lease and any environmental regulatory agency agreements. There may be others but those are the main ones if applicable as they all may have limitations on the seller or try and convey responsibilities on seller which otherwise may be eliminated or greatly reduced with a properly structure insurance program. In the event these are available for review early enough in the process, there may be still opportunities for suggestions to be made for changes to the agreement provisions to lessen the responsibilities of the seller when insurance is available to transfer the uncertainties or risks. Recommendations can be made regarding contracts pertaining to the divestiture of the asset. These can include certain key provisions: 1. understanding any indemnity provisions, and avoiding those wherever possible or lessen to the greatest extent 2. understanding seller and buyer responsibilities; 3. understanding clauses for access, assignment, sunset provisions, etc.; 4. understanding any known environmental obligations or liabilities, and 5. understanding escrow requirements if any. Based on the understanding of the contract terms, the environmental risk consultant can better tailor the environmental coverage to best support the transaction. In some cases when there is an understanding that insurance can transfer much of the risk, recommendations can be made to the contract terms to eliminate or greatly reduce the seller s responsibilities.

9 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 7 PROPERTY TRANSFER STRATEGIES UTILIZING ENVIRONMENTAL INSURANCE As with any property divestiture, there are usually a number of strategic options that can be considered. Many factors will determine the best option, and it s best to understand all of those factors (such as whether the site has known contamination and is undergoing remediation) before the company markets the property. A fair price can t be determined until those options are better understood. It would be prudent for the company to evaluate a number of options for the property, including but not limited to, the following: 1. company may decide not to sell the location and retain the asset for future use. 2. company may retain responsibility for any known remediation project, and the necessary access to the site following the transaction. buyer would then indemnify the company for new conditions unrelated to the on-going remediation project and for buyer-caused activities that exacerbate the known contamination and for causing harm to the on-going remediation project, or for compromising or violating any covenants for the site. It will likely also be that the seller will be required to indemnify the buyer for the known environmental conditions and remediation. We should suggest however that indemnity should be limited to clean up costs only and not include third-party toxic tort liability claims as this likely will be covered by a properly structured insurance policy. 3. company negotiates a sale of the property where they shift all responsibility for any known conditions and associated on-going remediation project to the buyer ( most favorable to the seller), likely adjusting the purchase price due to the legacy liability and responsibilities to buyer, and establishing a properly funded escrow account in favor of the buyer and where any surplus of funds after closure benefit the buyer. The buyer would then be incentivized to minimize costs relative to the remediation. At the same time, the buyer would then be inclined to maximize the environmental stewardship of the site and the use of institutional controls. As a condition of this shift of responsibility to the buyer, the company would look for the buyer to indemnify thr seller for all environmental liability at least for and to the extent Often, when environmental risks are significant, sophisticated buyers and sellers will use a combination of strategies. If effective risk management strategies are used, the known remediation responsibilities should not negatively impact the real estate value of the site, subject to specific site conditions and regulatory environment.

