Testimony of
Kenneth Cornell
Executive Vice
President
before the
Subcommittee
on Superfund, Waste Control and Risk Assessment
of the U.S.
Senate Environment and Public Works Committee
April 10, 2002
Madame Chairwoman and members of the committee, I am Ken Cornell, Executive Vice President of AIG Environmental. Thank you for allowing us to present our views on the Superfund program and suggest ways that the program can be improved to speed cleanups, and reduce costs by using financial and insurance tools that can benefit both the private and public sector.
AIG Environmental is a division of American International Companies. AIG’s General insurance operations include the largest underwriters of commercial and industrial insurance in the United States, and the most extensive international property-casualty network. We are a Triple A rated company by Standard and Poors with over $450 billion in assets and a wide variety of insurance and financial products to serve our clients. AIG Environmental has over 20-years of experience underwriting environmental risks and is currently the nations leading provider of environmental insurance. Our portfolio of environmental insurance products ranges from coverage for underground storage tanks, to environmental remediation contractors to insuring the cleanup of hazardous waste sites across the country – including Brownfields and Superfund sites. We are also the endorsed environmental insurance carrier for the Commonwealth of Massachusetts’ Brownfields Redevelopment Access to Capital program. This innovative environmental insurance program has resulted in more than 70 Brownfield redevelopment projects in Massachusetts in the last three years.
We view ourselves as a solutions company, as we work to provide innovative approaches to handling environmental liability and cleanup issues. Throughout our history, we have developed new insurance products to respond to new and emerging risks for the public and private sectors. In the 1980’s, we offered insurance for Superfund Remedial Action Contractors (RAC), RCRA Treatment Storage and Disposal facilities (TSDF), and Underground Storage Tanks operators. In the 1990’s, we offered insurance for lender liability and private sector cleanups. In the new millennium, we are looking at mold, terrorism and bioterrorism risks. We are here today to focus on three areas where we believe the use of environmental insurance and financing can lead to more and faster cleanups of NPL sites within the existing framework of the Superfund statute. These areas are Cleanup Cost Cap Insurance for Fund lead work by EPA; De Minimis settlements for PRPs; and blended finite insurance programs that provide short and long term funding for cleanup of sites conducted by PRPs.
Based on our experience with other Federal Agencies, we believe that we can devise a program for hazardous waste sites being cleaned up by the EPA to help the Agency budget more effectively. A program supported by insurance can maximize the use of existing Superfund dollars, provide protection against unexpected costs that can postpone or stop current projects and move sites into redevelopment sooner because costs will be quantified and capped. Cleanup Cost Cap insurance can provide the EPA with a high degree of certainty as to what cleanups will cost, and provide private sector expertise in cost estimating.
Briefly, Cleanup Cost Cap protects the responsible party(ies) against the unknown and unexpected cost overruns during cleanups. An example would be an estimate that the cost of cleanup is $10 million. The responsible party(ies) purchases Cleanup Cost Cap to cover cost overruns above the $10 million (plus a buffer). The buffer usually is about 10% of the expected cost of cleanup – or in this example $1 million. The limits on the policy can range from a low of $100,000 to as high as $150 million. Going back to our example of a $10 million cleanup – the responsible party(ies) might elect to cover 100% above their expected cleanup cost of $10 million so they would buy a Cleanup Cost Cap limit of $10 million. In this example the responsible party(ies) would pay the first $11 million of cleanup (the original estimated cost of $10 million, plus the 10% buffer or $1 million). Once cleanup costs exceed $11 million, the Cleanup Cost Cap would pay the next $10 million in cost. In others words, by buying the policy the responsible party(ies) is providing that $21 million dollars will be available for cleanup.
EPA often sees cost overruns of between 20% to 30% at Fund lead NPL sites. When these overruns occur, funds are often diverted from other future planned cleanups, thereby delaying cleanups at other sites due to cost overruns.
