Transfers: Key Considerations Navigating Scope of the Assumption, - - PowerPoint PPT Presentation

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Structuring Environmental Risk Transfers: Key Considerations

Navigating Scope of the Assumption, Financial Structure and Potential Tax Benefits

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, DECEMBER 16, 2015

Daniel A. Cantor, Partner, Arnold & Porter, Washington, D.C. Jeffrey B. Gracer, Principal, Sive Paget & Riesel, New York William J. Squires, III, Esq., Morgan Lewis & Bockius, Boston

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DAN CANTOR ARNOLD & PORTER LLP

daniel.cantor@aporter.com

JEFF GRACER SIVE PAGET & RIESEL, P .C.

jgracer@sprlaw.com

BILL SQUIRES MORGAN, LEWIS & BOCKIUS LLP

william.squires@morganlewis.com

STRUCTURING ENVIRONMENTAL RISKS: ALLOCATING ENVIRONMENTAL RISK IN COMMERCIAL TRANSACTIONS

STRAFFORD PUBLICATIONS DECEMBER 16, 2015

AGENDA

• Introduction
• Key Contractual Provisions
• Contractual Risk
• Environmental Insurance
• Risk Transfers

6

RELEV

LEVAN ANT COM OMME MERCIAL IAL TRANSACTIONS IONS

7

• Purchase and Sale of Business

 Stock Purchase, Asset Purchase or Merger Agreements

• Purchase and Sale of Real Property

 Real Estate Purchase and Sale Agreements and Leases

• Acquisition and Construction Financing

 Various types of Loan Agreements

• Insurance

IDENT

NTIFYI FYING NG ENVIRONMEN ENTAL RISKS

8

SOME GENERAL

AL CONSIDER IDERATI TIONS NS WHEN CONTR TRACTU CTUALL ALLY

ALLOCA

OCATI TING NG ENVIR IRONMENT ONMENTAL AL RISKS

9

• One cannot contract away statutory environmental liabilities and
• bligations
• For the most part, contracts only bind the parties to the contract and

do not bind third parties

• In general, a contractual protection is only as good as the parties’

balance sheet

KEY

EY CON ONTRACTUAL PROVIS VISIONS IONS FOR OR ALL LLOC OCATING NG

ENVI

VIRON ONMEN MENTAL RISK ISK

10

 Tools for allocating liability and responsibility

 Definitions  Representation and warranties  Assumptions and affirmative requirements  Releases & covenants not to sue  Indemnities & escrows  Purchase price

SOM

OME KEY EY CON ONSIDER ERATIONS IONS WHEN ALL LLOC OCATING NG

ENVI

VIRON ONMEN MENTAL RISK ISK (cont’d)

11

• Application to third parties

 Parents, subsidiaries, and affiliates?  Right to assign  Others  Are third parties bound by the contract?  Running with the land and recordation

SOM

OME KEY EY CON ONSIDER ERATIONS IONS WHEN ALL LLOC OCATING NG

ENVI

VIRON ONMEN MENTAL RISK ISK (cont’d)

12

Representation and Warranties



The importance of careful coordination with environmental personnel



Potential overlap with non-environmental representations

 Including language that provides that environmental representation and warranty section is the

exclusive section for environmental representations and warranties



Important potential limitations

 Materiality  Knowledge qualifiers  Time qualifiers



Remedies for breaches

SOM

OME KEY EY CON ONSIDER ERATIONS IONS WHEN ALL LLOC OCATING NG

ENVI

VIRON ONMEN MENTAL RISK ISK (cont’d)

13

Indemnities

• Who as between the contracting parties is responsible?
• For what?

 Pre-Closing versus Post-Closing?

 Presumptions and baselines

 Just defined by a given party’s tenure at the property?  Only what is required by government or anything required by laws?  Voluntary cleanup? How about excavation in connection with

development?

 Cleanup of soil and groundwater only?

 Asbestos, lead paint, mold, demolition?

SOM

OME KEY EY CON ONSIDER ERATIONS IONS WHEN ALL LLOC OCATING NG

ENVI

VIRON ONMEN MENTAL RISK ISK (cont’d)

14

Indemnities (cont’d)

• For what? (cont’d)

 What kind of cleanup?

 Industrial/commercial versus residential?  Risked-based permitted?

 Use of institutional controls permitted? How implemented and complied

with?