10 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 8 of the known conditions. In addition, the company can look to avoid providing any indemnity to buyers where there has been a properly structured environmental insurance policy which can insure those risks. Further the company/ seller could offer the buyer both remediation cost cap (Cost Cap) insurance to protect against cost overruns of the remediation project and a pollution legal liability (PLL) policy to insure the toxic tort liability associated with the historical conditions of the site and any unknown conditions that may arise in the future. For either option 2 or 3 above, the company should consider the purchase of environmental insurance, specifically PLL coverage, which can include an excess of indemnity provision that can be tailored to support either the seller s or buyer s indemnity to the other party, depending on which option above is selected. Both the company and buyer will be Insured s under the policy. The PLL policy will provide a backstop to the uncertainty of potential unknown environmental conditions at the site, a change in conditions or requirements from Regulators, and / or the buyer s inability to fulfill their indemnity provisions. The PLL can include coverage even for the Known Conditions in the event of a toxic tort claim resulting from the known conditions; however, cleanup costs for known remediation responsibilities will not be covered as these are known and/or ongoing expenses. 4. company may decide to not sell the site to anyone and consider the application of a 468B Trust to transfer the site. Environmental Liabilities stemming from US regulations, including the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), impose onerous responsibilities on operating companies as well as individuals. In certain situations, companies can benefit from structured settlements that, if done correctly, will transfer responsibility for liabilities to a trust and provide immediate tax benefits to the company. It is a mechanism that streamlines the process and is outlined per the Department of IRS within Code 468B, and is known as a Designated Settlement Trust or Qualified Settlement Fund (collectively referred here forward as 468B Trusts). The material difference between Designated Settlement Trusts and Qualified Settlement Funds is that the latter is used only for tort settlements and requires a court order, whereas Designated Settlement Trusts qualify for 468B tax benefit when established under federal or state agreement. 468B Trusts, which remain widely underused mostly due to lack of familiarity, can bridge the interests of responsible party(s), regulators, and the public, and provide a pre-funded financial instrument to address environmental issues associated with a site. The responsible party settling also receives the benefit of accelerated tax deduction and a release from liabilities. The company would benefit from structuring a trust in advance of the sale of the property because the liability protection for the buyer makes the asset more attractive, and minimizing liabilities associated with environmental conditions would allow the company to

11 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 9 avoid taking a discount on the sale price of the property due to such liabilities. However, the company does not have to have a buyer to transfer the property and associated liabilities into the Trust. Trusts can be established independently without the need to sell the property and still achieve all the financial benefits as described earlier. Often, when environmental risks are significant, sophisticated buyers and sellers will use a combination of strategies. If effective risk management strategies are used, the known remediation responsibilities should not negatively impact the real estate value of the site, subject to specific site conditions and regulatory environment. While the site conditions may present some challenges, the ability to transfer risks for the known and unknown exposures can eliminate the need for separate escrow accounts and/ or indemnities, and ultimately release the company from all other ongoing remedial obligations. ENVIRONMENTAL INSURANCE AS A TRANSACTION RISK MANAGEMENT TOOL Most every transaction will include some level of known and unknown environmental liability. Insurance products are offered by many insurers that can be effective in addressing the risks, and facilitating closure of a transaction by closing the gap between the perceived risks of the buyers and sellers. In addition, financiers of these transactions often impose their own risk management requirements, and commonly require environmental insurance as a component of the strategy. Similarly, these products can be used by Directors, Officers, and other members of the Executive Suite to enhance their decision-making process at times when traditional expert advice does not provide an adequate level of security or comfort. Directors & officers are increasingly exposed to environmental liability, particularly when the company they served no longer has the financial capacity to indemnify them. While the Risk Management Marketplace has been implementing a product that is designed to protect and insure against specific liabilities during the course of a transaction (e.g., representation and warranty insurance), there are significant gaps that are not covered by this type of insurance. Of specific concern are potential environmental representations, specifically when the level of contamination is considerable These same risks can lead to catastrophic results that negatively affect a company s financial results, harm their public reputation, and lead to long-term environmental impacts that require costly cleanup and present the potential for toxic tort liability claims.

