Presenting a live 90-minute webinar with interactive Q&A Fixed-Price Cleanups: How To Enter Them In The Post-Cost Cap Insurance Era Using Captives and Other Cost Cap Alternatives Lessons from Accomplished FPCs, When and Why to Use CCAs, and the Mechanics of Using a CCA WEDNESDAY, FEBRUARY 24, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Michael O. Hill, Esq., Senior Counsel, Primmer Piper Eggleston & Cramer , Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Fixed-Price Cleanups in a “Post Cost Cap” World: Insurance and Contractual Approaches (February 24, 2016) Michael O. Hill, Esq. Primmer Piper Eggleston & Cramer PC mhill@primmer.com Washington, D.C. 20006
Overview Description of Fixed Price Cleanups (“FPCs”) Why/When to Use: Pros and Cons of an FPC, from perspectives of Owners ◦ (holding/selling/buying or otherwise potentially liable), Contractors and Regulators . Mechanics of FPCs (best practices) ◦ Examples of FPCs (5 contexts) ◦ Economics of FPCs: Overview of Contractor economics (and relevance to Owner economics) ◦ Environmental insurance products (pre-2011 and today) ◦ Cost Cap Alternatives Captive Insurance as an Alternative to Traditional Insurance ◦ Other forms of CCAs ◦ FPCs as a possible tool in bankruptcies ◦ Vehicles to consider using with CCAs ◦ Questions 6
Description of Fixed- Price Cleanups (“FPCs”) 7
Fixed-Price Cleanups: Overview Not right for all sites. Best for cleanups estimated to cost: o $5M or more (but can “portfolio” sites to reach >$5M) ; and o $30M or less (but can divide larger sites into smaller projects to reach <$30M) . Contractors assume environmental regulatory liabilities, typically up to 2x expected costs. Insurer and/or other risk transferee may cover overruns of expected regulatory costs (through “Cost Cap” or Cost Cap Alternative); and ◦ from unknowns, regulatory and non-regulatory (through PLL). ◦ Not Fail-Safe. 8
Benefits from Owner Perspective Contractor ($1.2M) Limits in policy, escrow or other risk $10M $10M Owner Excess transfer Exposures instrument ($10M) ($6.8M) Contractor ($2M) $10M $10M Expected Expected Cleanup Costs Cleanup Costs ($10M) ($10M) Without an FPC With an FPC 9
Layers of Protection Traditional Indemnities (e.g., from Seller); Traditional Return to Seller & Buyer Indemnity from Contractor? Not since mid- 2000’s Insurance (typically to where costs = 2x) (with Contractor co-pay of, e.g., 15%) Deductible/SIR ( from Contractor, e.g., 20% of x ) Expected Cleanup Costs (“x”) ( e.g., $10M) (might held in an escrow account; QSF-qualifying trust account; by Court; by Captive; even by Owner) [1998-2007, Finite Insur. Possible] Commutation Account (estimated clean-up costs) 10
Owner Perspective (Pros & Cons) Pros: • Cost certainty increased. • Costs frequently lower than expected (and can “Beta - Test” before committing) . • Cleanups usually expedited. • Potential tax and accounting benefits. • Greater long-term protections. • Limited commitment required. Cons: • Must give up chance of savings from cleanup completed below expected costs. • Up front transactions costs ( set-offs or other compromises possible). • May need to switch from incumbent or otherwise preferred Contractor (but may persuade that Contractor to convert to FPC). 11
DOD Dep’t of Defense Findings Of 41 Fixed-Price Cleanups: • Lower Costs: Average costs were 21% below Independent Government Estimates; 34% below estimated Costs To Complete. • Faster Cleanups: Contractors in general are meeting or beating schedules. There is no indication that overall schedule completion will be compromised. • Better Quality : “At all installations, the quality of work has been reported from good to going beyond requirements.” * Source: U.S. Army Environmental Command, Tracking Performance on the Army’s Performance -Based Contracts, at 4, 24, 31 (May 16, 2006) (included in webinar handouts). While broader data is difficult to obtain and distill, R. Durant, The Greening of the U.S. Military , 1, 4 (Georgetown Univ. Press, 2007), states that “the DOD inspector general has found that average cleanup costs at closing bases are typically 60 percent higher than estimated originally.” See also EPA IG, EPA Should Increase Fixed-Price Contracting for Remedial Actions , Rept. No. 13-P-0208, at 14 (March 28, 2013). 12
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Regulator Perspective Pros: Avoid barriers to cleanup commencement (litigation, etc.) . Generally expedite cleanups (without sacrificing quality … all remains subject to regulator approval) Not losing a PRP (only 2-3 non-de minimis exceptions). Greater certainty of completed cleanup: Greater certainty of funding ◦ Greater certainty of Contractors keeping costs at or below expected costs. ◦ Cons: • ? *Article: M. Hill, A Tale of Two Sites: How Insured Fixed-Price Cleanups Expedite Protections, Reduce Costs, and Help the EPA, the SEC and the Public , published by Chem. Waste Litig. Rptr., then reprinted with permission by National Ass’n . of Attorneys General, and ABA (2003) (included in webinar handouts). 14
Multi-Party Superfund Site Cleaned up at 40% below expected costs ($15M v. $25M) . Completed in 19 months (v. 8-year national average) . Began in 2000; by 2002, town soccer fields and open space. References: “[TRC’s] Maine Experiment May Point The Way To Ending Tangle Of Litigation Around Superfund Law” (WSJ, 4/29/98); “[TRC’s] arrangement is ‘revolutionary’ . . . A ‘new model’ for reducing cleanup and litigation costs” (BNA Daily Envir. Rptr., 6/8/00, quoting Maine DEP official). 15
Redevelopment of Brownfield • Two conventional estimates, with no guarantee: $15-$20M. • Insured FPC done for $10.1M. • City contributed $5M via Brownfield grants and Tax Incremental Financing, and received title to property from Owner essentially for free. • Owner exited for lower cost ($5.1M) and greater goodwill. *Reference: C. Olson, R. Bursek, and M. Jones, Urban Renaissance: From Brass Manufacturing To Uptown Brass Center , Air & Waste Mgt. Ass’n. (Dec. 2005). 16
Sale/Purchase of Subsidiary Cleanup of 23 sites done for <$8M (<$300K each). >20% below prior estimates. Construction completed within 3 years (80% within 18 months) . Sold sites at full “market value” (that is, without premium due to the uncertainty of environmental costs) . 17
Sale/Purchase of Operating Facilities Cleanup of pre-existing pollutants at an operating refinery. Guaranteed and insured for 13% below anticipated costs. 18
FOSET Transfers (“Finding Of Suitability for Early Transfer”) CERCLA § 120(h)(3)(C) (federal facilities cannot be transferred pre-NFA absent prior determination by Governor (and, if on NPL, also by EPA Administrator) that the cleanup will not be substantially delayed). Parcel C6 ($11M; 62 acres). First privatized cleanup via FOSET (2007). Also the first completed (2009). FOSET #1 ($14M; 545 acres) (2010). FOSET #2 ($16M; 528 acres). CCA used. EPA Administrator and CA Governor approved (2013). FOSET #3 (>20M; 207 acres). CCA used. EPA Administrator and CA Governor approved (2015). Reference: M. Hill, Insured Fixed-Price Cleanups: Still Possible Even After Commercial Insurers ’ 2011 Exit from the Cost Cap Market , 70 CWLR 955 (Oct. 2015) (included in webinar handouts). 19
Economics of Fixed-Price Cleanups 20
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