LICAP and Its Lessons:
Doubts intensify over New England's radical new market for electric capacity.
Insurance Recovery for Manufactured Gas Plant Liabilities
the "scorched earth" litigation that often follows, is to develop a valuation framework where both the utilities and the insurance companies agree on the approach, and work together to break the problem into component parts. In this approach, the parties jointly assign costs and likelihoods to each component. For those components where there is a major difference in opinion, ranges can be assigned and sensitivity analyses run to determine whether the differences will significantly affect the results. In this way, the parties can quickly determine the key points of the case, and those where they agree and disagree.
Parties often have many more areas of agreement than disagreement when insurance company "discount factors" are generally close to the insured's likelihoods of recovery. And areas of strong disagreement often do not significantly affect the recovery outcome, so do not have to be debated in detail. For example, debating the meaning of "sudden and accidental" pollution exclusion language may not prove necessary if the utility is unlikely to trigger policies that contain that language. Through careful analysis, only those areas with differences that significantly affect the recovery outcome require further research and additional negotiation, allowing the parties to focus their negotiations in an efficient manner. t
Gayle S. Koch and Kenneth T. Wise are principals with The Brattle Group, an economic, environmental and management consulting frim. Phil Hanser is a senior consultant with The Brattle Group.
1For additional information on who should pay for environmental liabilities, see "Environmental Cleanup Liabilities" by A. Lawrence Kolbe and William B. Tye, Public Utilities Fortnightly, January 1, 1992; "How Far Back Should Prudence Tests Reach: by William W. Hogan and A. Lawrence Kolbe," Public Utilities Fortnightly, January 15, 1991; and "Managing Environmental Liabilities at Manufactured Gas Sites" by Gayle S. Koch, Paul R. Ammann, and A. Lawrence Kolbe, presented at the American Power Conference, 1994.
2Decision analysis is a logical framework that combines probability theory and management science to structure and analyze the alternatives and uncertainties present in complex problems which exist in both business and litigation environments.
3The relevance of this information will vary by forum, as courts have differed in their rulings concerning whether "sudden and accidental" language has a temporal context or simply requires that a release be unintended and unexpected.
4Often, the insurance recovery analysis provides insights into management of the site's environmental liabilities. Thus, an assessment initially directed toward litigation can be used as a strategic environmental liability management tool. See "Using Decision Analysis to Manage Environmental Costs," by Gayle S. Koch, Paul R. Ammaan and Kenneth T. Wise, Journal of Environmental Regulation, Summer 1995.
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