12 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 10 and data gaps exist resulting in unknown issues not being addressed. These same risks can lead to catastrophic results that negatively affect a company s financial results, harm their public reputation, and lead to long-term environmental impacts that require costly cleanup and present the potential for toxic tort liability claims. Depending on the nature of the transaction,(i.e. stock or asset only purchase for example) and the complexity of existing pollution levels and or operational exposure(s), there are environmental insurance products that can be used to offset the transactional environmental liability and provide investors with appropriate entrance and exit strategies. The following three environmental insurance solutions can be combined and tailored to address the hazards of a particular transaction. Environmental Impairment Liability Insurance (EIL, PLL) EIL or PLL insurance coverage is valuable when there is potential for legacy (historical) known and unknown liability, or from operational exposures of the insured site which can include any type of use, from industrial to residential (i.e. manufacturing, chemical processing, pharmaceutical utility, oil & gas, real estate portfolios, etc.). This product can cover a significant portion of environmental risk, and as such, offers the most utility of any single environmental insurance product. PLL coverage can include (as a result of pollution incidents discharge, dispersal, release, escape, migration, emanation from / through, etc.): On-site & off-site Cleanup costs discovered by the insured or as a claim by a third-party such as a regulator Third-party bodily injury or property damage claims, as well as corresponding legal / defense expenses Coverage in this instance can include associated medical monitoring costs Non-owned disposal sites which result in Potentially Responsible Party (PRP) liability Claims arising out of transportation exposures (i.e. spills) from the insured or contracted third-party haulers Business interruption, extra expenses, and delay costs as a result of pollution incidents Cleanup costs and Bodily Injury coverage can include claims arising from microbial matter, i.e. mold Legionella bacterial substances Claims for lead-based paint or asbestoscontaining materials and cleanup of these materials as contaminants in soil and groundwater Illicit abandonment (aka midnight dumping ) of hazardous materials on an insured property Emergency response costs to remediate and respond to immediate threats to human health and safety and imminent environmental damage EIL or PLL insurance coverage is valuable when there is potential for legacy (historical) known and unknown liability, or from operational exposures of the insured site which can include any type of use, from industrial to residential (i.e. manufacturing, chemical processing, pharmaceutical utility, oil & gas, real estate portfolios, etc.).

13 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 11 Crisis response management costs public relations management costs in connection with negative media attention as a result of a pollution condition including mold or legionella The PLL policy can be assigned to a purchaser with carrier approval, provided the assignee demonstrates financial ability to pay for any deductible, hasn t violated any environmental laws or are subject to legal proceedings of environmental claims. In situations where the property is sold / divested, having the ability to assign the policy in many instances eliminates or lessens the need to create escrow accounts associated with environmental liabilities, and as such, is very useful in in support of transactions. In addition, while the PLL policies are most common in the United States, this coverage is available on a global basis and can be structured to be compliant with most all foreign insurance regulations. Excess of Indemnity In transactions, there is often an indemnity offered by the sellers to address uncertainty in the transaction. However, in most cases the indemnity will have limitations in terms of both time and/or amount. Escrow accounts also may be utilized to address uncertainties, but similar to an indemnity, an escrow account will have limitations. PLL policies can be tailored to address and provide coverage for cleanup costs and toxic tort claims, while working in conjunction with the indemnity and or escrow account. While the PLL policy will exclude any known pollutant that requires a cleanup action by a regulator (and this liability will likely be covered under any indemnity and or escrow), coverage can be tailored to provide excess insurance over an indemnity agreement reached between seller and buyer for the known conditions. Should the indemnitor fail to meet the obligations under the agreement or with respect to those events outside of the indemnity, coverage can be applicable subject to the terms and conditions of the overall policy, including deductible / retention. Carriers offering this type of coverage may require review of the indemnitor s financial statements to determine solvency. The carrier will then determine their willingness to take the excess position accordingly. The excess of indemnity structure is applicable when there is a commitment from the seller to take on responsibility for known (and some unknown) pollution incidents. It can help reduce the amount of required indemnity or escrow accounts, and thereby increase the chances to close the transaction more quickly while preventing unnecessary expenses. The excess of indemnity-structure is applicable when there is a commitment from the seller to take on responsibility for known (and some unknown) pollution incidents.

