Monday, April 14, 2014 12:00 AM

Ohio Brownfields 2014 - Forensic Engineering in Insurance Underwriting and Claims


By: Joseph Berlin, PE, EP, CP
Tags: None


BLDI president Joe Berlin, PE, CP presented at 2014 Ohio Brownfields Conference this past week in Columbus. Joe presented on “Forensic Engineering in Insurance Underwriting and Claims.” Joe teamed with environmental insurance expert Dave Dybdahl (www.armr.com) on the presentation. The main message of Joe’s presentation was that identified issues, and not just Phase I ESA RECs, should be assessed, the use of forensic engineering/environmental forensic techniques, and data development and packaging should complement the ultimate project goal (e.g. escrow, insurance or claim). Dave stressed that insurance is the only tool that can take probability into consideration.

Joe discussed the benefits and challenges of using various methods to address the potential environmental risks often encountered and presented in the case study. Both Joe and Dave, plus a few attendees, agreed that many transactions use undervalued escrows along with poorly defined seller/purchaser/consultant duties and complicated or limited documentation to close deals.  Common problems with this scenario include inadequate funds to complete the scope of work, cost to manage the environmental escrow(s), lack of incentive(s) to complete SOW, lack of progress/budget tracking, and possible overvaluation of the escrow complicating or the killing deal. 

Dave discussed that COSTCAP policies can be available from specialty insurers and, surprisingly, may be available for smaller projects (e.g. less than $1million).

Case Study

The attendees were split into two groups, sellers and buyers, of an industrial plant that both parties was worth $40million but there were various environmental issues that would create a potential ‘stigma” effect on the ultimate sale price. The site was assumed to have an on-going cleanup valued at $1million, excess cleanup cost due to remedy or regulatory uncertainty, potential third-party issues associated with off-site migration, unknown site conditions and potential legacy costs.

Here is a simplified version of the case study cost comparison:

Risk

Exposure/Escrow

Insurance Policy

Premium

Expected cleanup cost

$1,000,000

3rd party cash escrow

$1,000,000

Excess remediation costs

$5,000,000

Fixed Price Remediation surcharge

  $250,000

3rd party claims during remediation

$5,000,000

Contractors Pollution Liability

  $20,000

Discovery of new contamination (EIL)

$15,000,000

Environmental Impairment Liability

 $290,000

Superfund liability at a non-owned disposal site

Included in EIL (no escrow)

Environmental Impairment Liability

Included in EIL above

Environmental loss from the ongoing operations of the plant

Included in EIL (no escrow)

Environmental Impairment Liability

Included in EIL above

Total potential deduct on purchase price

$26,000,000

Total cost of insurance

$1,560,000

Cash Proceeds at Sale, using escrows

$14,000,000

Cash Proceeds at Sale, using insurance

$38,440,000

 Select portions of the presentations and case study are presented below.

 Please feel free to contact Joe Berlin, PE, EP, CP (616-459-3737, jberlin@bldi.com) or Jeff Kenneweg, EP (513-490-0664, jkenneweg@bldi.com) with any questions. 




   

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