 Third party claims (diminished value, toxic tort, business loss etc)  Who controls relationship with government and decisions re cleanup?

 Right to comment on reports and attend meetings?

 Managing future risk

SOM

OME KEY EY CON ONSIDER ERATIONS IONS WHEN ALL LLOC OCATING NG

ENVI

VIRON ONMEN MENTAL RISK ISK (cont’d)

15

Indemnities (cont’d)

• For how long?

 The pros and cons of time limits?

• Any thresholds/deductibles or financial caps?
• Access
• Non-disturbance
• Cooperation

SOM

OME KEY EY CON ONSIDER ERATIONS IONS WHEN ALL LLOC OCATING NG

ENVI

VIRON ONMEN MENTAL RISK ISK (cont’d)

16

Environmental Indemnities (cont’d)

• Limitations on indemnities



Anti-indemnity statutes



Government fines



Punitive damages



Ability of governmental entities to indemnify

• Differences between an obligation “to defend” and an obligation “to indemnify”
• Differences between an indemnity for “loss” or “damages” versus “claims”

SOM

OME KEY EY CON ONSIDER ERATIONS IONS WHEN ALL LLOC OCATING NG

ENVI

VIRON ONMEN MENTAL RISK ISK (cont’d)

17

Environmental Indemnities (cont’d)

• Indemnification Procedures



Simple vs detailed



Time limits for notice and making claims



Time limits for indemnitor assuming defense



Indemnitee participation in defense



Cooperation



Compromising and settling third-party claims

ENVIRON

ONMEN ENTAL INSURANC NCE

18

• Two primary types of insurance

 Pollution Legal Liability (PLL)

 Menu of coverages including cleanup of unknowns discovered during policy

period, tort coverage, NRD, transportation, disposal facilities and business interruption.

 Typically has a per incident deductible

 Costcap/Stoploss

 Applies to cost overruns for cleanup of known contamination  Limited availability  Often high cost

INSURANCE

SURANCE POLICY ICY DRAFTIN FTING CONSIDER IDERATION TIONS (cont’d)

19

Definitions

• Defining “discovered” for purposes of PLL



PLL policies often require that the insured “first discovers” the pre-existing pollution during the policy period



What does discover mean?



Does it cover discovering higher concentrations of a constituent that the insured knew existed at a lower concentration?



Does it cover the situation where an insured previously knew a constituent existed in the soil in corner x of the Site and subsequently finds the constituent in corner y?

INSURANCE

SURANCE POLICY ICY DRAFTIN FTING CONSIDER IDERATION TIONS (cont’d)

20

Definitions

• Defining the Remedial Plan for purposes of Cost Cap



Different insurers define the remedial plan in different ways



Key is clarity as Cost Cap will only typically apply to work performed pursuant to the remedial plan



It is essential that changes to the remedial plan be covered if the government regulator requires such changes

INSURANCE

SURANCE POLICY ICY DRAFTIN FTING CONSIDER IDERATION TIONS (cont’d)

21

Exclusions

• Do the exclusions reduce coverage needed for transaction at issue and is manuscripting

required?

• Known conditions exclusion

22

Exclusions

• Material change in risk exclusion



A common PLL exclusion that bars coverage arising from a change in use of the property that “materially increases the likelihood of severity of a ‘pollution condition’ or ‘claim(s)’ from the intended use(s) or operations.” (ACE PLL specimen)



Where a change in use is intended, it is often a good idea to define that change as not materially increasing the risk.



Can also be useful to define the intended use of the property.

To the extent exclusion applies, consider adding language that exclusion only bars incremental costs occasioned by the material change in risk, not entire coverage

INSURANCE

SURANCE POLICY ICY DRAFTIN FTING CONSIDER IDERATION TIONS (cont’d)

23

Exclusions

• Contractual liability exclusion



Excludes contractual liability unless the liability would have existed in the absence of the contract or unless the contract is endorsed as an “insured contract” to the policy



Where the insured is a party to a contract involving environmental liabilities, consider endorsing the contract as an “insured contract”

INSURANCE

SURANCE POLICY ICY DRAFTIN FTING CONSIDER IDERATION TIONS (cont’d)

24

Provisions Related to Redevelopment

• Material change in risk exclusion



See above

• Impact of sale of property on coverage



What is impact of sale of property?



Consider clarification stating that sale does not impact coverage.