14 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 12 Remediation Cost Cap The cost cap product is designed to protect owners or remediation firms from potential cost overruns associated with the execution of a cleanup. Through use of this policy, a greater level of certainty to the total cost of tackling a remediation project can be provided to those parties involved. Cost Caps can be used to guarantee the size of a firm s total liability when involved in a merger or divestiture, and similarly, to facilitate transactions that have otherwise stalled due a disagreement over the size and allocation of known and unknown liabilities. The cost cap product is designed to protect owners or remediation firms from potential cost overruns associated with the execution of a cleanup. CASE STUDY company asked JLT to evalute the applicability of an environmental insurance product in conjunction A with a sale of surplus property. We evaluated the property, including environmental conditions, hydrogeologic conditions, regulatory status and history, sensitive receptors, surrounding areas and a review of proposed purchase sale agreement terms and an access agreement. A summary of the results is provided below. JLT evaluated contaminant areas of concern (AoCs) that included degreasers, wastewater ponds, and an aboveground storage tank area that was closed and/ or removed. These AoCs resulted in a groundwater plume containing volatile organic compounds (VOCs) within the site boundary. Environmental reports related to the site demonstrate that soil and groundwater are impacted by VOCs, including chlorinated VOCs. Key constituents of concern for the site include TCE and other solvents that were used at the site for degreasing operations and their breakdown products. Engineered seeps that discharge groundwater to an adjacent river also were reportedly impacted with VOCs. No impact was reported from samples collected from the river. Similarly, there was no reported impact in nearby water supply wells.

15 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 13 The company s responsibility for the environmental conditions likely commenced upon acquisition of the site via acquisition of the previous owner of the property. At the time of our evaluation, the site was undergoing remediation for known environmental conditions and had active regulatory involvement. Groundwater and soil remedies at the site include rip-rap blanket cover seeps, building floor slab acting as site cap, and a proposed environmental covenant that will prevent access and potential exposure to VOC-impacted soil and groundwater. Groundwater monitoring is performed semi-annually. There are no other identified on-going remedial activities other than the groundwater monitoring. Current estimates for those activities for the next 10 years only amount to approximately $550,000 on a net present value basis. In addition, there appears to be no identifiable environmental pathways for exposure to human health or the environment if the current institutional controls are left in place and maintained properly. Identifying Data Gaps Based on review of the site-specific information and independent information sources, gaps were identified. It is noted that groundwater well reports and additional subsurface monitoring reports could enhance the overall analysis and potential coverage offerings. Contract Reviews 1. ENVIRONMENTAL CONSIDERATIONS FOR SALE OF PROPERTY (INCLUDED IN PROPOSED PSA) Based on a recent review of the environmental considerations document for the site, information relating to sale requirements included: remediation requirements vapor intrusion indemnities. Information outlined included responsibilities for both the seller and buyer: 1. seller is responsible for: a. Retaining on-going known remediation responsibilities, including continued groundwater and surface water monitoring; rip-rap blankets maintenance; and oversight status reporting. b. Performing vapor intrusion assessment prior to close such as design sub-slab depressurization requirements c. Developing floor slab maintenance and subslab soil management requirements prior to close d. Reserving an access agreement executed at close whereby buyer allows seller and/or

16 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 14 authorized representative access to the site for known remediation activities. 2. buyer shall take on responsibilities including but not limited to: a. Adherence to scope of work determined by seller b. Maintaining floor slabs and sub-slab soils in compliance with plan c. Not disturbing rip-rap blankets d. Implement and maintain sub-slab depressurization requirements defined by seller prior to close e. Implement any vapor mitigation system in new structures post close 3. The site to be sold as-is except where seller retains known remediation responsibilities, inclusive of buyer waiving all rights against seller and buyer assuming responsibility for newly discovered conditions and conditions created after close. 4. site will be restricted per Uniform Environmental Covenant that includes: a. Zoned for Industrial use only b. No use or disturbance of groundwater c. Maintaining slabs and concrete in place d. Not disturbing permanent signs required by the Uniform Environmental Covenant 5. seller shall indemnify buyer: a. With respect to oversight orders including actions against buyer for those remediation requirements that seller agreed to with the PSA. b. For personal injury to its employees and agents entering the site post close unless such harm is caused by buyer 6. buyer shall indemnify seller: a. With respect to buyer s failure to perform and fulfil obligations under the PSA b. Actions that harm seller s remediation activity c. Exacerbates current conditions at the site d. Third-party claims post close excluding seller and their authorized representatives 2. ACCESS & NON-DISCLOSURE AGREEMENT Based on review of this access agreement, this document includes the following: 1. Notice of intention to access property for inspection and testing a. This does not include any invasive testing, drilling, soil testing or physical alteration, unless prior written consent was received b. Also would require a general description of the work to be conducted 2. Disclosure of results of testing a. Testing results would be kept confidential and not disclosed to third parties b. Results would be provided upon written request; however, it was agreed and acknowledged that the information was developed for the sole use of certain parties and no one was entitled to rely on such results without the express written acknowledgement and consent of the Inspecting Party conducting the tests.

