The New EPA AAI Rule – Insurer’s Perspective Presented By: Ken Burrell Vice President – Corporate Accounts AIG Environmental

The 1,000 ft. View Exposures to risk vary by product line (Professional Liability or PLL) Exposures to risk vary by product line (Professional Liability or PLL) There are Pros and Cons for each Product There are Pros and Cons for each Product There is risk. We like risk. Risks change. We change with them! There is risk. We like risk. Risks change. We change with them!

Professional Liability Risks Internal Controls - Insurers must have confidence that their insureds understand the requirements, qualifications, certifications and exposure to risk for AAI work under the new 11/1/2006 Rule. Internal Controls - Insurers must have confidence that their insureds understand the requirements, qualifications, certifications and exposure to risk for AAI work under the new 11/1/2006 Rule. Underwriters will require a review of the insured’s internal controls and QA/QC processes. Underwriters will require a review of the insured’s internal controls and QA/QC processes.

AAI Requires Certification BE CAREFUL Professionals normally avoid Certifications like the Plague. Professionals normally avoid Certifications like the Plague. The Certification in the AAI approach may well create a higher standard of care for Consultants. The Certification in the AAI approach may well create a higher standard of care for Consultants. It is important for Consultants to add verbiage to their standard reports defining the AAI Certification away from any sort of warranty of results. It is important for Consultants to add verbiage to their standard reports defining the AAI Certification away from any sort of warranty of results.

Qualification Controls Implementation of an internal monitoring process which sets out the qualifications of personnel involved in AAI work and identifies specific individuals as AAI EPs. YOUR INSURER MAY CHECK THIS ANNUALLY!! Implementation of an internal monitoring process which sets out the qualifications of personnel involved in AAI work and identifies specific individuals as AAI EPs. YOUR INSURER MAY CHECK THIS ANNUALLY!! Program ensures compliance in light of personnel changes. Document certification (PG, PE) and experience (Industry turnover can approach 1/3 per year.) Program ensures compliance in light of personnel changes. Document certification (PG, PE) and experience (Industry turnover can approach 1/3 per year.) Consultants MUST remember that this will be subject to discovery and they will be accountable for compliance with this standard. Don’t simply let someone self-certify and take them at their word. Letters from former employers, etc. are vital

So What? Assume that the Consultant allows an “unqualified” (in the AAI sense of the term) individual to perform a Phase I which goes wrong. Failure to comply with AAI EP standards would likely be a strong case for negligence. Assume that the Consultant allows an “unqualified” (in the AAI sense of the term) individual to perform a Phase I which goes wrong. Failure to comply with AAI EP standards would likely be a strong case for negligence. Failure to look behind an assertion of 12 years’ experience would be problematic. Failure to look behind an assertion of 12 years’ experience would be problematic. Consultants should be prepared for more intrusive investigations by E&O insurers into Phase I personnel, qualifications, internal QA/QC etc. The reason for this is that the qualifications issue can possibly be used to show a violation of the standard of care. Consultants should be prepared for more intrusive investigations by E&O insurers into Phase I personnel, qualifications, internal QA/QC etc. The reason for this is that the qualifications issue can possibly be used to show a violation of the standard of care.

Report Controls Most Consultants have templates or forms for their Phase I reports. These need to be updated for AAI. Most Consultants have templates or forms for their Phase I reports. These need to be updated for AAI. In particular, the report (and underlying contract) MUST control third party access to and reliance upon the EP’s report. In particular, the report (and underlying contract) MUST control third party access to and reliance upon the EP’s report. Disclaimer language should be utilized to better define the Certification. Disclaimer language should be utilized to better define the Certification.

Contractual Controls Consultants should routinely prohibit distribution of their work product to third parties absent a well-drafted Secondary Client Letter. Consultants should routinely prohibit distribution of their work product to third parties absent a well-drafted Secondary Client Letter. –See: “Beware of Strangers: Third Party Reliance Risks for Environmental Professionals in Transactional Situations”, Dr. Karl J. Duff, 17 Environmental Claims Journal No. 1 (Winter, 2005) at pgs

AAI and Third Parties AAI § (d) says: AAI § (d) says: –All appropriate inquiries can include the results of report (s) specified in (c) that have been prepared by or for other persons, [emphasis added] provided that: (1) The report (s) meet the objectives and performance factors of this regulation as specified in paragraphs (e) and (f) of this section; and (1) The report (s) meet the objectives and performance factors of this regulation as specified in paragraphs (e) and (f) of this section; and (2) The person specified in 312.1(b) and seeking to use the previously collected information reviews the information and conducts the additional inquires pursuant to §§ , and and the all appropriate inquiries are updated in paragraph (b)(3) of this section as necessary. (2) The person specified in 312.1(b) and seeking to use the previously collected information reviews the information and conducts the additional inquires pursuant to §§ , and and the all appropriate inquiries are updated in paragraph (b)(3) of this section as necessary.

