Travelers 2007 Annual Report Download - page 108

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 extinguished any 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. 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 the exposure 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: past settlement payments;
changing judicial and legislative trends; its reserves for the costs of litigating environmental coverage
matters; 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 the extent of time
necessary to determine an appropriate estimate, if any, of the value of the claim to the Company vary
significantly and are dependent upon a number of factors. These factors include, but are not limited to,
the cooperation of the policyholder in providing claim information, the pace of underlying litigation or
claim processes, the pace of coverage litigation between the policyholder and the Company and the
willingness of the policyholder and the Company to negotiate, if appropriate, a resolution of any
dispute pertaining to these claims. Because these factors vary from claim-to-claim and
policyholder-by-policyholder, the Company cannot provide a meaningful average of the duration of an
environmental claim. However, based upon the Company’s experience in resolving these claims, the
duration may vary from months to several years.
The Company continues to receive notices from policyholders tendering claims for the first time.
These policyholders generally present smaller exposures, have fewer sites and are lower tier defendants.
Further, in many instances clean-up costs have been reduced because regulatory agencies are willing to
accept risk-based site analyses and more efficient clean-up technologies. However, the Company has
experienced higher than expected defense and settlement costs driven in part by coverage disputes with
its policyholders and adverse judicial developments in certain states regarding the availability of
coverage for environmental claims. In addition, while the Company continues to experience a decline in
both the number of new policyholders tendering claims for the first time and the number of pending
lawsuits between the Company and its policyholders pertaining to coverage for environmental claims,
the Company has seen a moderation in the rate of this decline. As a result of these factors, the
Company increased its environmental reserve by $185 million in 2007 and $120 million in 2006. In
2005, the Company increased its environmental reserves by $30 million, primarily for declaratory
judgment litigation costs.
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