HomeMy WebLinkAbout16 NEW ENVIRONMENTAL INSURANCE POLICY AT TUSTIN LEGACYAgenda Item 16
Reviewed:
AGENDA REPORT City Manager
Finance Directorf/A
MEETING DATE: DECEMBER 20, 2016
TO: JEFFREY C. PARKER, CITY MANAGER
FROM: MATTHEW S. WEST, DEPUTY CITY MANAGER
KENNETH PIGUEE, MANAGEMENT ANALYST
SUBJECT: NEW ENVIRONMENTAL INSURANCE POLICY AT TUSTIN LEGACY
SUMMARY:
City Council authorization is required to secure environmental insurance coverage for
certain property at Tustin Legacy (former MCAS Tustin).
RECOMMENDATION:
It is recommended that the City Council:
1. Authorize City Manager to bind environmental insurance coverage from Tokio
Marine for portions of Tustin Legacy property, subject to legal counsel approval
of all policy terms and endorsements (see page 4 of this Staff Report).
2. Authorize $1,577,969 to be appropriated from the Land Sales Proceeds
account to purchase the Tokio Marine policy, including broker payment and
taxes.
FISCAL IMPACT:
The total cost to purchase the Tokio Marine policy is $1,577,969, including broker payment
and taxes. (Though Staff does not anticipate there will be a need to terminate the policy
early, the minimum earned premium at inception will be 25%, 61 % at year one, 85% at
year two, and 100% at year three.)
CORRELATION TO THE STRATEGIC PLAN:
The binding of an environmental insurance policy for properties at Tustin Legacy will
contribute to "Goal A: Economic and Neighborhood Development" by continuing to
facilitate development of critical phases of Tustin Legacy.
Agenda Report
December 20, 2016
Page 2
BACKGROUND:
ENVIRONMENTAL INSURANCE HISTORY AT TUSTIN LEGACY
The City currently has an environmental pollution legal liability insurance policy with
XL/Indian Harbor for portions of the Tustin Legacy project that involves properties owned by
the City that was purchased in December 2001, which will expire December 21, 2016. The
ten-year policy, augmented with a five year extended reporting period, offered the City a
$75M limit of liability covering portions of the former Marine Corps Air Station (MCAS) Tustin
as outlined in the initial transfer of the base from the Navy. This policy covers losses that
occur due to pre-existing pollution conditions created at the former MCAS Tustin ("Tustin
Legacy") by the federal government. During the policy period, the City encountered thirteen
different discoveries of contamination throughout the parcels resulting in nearly $13M in
remediation response. The existing coverage proved to be a valuable resource to the City
for addressing those claims.
INSURANCE SOLICITATION AND PROPOSAL
In anticipation of the impending policy expiration, the City Council on January 19, 2016,
authorized the City Manager to execute a Brokerage Services Agreement with Aon Risk
Insurance Services West, Inc. ("Aon"), represented by Dan Sister, for the purpose of
marketing and soliciting proposals for environmental insurance covering approximately
667 acres at Tustin Legacy (see attached 'Insurance Exhibit — Covered Location") to
replace the XL/Indian Harbor policy.
This pattern of discovery, the Base Realignment and Closure (BRAC) stigma in the
environmental insurance marketplace, and the prior policy Loss Ratio resulted in limited
environmental insurance carrier interest in the replacement of insurance at Tustin Legacy.
In total, Aon approached nineteen insurance carriers and of those, seven showed interest
in pursuing the replacement of coverage. After an initial kick off meeting and site tour as
well as several rounds of follow-up calls and meetings with the City team (Aon, City
Special Counsel Barry Steinberg of Kutak Rock LLP, and City staff), Tokio Marine,
Beazley, Allied World, Liberty and Ironshore committed to the engineering and
underwriting of the parcels.
As the underwriting progressed it became apparent that Tokio Marine would be the
preferred market as they differentiated themselves from the other carriers in the following
ways:
Agenda Report
December 20, 2016
Page 3
1) Willing to offer policy term length options up to ten years whereas others were
unwilling to go past five and in some cases three years,
2) Willing to offer a policy deductible of less than $1 M,
3) Willing to offer Limit of Liability options up to $25M whereas others were unwilling
to go above $10M,
4) Willing to allow the minimum earned premium to be realized over three years (only
25% upon inception) versus others requiring 100% immediately.
5) Willing to issue exclusionary wording specific to Parcels versus applying site wide
exclusions, and;
6) Provided wording within the policy to confirm willingness to accept and review
additional testing and/or investigations to reduce or fully remove current
exclusions.
NEED TO OBTAIN ENVIRONMENTAL INSURANCE
The need of environmental insurance as the development of the Legacy continues, and
particularly while the City owns significant portions of the former Marine Corps Air Base.
Although the federal government is generally responsible for remediation of
contamination at former military bases and for providing limited indemnification against
subsequently discovered environmental contamination at former MCAS Tustin. An
indemnification was provided to the City in the Navy's conveyances to the City (the
Section 330 indemnification under the Defense Authorization Act), in which they
indemnified property transferees, like the City, for third party claims for personal injury or
property damage which result from, or are in any manner predicated upon, environmental
contaminants. However, the Navy often is not timely in response to situations where
unknown contamination is subsequently discovered and in many cases they also argue
whether they are actually the responsible party.
The risk/challenge is to protect recipients of property that the federal government has
conveyed to the City by ensuring that known exposures are contained and limited and the
risk of unknown or future exposures is transferred to an insurance carrier, thus allowing
redevelopment to proceed in a timely manner. An environmental insurance policy
protects the City and may also protect other parties that have or will acquire Tustin Legacy
property.
Lastly, it is important to note that over the last 15 years environmental insurance has
become critical to marketing property at Tustin Legacy and to providing assurance to
lending institutions which are generally unwilling to finance projects on "high risk" land
where potential contamination issues may arise during development.
Agenda Report
December 20, 2016
Page 4
STAFF RECOMMENDATION
For all the reasons noted above, Aon, Special Counsel, and staff recommend that the
City pursue the following Tokio Marine quotation proposal for coverage effective
December 21, 2016:
Staff Recommends the following Tokio Marine Proposal:
Term
10 Years
Limits of Liability
$25,000,000
Deductible
$250,000
Minimum Earned Premium
Three Years; 25% at ince tion
Coverage
Pre -Existing and Newly Created Conditions
Total Cost
$1,577,969
ALTERNATIVE OPTION
Tokio Marine has offered an alternative policy quote with exactly all of the same terms;
however, the premium is lower and the deductible is higher at $500,000. This is
presented as a less expensive option with lower upfront costs.
Alternative Tokio Marine Proposal:
Term
10 Years
Limits of Liability
$25,000,000
Deductible
$500,000
Minimum Earned Premium
Three Years; 25% at inception
Coverage
Pre -Existing and Newly Created Conditions
Total Cost
$1,282,469
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