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Insurance Recovery for Manufactured Gas Plant Liabilities

Fortnightly Magazine - April 15 1997

Valuation, optimization and settlement strategies

oth gas and electric utilities face a variety of environmental issues arising from more than 1,500 former manufactured gas plant (MGP) sites, which supplied a major source of energy in the United States from the early 1800s to the mid-1900s. Using the standard operating procedures of the day, MGPs created and often disposed of byproducts such as coal and oil tars, tar/water emulsions, sludges, spent oxides (including cyanides), lampblack, ash and clinker.

Today, simply identifying these MGP sites and their history of operation and ownership can be a significant chore. It calls for review of company records and historical association proceedings, industry directories, journals and other documents that describe individual plant operations and site layouts. MGP site environmental liability issues include the type and extent of contamination, the risks posed and current and future use of the site. State laws and regulations also must be considered. Site remedies and expected costs pose another issue, including how those costs are best allocated. Other potential liabilities include property damage and toxic tort claims. %n1%n

Once a company identifies these liabilities, questions soon follow concerning recoverability of costs from insurers, such as: How to place a value on a potential insurance recovery or damage award? How to maximize recovery through litigation or settlement? And, how can coverage disputes be mediated to avoid litigation?

Valuing Potential Recovery

Utilities contemplating litigation against insurers to recover costs associated with MGP cleanups face difficult business decisions. By analyzing the expected recovery from litigation, a company can determine if such an action is worth the effort by comparing its anticipated litigation costs with expected recovery. The analysis of expected recovery can also help determine appropriate settlement values and document prudence.

In multi-site/multi-insurer litigation, many complex factors and uncertainties complicate evaluation of the expected value of litigation. These factors include policy limits and language, site costs and the state's case law interpretations. The many uncertainties and complexities make it seem difficult, if not impossible, to predict the value of an insurance suit. This uncertainty could discourage utilities from taking legal action or lead them to accept settlements that are far less than fair. However, this need not be the case.

By combining the tools of decision analysis %n2%n with the experienced judgment of attorneys and engineers, utilities can evaluate the merits of alternative litigation strategies. A probabilistic approach assesses the likelihood and cost of each possible litigation outcome to estimate both the expected value and the risks of litigation. Insured parties have used this information to determine whether to sue, to compare the value of global versus separate insurance actions, to select litigation forums, to evaluate settlement offers and to develop testimony for trial. This approach consists of five steps:

Step 1:

Organizing Policy Data

The first step in the process is to locate all relevant insurance policies and develop information about both their individual characteristics and the structure of the insurance coverage hierarchy in each year. Finding all of the pertinent policies may be difficult for MGP sites that could have been owned and operated

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