A program of this type would protect EPA’s budget against these cost overruns. We have used similar programs with U.S. Department of Defense in addressing both active and closing military bases, Formerly Used Defense Sites (FUDS), as well as on transferring Department of Interior sites. For example:
· Mare Island (CA): The Department of Navy was able to transfer the site “dirty” to the remediation firm with the stipulation that no additional funding would be available. The remediation firm purchased Cleanup Cost Cap, which assured that the site would be cleaned up to the reuse standard – without returning to the Navy for additional funding. In the absence of Triple A rated paper supporting the remediation firm, transfer with provisions against future recourse may not have been possible.
· Fort Leavenworth (KS): The Department of Army was able to guarantee a finite cleanup on an active military base. In this instance, environmental insurance made it possible for the military to appropriate the cost of cleanup at the site thus being assured that the remediation firm would not try to return to the Army to request additional funding. The environmental insurance product assured that if there was more contamination than originally discovered, the Cleanup Cost Cap would cover the remediation costs.
· Portland-Bangor Waste Oil Facility (ME): This is a joint private sector-federal government State Superfund Remediation. The insurance allows a long-delayed cleanup to occur by financially securing a realistic settlement and eliminating hundreds of PRPs. The Army agreed to fund their portion of the cleanup at this formerly used defense site (FUDS), with the stipulation that the remediation firm not return to them for additional cleanup funds. The cleanup firm took this assurance and approached the other PRPs at the site. After “buying out” the PRPs liability at the site, the cleanup firm used a finite insurance product to assure the cost of remediation and address future liability issues at the site.
These programs can be cost effective and result in faster and more cleanups because the threat of cost overruns is reduced or eliminated. As the insurer our interest are aligned with EPA in that we minimize our risk by making sure the project is completed satisfactorily at minimal cost.
Further, when the policy is underwritten by AIG Environmental the resources of AIG Consultants is included. They are a dedicated staff of environmental engineers who will review planning, designs, and costs to help the insured implement a cost effective remedy given the requirements of the cleanup goals. During the course of the cleanup AIG Consultants work with the insured to monitor costs and watch for potential overruns.
If the committee is interested in this approach, we would welcome the opportunity to work with you and the EPA to develop a program for Fund lead Superfund cleanups.
One of AIG Environmental’s most important achievements occurred in November, 2000 with the settlement of liability at the Iron Mountain Superfund Site in California. This innovative settlement, involving multiple private and public entities, will provide funding for cleanup over the next 30 years and fund a trust fund in perpetuity for the largest source of acid mine drainage in North America. This was achieved through the use of Blended Finite Insurance and a guaranteed investment contract.
The use of blended finite insurance programs, coupled with SEC Regulation 468b trust funds for funding of environmental liabilities, may well prove to be one of the most effective tools to quickly settle liability at sites. This will provide funds for cleanup even if in the future PRPs involved in the cleanup are no longer financially able to pay for the cleanups.
Blended Finite insurance is, very simply, a risk management tool that is used in conjunction with Cleanup Cost Cap and Pollution Legal Liability insurance and provided with environmental loss control expertise. It is a flexible program combining insurance with discounted funding techniques for existing liabilities. While seemingly complex at first glance, blended finite insurance programs establish trust funds, coupled with environmental insurance, to provide short and long term funding for the cleanup of sites. The Federal government has a guaranteed source of funds to cleanup a site, even if PRPs become unable to pay for a variety of reasons. In many instances the government may be able to transfer the liability for cleanup from a company on shaky financial footing to a trust fund backup by a Triple A rated insurance company . This could prove to be a significant advantage for the government to insure that funds are available to cleanup the site – even over many years. It would also mean that if a PRP was no longer able to pay for the cleanup that EPA would not have to use scarce Fund dollars to conduct the cleanup.