Underwriters and Third Parties Third Party reliance risks have historically been one of the profession’s “bear traps.” It is now more important than ever, given the AAI/EPA approach to third party use to control and limit third party receipt and reliance through appropriate terms and conditions. Third Party reliance risks have historically been one of the profession’s “bear traps.” It is now more important than ever, given the AAI/EPA approach to third party use to control and limit third party receipt and reliance through appropriate terms and conditions.

AAI and the Issue of a Conflict of Interest PE and PG EPs are subject individually to ethical canons regulating conflicts of interest. PE and PG EPs are subject individually to ethical canons regulating conflicts of interest. AAI seems to envision these reports being circulated like candy, with no regard to possible conflicts. AAI seems to envision these reports being circulated like candy, with no regard to possible conflicts.

Carriers and Conflicts The awareness and sensitivity of the EP to the conflict of interest issue is crucial to an overall assessment of the level of professionalism in the insured. The awareness and sensitivity of the EP to the conflict of interest issue is crucial to an overall assessment of the level of professionalism in the insured. There has been one case in the last year where a violation of conflict of interest rules by a professional engineer served as sufficient negligence to draw in a carrier in what would have otherwise been a questionable claim matter. There has been one case in the last year where a violation of conflict of interest rules by a professional engineer served as sufficient negligence to draw in a carrier in what would have otherwise been a questionable claim matter.

Scope and Utility Controls The decision of whether or seek an AAI report (CERCLA protections) or not is a complex and crucial one. The decision of whether or seek an AAI report (CERCLA protections) or not is a complex and crucial one. Clients after the fact will likely blame the EP for the absence of an AAI report (although perhaps the cost-sensitive client bludgeoned the EP in this regard about costs.) Clients after the fact will likely blame the EP for the absence of an AAI report (although perhaps the cost-sensitive client bludgeoned the EP in this regard about costs.) This decision must be made by the Client with advice from both the Client’s Counsel and the EP. This decision must be made by the Client with advice from both the Client’s Counsel and the EP. The EP must be very careful not to provide a legal liability opinion as the Client makes its decision. The EP must be very careful not to provide a legal liability opinion as the Client makes its decision.

Scope and Utility Controls Consultants should have a standard boilerplate used by the EP in discussing whether or not the Client AND ITS COUNSEL may want an AAI approach, or some other approach. The key here is for the Client to make an informed decision with the assistance of its Counsel; otherwise, default to AAI. Consultants should have a standard boilerplate used by the EP in discussing whether or not the Client AND ITS COUNSEL may want an AAI approach, or some other approach. The key here is for the Client to make an informed decision with the assistance of its Counsel; otherwise, default to AAI.

Limitations 1. These materials are intended only to stimulate thought, dialogue and risk analysis on the part of AIG Insureds, as well as the Counsel, Brokers and Risk Management personnel of the Insureds (collectively: “the Insured”). No representation or warranty is made or intended that following these suggestions will successfully address particular risks. These materials are not intended to be a comprehensive catalogue of risk issues. The Insured must seek assistance from its own team of advisors, including locally-licensed Counsel, Brokers and Risk Management personnel on a case-by-case basis. 1. These materials are intended only to stimulate thought, dialogue and risk analysis on the part of AIG Insureds, as well as the Counsel, Brokers and Risk Management personnel of the Insureds (collectively: “the Insured”). No representation or warranty is made or intended that following these suggestions will successfully address particular risks. These materials are not intended to be a comprehensive catalogue of risk issues. The Insured must seek assistance from its own team of advisors, including locally-licensed Counsel, Brokers and Risk Management personnel on a case-by-case basis. 2. This document is not a legal opinion, nor is it intended to be legal advice. It is an attempt to flag risk issues based upon the writer’s experience for the consideration of the Insureds. No attorney-client relationship to non-AIG entities or personnel is made or intended, and any such relationship is hereby expressly disclaimed. 2. This document is not a legal opinion, nor is it intended to be legal advice. It is an attempt to flag risk issues based upon the writer’s experience for the consideration of the Insureds. No attorney-client relationship to non-AIG entities or personnel is made or intended, and any such relationship is hereby expressly disclaimed. 3. Opinions by the author or his firm are not in any event to be understood as the view or position of AIG Environmental or any AIG company. No opinion is intended or given as to whether a particular risk may be (or may not be) covered by a particular policy of insurance. Any non-AIG entity or person (third parties) in receipt of this document receive it “for information only”, not for reliance, and in every respect subject to the terms and provisions of these limitations. 3. Opinions by the author or his firm are not in any event to be understood as the view or position of AIG Environmental or any AIG company. No opinion is intended or given as to whether a particular risk may be (or may not be) covered by a particular policy of insurance. Any non-AIG entity or person (third parties) in receipt of this document receive it “for information only”, not for reliance, and in every respect subject to the terms and provisions of these limitations.