Travelers 2006 Annual Report Download - page 111

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The Company has been, and continues to be, involved in litigation involving insurance coverage issues
pertaining to environmental claims. The Company believes that some court decisions have interpreted the
insurance coverage to be broader than the original intent of the insurers andpolicyholders. These
decisions often pertain to insurancepolicies that were issued by the Company prior to the mid-1970s.
These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction. Environmental
claims when submitted rarely indicate the monetary amount being sought by the claimant from the
policyholder, and the Company does not keep track of the monetary amount beingsought in those few
claims which indicate a monetary amount.
At December 31, 2006, approximately 81% of the net environmental reserve (approximately
$337 million) was carried in a bulk reserve and included unresolved environmental claims, incurred but not
reported environmental claims and the anticipated cost of coverage litigation disputes relating to these
claims. The bulk reserve the Company carries is established and adjusted based upon the aggregate volume
of in-process environmental claims and the Company’s experience in resolving those claims. Thebalance,
approximately 19% of the net environmental reserve (approximately $81 million), consists of case reserves.
The resolution of environmental exposures by the Company generally occurs by settlement on a
policyholder-by-policyholder basis as opposed to a claim-by-claim basis. Generally, the Company strives to
extinguish any obligations it may have under any policy issued to the policyholder for past, present and
future environmental liabilities and extinguish any pending coverage litigation dispute with the
policyholder. This form of settlement is commonly referred to as a “buy-back” of policies for future
environmental liability. In addition, many of the agreements have also extinguishedany insurance
obligation which the Company may have for other claims, including but not limited to asbestos and other
cumulative injury claims. The Company and its policyholders may also agree to settlements which
extinguish any future liability arising from known specified sites or claims. Provisions of these agreements
also include appropriate indemnities and hold harmless provisions to protect the Company. The
Company’s general purpose in executing these agreements is to reduce the Company’s potential
environmental exposure and eliminate the risks presented by coverage litigation with the policyholder and
related costs.
In establishing environmental reserves, the Company evaluates theexposure presented by each
policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company
considers the probable liability, available coverage, relevant judicial interpretations and historical value of
similar exposures. In addition, the Company considers the many variables presented, such as the nature of
the alleged activities of the policyholder at each site; the allegations of environmental harm at each site;
the number of sites; the total number of potentially responsible parties at each site; the nature of
environmental harm and the corresponding remedy at each site; the nature of government enforcement
activities at each site; the ownership and general use of each site; the overall nature of the insurance
relationship between the Company and the policyholder, including the role of any umbrella or excess
insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for
other available coverage, including the number of years of coverage; the role, if any, of non-environmental
claims or potential non-environmental claims in any resolution process; and the applicable law in each
jurisdiction. Conventional actuarial techniques are not used to estimate these reserves.
In its review of environmental reserves, the Company considers: the adequacy of reserves for past
settlements; changing judicial and legislative trends; the potential for policyholders with smaller exposures
to be named in new clean-up actions for both on- and off-site waste disposal activities; the potential for
adverse development; the potential for additional new claims beyond previous expectations;and the
potential higher costs for new settlements.
The duration of the Company’s investigation and review of these claims and theextent of time
necessary to determine an appropriate estimate, if any, of the value of the claim to the Company vary