Cost Cap Insurance defines the ultimate cost of an environmental remediation project by insuring against project cost overruns. Typical Cost Cap insurance has five basic components to its structure:

1. Expected Remediation Costs is the scope of services for which estimated clean up costs will be calculated for purposes of the insurance.
2. Self Insured Retention is the fixed amount of Expected Remediation Costs plus a Buffer amount, if any, generally ranging between 10% to 20% of these costs.
3. Limit of Liability is the total amount that the insurer may be liable to pay on the insurance program.
4. Co-Insurance is the percentage of costs above the Self Insured Retention for which the insured is responsible.
5. Attachment Point is the amount of costs at which the insurer will start paying.

The parties involved in a Cost Cap insurance placement may be:

• A responsible party or group motivated to perform a remediation that is as cost-effective as allowable by applicable law and which is intended for site re-use.
• Legal counsel who are involved in regulatory agency dealings.
• A remediation contractor motivated towards cost-management and regulatory compliance.
• An insurance company willing to be flexible and assume real risk transfer.
• An insurance broker who is an expert in cost cap insurance and understands the goals and contingencies of the project.

About the Policy Forms
Each insurer has its own different and distinct policy form. While the concept of the insurance is rather easy to understand, the terms and phrases employed by the insurers in their policies mix insurance, legal and environmental terms which are intended to apply to a generic remediation and most often must be tailored to the insured project for clarity.

Scope of Coverage
The policy pays for costs, in excess of the Self Insured Retention, incurred by the insured during the policy period and pursuant to the remediation activities described in an agreed-upon scope of work.

Causes of Cost Overruns include (but are not limited to):

• Mis-characterization of the contaminants, their quantity or dispersal
• Change in law or regulations
• Failure or misapplication of the remediation technology
• Failure of remediation contractor to adequately perform
• Discovery of new contamination

Common Policy Exclusions

• Negligent acts, errors, or omissions, or any unreasonable time delays in the performance of the remediation by contractor
• Fines, penalties, assessments
• Contract liability
• Costs to repair or replace faulty workmanship
• Additions, amendments, modifications, alterations, or changes of any kind to the remediation plan after the effective date of the policy, unless submitted to and approved by the insurer.
• Government action prior to the inception date that are not disclosed in writing to the Company
• Any representations and warranties

Policy Periods
Cost Cap policies are "claims-made and reported" policies – meaning that they only cover cost overruns that occur and are reported while the policy is in effect. Therefore, the policy must by in force for the entire intended length of the remediation project. Generally, insurers do not offer policy periods greater than 10 years, but exceptions do apply. See the section below on then Blended Finite Risk option.

The Blended Finite Risk Insurance Option
A variation on the Cost-Cap insurance arrangement is a blended finite risk arrangement with an insurer. In such an arrangement, the insured pays an amount equal to the discounted net present value of the estimated remediation costs into a commutation account managed by the insurer. A risk premium is also added to this amount. The "Cost Cap" policy will then have no Self Insured Retention and the insurer binds itself to not only cover cost overruns, but also to make the appropriate remediation cost payments beginning with the first dollar.
The blended risk format enables the insurer to extend risk transfer insurance well beyond their normal policy period limit of 10 years to in excess of 30 years. In addition to the Cost Overrun aspect, additional risks are transferred to the insurer as noted below.

Finite Risk Funding Opportunity
Environmental insurers are increasingly acting as banks – willing to accept the risk of investment return arbitrage of reserves for remediation costs. Attachment B has a more detailed description of this services, but in essence it is a method by which Pantry Pride could "cash-out" its remediation liabilities by depositing an amount equal to the net discounted present value of total remediation costs. This deposit can be up-front or in installments, depending upon the
finances involved. The insurer would guarantee an interest rate on the account. Normally the responsible party (owner) would be afforded a dividend of the funded amount residue should the projects come under budget. In a twist to this, Gannett Fleming could take the right to the dividend since Gannett Fleming is taking the fixed-price contract risk.

The Blended Finite Risk Insurance Option
A variation on the cost-cap insurance arrangement is a blended finite risk arrangement with an insurer. In such an arrangement, the insured pays an amount equal to the discounted net present value of the estimated remediation costs into a commutation account managed by the insurer. A risk premium is also added to this amount. The "Cost cap" policy will then have no SIR and the insurer binds itself to not only cover cost overruns, but also to make the appropriate remediation cost payments beginning with the first dollar.

The blended risk format enables the insurer to extend risk transfer insurance well beyond their normal policy period limit of 10 years to in excess of 30 years. In addition to the Cost Overrun aspect, additional risks are transferred to the insurer as noted below.

Risks Transferred to Insurer:

Investment Return Risk
Inflation
Pay-Out Timing Risk
Remediation Cost Overruns

The Commutation Account
This account is the funded portion of the clean-up – in essence the SIR. At the end of the project, the insured is entitled to a refund of the residue of the account existing after remediation costs have been paid (including overruns).

Dividend: The insurer will maintain a notional commutation account balance calculated as follows:

1. 85.0% of the premium payment; plus, [Note: Variable, the difference is the risk premium retained by the insurer]
2. Interest credited as per below, less
3. 100% of losses paid by the Insurer.

Interest Credit: The notional commutation account, if positive will earn interest at a rate equal to either:

• The one-year United States Treasury Bill rate prevailing on the first day of each anniversary year; or
• A guaranteed minimum rate (depending upon the insurer).

The interest will be applied to the average daily balance of the notional commutation account and the interest will be compounded quarterly. The interest credit is calculated at each annual anniversary.

Commutation: The insured may elect to commute the contract. If the insured so elects, the Insurer will pay the Insured an amount equal to 100% of the commutation account balances in return for a complete release of liability for all claims whether known or unknown.