Insurer may require statement that new owner must agree to abide by terms of policy

• Right to add additional insureds



This right can be particularly important if site is sold or redeveloped



Not always part of the specimen but insurers are often willing to grant right provided that new insureds agree to abide by terms of policy and additional of insureds does not increase limit of liability

INSURANCE

SURANCE POLICY ICY DRAFTIN FTING CONSIDER IDERATION TIONS (cont’d)

WHAT IS

IS A RISK ISK TRANSFER FER? (cont’d)

25

• Assumption by third party of a party’s responsibility to perform environmental

remediation

• Third party is typically a specialized environmental contractor in conjunction with a

major insurer

• The scope of the environmental remediation responsibility that is transferred can be

as broad or narrow as the parties negotiate

• Contractor is betting that it can do the remediation for less than PRP is paying
• Possibility of insuring against toxic tort risks
• It is a contractual transfer of responsibility. In most cases, a PRP cannot shed

potential liability to government or other third parties

HOW

OW DO RISK ISK TRANSFER ERS WOR ORK?

26

• Typically two components

 Agreement with contractor  Insurance policy  But, there are alternative structures

KEY

EY CONSIDER ERATION IONS

• Picking the right contractor

 Reputation with regulators  Strength of balance sheet  If it sounds too good to be true…

• Balancing increased risk transfer versus increased cost
• Controlling future use of property so as not to void risk transfer

27

HOW

OW DO RISK TRANSFER ERS WORK? (cont’d)

28

• Agreement With Contractor

 Scope of Assumption By Contractor

 What is contractor agreeing to remediate?  To what standard?  Can contractor use institutional controls?  For how long--fixed time period or indefinitely?  Who bears risk of reopeners?

HOW

OW DO RISK TRANSFER ERS WORK? (cont’d)

29

• Agreement with contractor

 Other Important provisions

 Exclusions from assumption  Prohibitions or limitations on change of use  Responsibility for obtaining access  Cooperation by PRP  Management of relationship with government agencies  Termination  Representations and warranties  Dispute resolution

HOW

OW DO RISK TRANSFER ERS WORK? (cont’d)

30

• Agreement with contractor

 Negotiating price

 Pricing the remediation and setting a premium for unknowns

 Funding structures

 Escrow or trust  Flat payment to contractor

HOW

OW DO RISK TRANSFER ERS WORK? (cont’d)

31

• Why an insurance policy?

 Backstop contractor’s balance sheet  Obtain tort protections not available from contractor

• Two primary types of insurance

 Pollution Legal Liability (PLL)  Costcap/Stoploss

WHAT ARE

RE THE HE BENEFIT ITS OF A RISK TRANSFER FER?

• Potentially takes away the unknowns and crystallizes PRP’s expenses

with regard to environmental liability

• Removes PRP from day-to-day management of site

32

WHEN MIGHT A RISK

ISK TRANSFER FER MAKE SENSE?

• Balances sheet and portfolio management
• Settlement of litigation
• Compliance with CERCLA obligations
• Sale of property
• Merger or acquisition

33

WHAT ARE

RE POTENTIAL PROB OBLEMS LEMS WITH ITH

RISK

ISK TRANSFERS FERS?

34

• Contractor and insurer demand too high a premium at complex sites

with big unknown factors

• As with all complex contracts, issues of interpretation can arise
• Solvency of contractor

WHEN RISK TRANSFER

FERS DO NOT OT MAKE SENSE

• Situations where short-term cost management is of higher priority

than long term certainty

• Premium is too high for risk assumed

35

GUARA

RANTEED TEED FIXED PRICE CON ONTRACTS AND ND OTHER RISK ISK

SHARING

NG AGREEM EMEN ENTS

36

• Contractor agrees to perform defined remediation for fixed price.
• Can be used at single site or for portfolio
• Use of risk layers can help realize benefits of fixed price structure

while reducing premium charged by contractor. For example:

 Contractor agrees to perform up to negotiated level at a fixed price.  Should remedy exceed unlikely but possible level, risk is shared.

USE

SE OF OF REDEV EVEL ELOPM OPMENT ENT PARTN RTNERSHIP IPS TO LEVE VERAGE GE

BROWNFIELD

IELD OPPORT ORTUNITIES IES

37

• In some cases, developer who is new to property can leverage brownfield benefits not

available to historic PRP alone.

• Partnership with a responsible developer where the reuse drives and is consistent with the

remedy.

• Can be combined with risk transfer and/or insurance.