17 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 15 We could not determine whether this agreement remains in-force; nevertheless, a notable omission appears to be with respect to the Insurance-section, where there does not appear to be a requirement for pollution coverage, specifically contractor s pollution coverage, which should include supplemental transportation and Non-Owned Disposal sites (NODS) coverage, for all contractors, subcontractors, consultants, and other persons performing work at the site. Without these coverages, the company is exposed to the liability resulting from the exacerbation of an existing pollution condition, or contactor operations that result in a pollution incident. These outlined considerations are customary for transactions similar to this site; however, we recommend instead that the company require the buyer to assume all responsibility for on-going remediation with a properly funded remediation escrow account established in favor of the buyer. In addition the seller will secure a PLL policy for the site in support of the transaction, with the buyer responsible for satisfying any deductible/retention; both seller and buyer are named insureds. Policy coverage should include discovery and first-party remediation, third-party toxic tort liability and legal defense expenses, and coverage for unknown conditions discovered after sale of the property. In addition, as a condition of this policy and memorialized within the PSA, the seller shall remain on the policy for a total of ten years post-transaction close. Assumptions Due to the identified data gaps and in an effort to move this analysis forward, these assumptions were made: 1. Soil impact at the site is vertically and laterally defined 2. Groundwater impact at the site is vertically and laterally defined to the North, West, and South. Groundwater impact to the East of the property toward and including adjacent river is vertically and laterally defined to the extent acceptable to local regulatory oversight 3. Groundwater impact, including the upper, intermediate, and lower water-bearing zones, remains stable and defined by the current well network. Acknowledging the local groundwater gradients, and historical sampling results, it is assumed that the local oversight will not warrant additional lower water bearing zone assessment, nor any additional regional municipal well sampling 4. No active remediation (i.e. soil/vapor extraction, dual-phase extraction, thermal treatment, etc.) is warranted 5. Oversight agency agreement is in place 6. Future use - will remain zoned as industrial use and compliant to site-specific environmental covenants; 7. Recorded covenant will be executed and recorded pursuant to Uniform Environmental Covenants Act. Current and/or future owner will operate within executed terms. 8. The company may retain responsibility for groundwater monitoring in the event the site is sold. Additional activities may be required at the time the site is sold, such as rip-rap blanket expansions, additional groundwater modeling/ assessment, and further investigation/remediation beneath the building slab.

18 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 16 Site-Specific Environmental Insurance options Terms and conditions of an environmental insurance policy can be tailored to cover provisions (e.g., excess of indemnity provided by seller) negotiated during divestments. Based on information made available for the analysis and considering the impact of an indemnity, a matrix of options can be provided to estimate premiums with associated terms and conditions. The following matrix was developed based on experience with similar sites, review of sensitive receptors related to the subject site, and a good understanding of this particular site and site historical use. The following premiums are projected for an environmental insurance program to address the company s risks while taking into account divestment of the site inclusive of retaining known remediation work: Coverages: On-site and Off-site cleanup of unknown preexisting and new pollution conditions Third-party claims for onsite and offsite bodily injury and property damage (including Natural Resource Damage; medical monitoring costs) Coverage for third-party claims arising from waste deposited at a non-owned disposal facility Legal liability arising out of transportation of site materials Legal defense and expense costs Option 1: One year Policy Term: Option 2: Five years Option 3: Ten years Limits of Liability: Deductible: Option A: $5,000,000 per claim / $5,000,000 aggregate Option B: $10,000,000 per claim / $10,000,000 aggregate $100,000 per pollution condition Option 1A: Estimated $25,000 $65,000 Option 1B: Estimated $45,000 $85,000 Premium Ranges: Option 2A: Estimated $45,000 $100,000 Option 2B: Estimated $65,000 $125,000 Option 3A: Estimated $75,000 $150,000 Option 3B: Estimated $100,000 $170,000