PRPs will be required shortly to make more accurate the disclosure of their environmental liabilities as a result of new congressionally-mandated SEC disclosure laws. The blended finite insurance program will allow companies and related responsible parties to demonstrate that they are managing their environmental liabilities appropriately. For PRPs, there may be significant benefits as well, thereby motivating them to settle faster. This would end lengthy settlement negotiations and move the sites into the cleanup stage faster than is currently occurring.
For the community that lives around the site – it has the additional security of knowing that the money will be there for cleanup, that the litigation surrounding the settlement is over more quickly, and that the site will be cleaned up as expeditiously as possible.
An example of blended finite insurance is as follows. A site has an estimated cost of $20 million to cleanup. It has soil contamination and needs ten years of ground water treatment. Blended finite insurance looks at the estimated cost of cleanup for each year and then adjusts those figures for inflation. In this example, the estimated cost is $20 million. The net present value of the total cost is adjusted based upon the expected payout pattern and market interest rates. If one assumes that under this example the net present value of the expected costs is $15 million, that would mean if we were paid $15 million today we would be able to pay for $20 million in cleanup costs based upon the estimated payout pattern. Added to this could be coverage for cost overrun protection, or for the actual costs being spent sooner than estimated. Under this example we may be willing to provide $40 million of cleanup cost and cost overrun coverage (the original $20 million estimated cost, plus an additional $20 million of Cleanup Cost Cap) for an up front payment of $17 million. The policy would pay all costs of cleanup up to the $40M policy limit. In this situation the government has the actual estimated cost of cleanup served on day one, plus protection for unforeseen costs that may arise. The government could then consider partial, accelerated or full releases of liability for the PRPs who establish these accounts.
Blended Finite insurance could prove to be a valuable policy tool. It will not solve every Superfund problem nor can it be used at every site. We do believe though that it should be considered much more frequently by the government. Our belief is that this approach can lead to faster settlements and encourage faster cleanups.
We would welcome this opportunity to work with the committee, EPA and the Department of Justice to develop guidelines for the use of this approach at Superfund sites.
One of the complaints often heard about the current Superfund process is the settlement of De Minimis Parties at sites. In order to get a full release of liability from EPA at settlement, De Minimis parties are usually charged a “premium” by EPA to cover unexpected cost overruns at the site. These “premiums” usually run between 50% to 100% of cleanup cost allocated to the De Minimis parties. Most De Minimis parties object to paying this “premium”, but wind up paying it anyway in order to receive the release of liability.
We believe an insurance approach could significantly lower the premium for De Minimis parties. This would work through the use of Cleanup Cost Cap insurance. As an example let us assume there are 200 De Minimis parties at a site and each has a cleanup liability of $20,000 for an aggregate of $4 million. In a traditional settlement EPA would seek up to an additional “premium” of $4 million (100% of cleanup liability) and charge each De Minimis PRP an additional $20,000 or a total of $40,000. However, if the De Minimis Parties were allowed to purchase a Cleanup Cost Cap policy for $4 million their premium would vary between 8% to 12% of the policy limit or an approximate high end total cost of $480,000, resulting in a cost of $2,400 each. This would make the De Minimis parties settlement cost $22,400 as opposed to EPA’s $40,000 or a savings to the De Minimis parties of $17,600. However the settlement would still provide EPA with the same $4 million dollars in cost overrun protection it was looking for.
This approach should result in faster settlements with the government. De Minimis parties may not view the Cleanup Cost Cap premium in the same light as the EPA “Premium” since it is significantly less costly and therefore would agree to settle faster, and thereby move the site into the cleanup phase sooner.
Again, we would suggest that the committee might ask that EPA and the Department of Justice could make the Superfund program fairer for small parties, while protecting the government against unexpected costs.
Madame Chairwoman, thank you for this opportunity to present our views and solutions to Superfund issues. We look forward to being a part of solutions with you and the committee and EPA on these issues. Our belief is that the approaches outlined here can assist Superfund in achieving its mission of protecting public health and the environment.
I will be happy to answer any questions you or the committee members may have.