19 ENVIRONMENTAL REVIEW & INSURANCE ANALYSIS 17 Retroactive date: None Coverage Enhancements: Excess of indemnity Business interruption as result of pollution condition Coverage for illicit abandonment Coverage for oversight agency change of remedial strategy requiring active remediation Known Conditions Exclusion: An exclusion in the policy negates coverage for any condition known to a responsible insured that is not disclosed. Therefore, known pollution conditions must be disclosed to the underwriter in the materials provided at the inception of the policy. Known pollution conditions will typically be excluded only for cleanup coverage, but will not be excluded for bodily injury and property damage on the basis the proposed subslab depressurization system will be installed prior to future tenancy. The coverage will be structured so that as known conditions receive no-further-action determinations (or similar regulatory document), they will be added to the policy for cleanup coverage. This will allow cleanup coverage to be in place for regulatory re-openers during the policy term. For this site, it was determined that Cost Cap would not be an efficient risk transfer mechanism at this time. Currently, the Cost Cap solution is a viable option when remediation projects are in the range, or excess, of $2.5M. Similar to Cost Cap, 468B Trust was not recommended for this site unless an increased cost estimate becomes apparent. CONCLUSION An analysis of environmental exposures is the most important first step to any transaction. The environmental analysis provides the basis for any evaluation of the applicability of the use of environmental insurance and or the ability to maximize the transfer of environmental liability to a buyer of a surplus property. Based on the results of the analysis, recommendations can be provided for potential environmental risk management strategies. In many instances insurance has not only provided a good backstop to the transferred environmental risk of the target site, but has helped minimize the negative impact on the economic value of the site based on prior environmental contamination - or the perception thereof. Known remediation responsibilities do not have to negatively impact the real estate value of the site. One can make a strong case and take a course of action by utilizing a combination of environmental risk transfer techniques to navigate this negative impact. The ability to transfer risk for the known and unknown exposures can give the company the opportunity to eliminate legacy environmental liabilities associated with a site and facilitate the sale to a buyer and an avenue for release from ongoing remedial obligations. We hope this document provides insight toward an approach to these evaluations, and the potential use of environmental insurance for site transactions and a long-term environmental risk management strategy.

20 FOR MORE INFORMATION Greg Schilz Executive Vice President JLT Environmental Liability Practice ABOUT JLT Jardine Lloyd Thompson (JLT) is the world s leading specialty focused provider of insurance, reinsurance, and employee benefits related advice, brokerage and associated services. We provide our clients with deep specialist knowledge, advocacy, tailored advice, and service excellence. Our 10,600 experts worldwide are focused on our client industries and are supported by the second largest international placement network with unparalleled capabilities and resources in 135 countries. JLT Specialty USA is the U.S. platform of the leading specialty business advisory firm, Jardine Lloyd Thompson Group. Our experts have deep industry and product experience serving leading US and global firms. Our key to client success is our freedom to be creative, collaborative, and analytical while challenging conventions, redefining problems, creating new analytical insights, and exploring new boundaries to deliver solutions for each client s unique business and risks. JLT Specialty USA 1520 Market Street, Suite 300 Denver, CO jlt.com 2015 JLT Specialty USA