MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
TO: Derek Huang, General Counsel, Crestline Packaging Solutions LLC Patricia Okonkwo, Vice President, Environmental Health & Safety, Crestline Packaging Solutions LLC
CC: Beatrice Holloway, Responsible Partner, Calderwood & Harkness LLP Grace Nakamura, Lead Associate, Calderwood & Harkness LLP
FROM: Harrison Caldwell, Of Counsel, Calderwood & Harkness LLP
DATE: October 19, 2022
RE: Pollution Legal Liability Insurance Coverage Analysis — Proposed Acquisition of Allegheny Chemical Coatings, Inc. (Matter No. 1006-00003)
This memorandum is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. This document is confidential and intended solely for the use of the addressees identified above. Any dissemination, distribution, or copying of this communication to persons other than the intended recipients, or use of the information contained herein for any purpose other than the evaluation of the proposed transaction described herein, is strictly prohibited without the prior written consent of Calderwood & Harkness LLP.
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I. Executive Summary
This memorandum analyzes the non-binding indication of interest received from Ironclad Specialty Insurance Company ("Ironclad"), based in Hartford, Connecticut, for a Pollution Legal Liability ("PLL") insurance policy in connection with Crestline Packaging Solutions LLC's ("Crestline") proposed acquisition of one hundred percent (100%) of the outstanding common stock of Allegheny Chemical Coatings, Inc. ("ACC"). The non-binding indication was received on or about October 14, 2022, through Whitfield & Calder Insurance Advisors LLC ("Whitfield & Calder"), Crestline's environmental insurance broker based in Chicago, Illinois. Calderwood & Harkness LLP ("C&H") has coordinated with the key broker contacts, Douglas Whitfield, Senior Vice President, and Lauren Petrov, Account Executive, in connection with the preparation of this analysis.
The indicative PLL policy terms contemplate the following principal parameters: an aggregate limit of Fifteen Million Dollars ($15,000,000) for all claims during the policy period; a per-occurrence limit of Ten Million Dollars ($10,000,000); a ten-year policy term commencing on the closing date of the acquisition; a self-insured retention ("SIR") of Two Hundred Fifty Thousand Dollars ($250,000) per pollution condition; and an indicative annual premium of One Hundred Eighty-Seven Thousand Five Hundred Dollars ($187,500) for the full ten-year base policy term, fully earned at inception. An optional three-year extended reporting period is available at additional premium, which has not yet been quoted.
Bottom Line. The indicative PLL policy would provide meaningful supplemental protection against unknown and latent environmental liabilities across the four ACC operating facilities. However, several significant potential coverage gaps have been identified through our analysis, and these gaps must be addressed through negotiation with Ironclad before the policy can serve as a reliable component of Crestline's environmental risk allocation strategy for the proposed transaction. If these gaps are not resolved, the policy's effective coverage would be substantially narrower than the indicative limits suggest, and its utility as either a backstop to contractual indemnification or a mechanism to satisfy the lender's environmental diligence requirements would be materially compromised.
The key coverage gaps identified are as follows:
(1) Known Conditions Exclusion. The indication's Known Conditions Exclusion will likely exclude the most significant identified environmental liabilities at the McKeesport facility, including the toluene groundwater exceedance at monitoring well MW-3 and the trichloroethylene ("TCE") vapor intrusion beneath Building C — precisely the conditions driving the bulk of TerraVerde Environmental Consulting LLC's ("TerraVerde") preliminary remediation cost estimate of $1.2 million to $2.8 million.
(2) Ambiguous Pre-Existing Contamination Definition. The indication uses the phrase "pre-existing pollution conditions" without a clear definition, creating potentially significant ambiguity regarding coverage for legacy contamination that predates ACC's ownership and operations.
(3) Potential Vapor Intrusion Sublimit. The indication references a potential sublimit applicable to vapor intrusion claims, the amount of which has not been specified. Given that TCE vapor intrusion at Building C represents one of the most consequential environmental findings and potential sources of third-party bodily injury exposure, an inadequate sublimit would critically undermine the policy's value.
(4) Defense Costs Erode Policy Limits. Under the indicative terms, defense costs are included within — and therefore erode — the policy's aggregate and per-occurrence limits, rather than being provided in addition to those limits. In complex environmental litigation, defense costs can consume a disproportionate share of available coverage.
Recommendation. C&H recommends that Crestline, through Whitfield & Calder, request revised terms from Ironclad addressing each of the identified coverage gaps. We further recommend that the PLL policy be treated as a supplement to — and not a substitute for — the contractual escrow and indemnification protections being negotiated in the Stock Purchase Agreement ("SPA"). The policy's greatest value lies in its ability to cover unknown or latent environmental conditions that may emerge post-closing and to extend the effective period of environmental risk transfer beyond the contractual indemnity survival period proposed by the Seller, which is currently three years.
Status. As of the date of this memorandum, the Ironclad indication remains a non-binding indication of interest only. No formal PLL insurance application has been submitted. Underwriting is currently paused pending the completion and receipt of Phase II Environmental Site Assessment ("ESA") analytical results for the Clarksburg facility; samples were submitted to Keystone Analytical Laboratories, Inc. ("Keystone Labs") on October 7, 2022, and results have not yet been received. The receipt of those results may materially affect the scope, premium, and conditions of any formal policy offer.
II. Background
A. The Transaction
Crestline Packaging Solutions LLC is an Ohio limited liability company headquartered at 4100 Riverside Commerce Drive, Suite 300, Dayton, Ohio 45402. Crestline is a portfolio company of Briarwood Capital Partners LP ("Briarwood"), operating through Briarwood's Fund IV, which has aggregate committed capital of approximately $2.1 billion. Crestline proposes to acquire one hundred percent (100%) of the outstanding common stock of Allegheny Chemical Coatings, Inc., a Pennsylvania corporation headquartered at 2200 Iron Works Boulevard, McKeesport, Pennsylvania 15132.
The proposed purchase price for the ACC stock is Ninety-Four Million Five Hundred Thousand Dollars ($94,500,000), representing a 7.0x multiple of ACC's trailing twelve-month EBITDA of approximately $13,500,000. The transaction is structured as a stock purchase, under which Crestline will acquire all outstanding common shares of ACC from the following stockholders:
• Walter Kessler — 62% of outstanding common shares
• Thomas Kessler — 18% of outstanding common shares
• The Kessler Family Trust — 12% of outstanding common shares
• The ACC Employee Stock Ownership Plan (ESOP) — 8% of outstanding common shares
The acquisition is to be financed through a combination of senior secured debt and sponsor equity. Specifically, Commonwealth National Bank, N.A. ("Commonwealth" or the "Lender"), through its managing director, Victoria Chen, has committed to provide a Sixty-Five Million Dollar ($65,000,000) senior secured term loan and a Twenty Million Dollar ($20,000,000) revolving credit facility. Briarwood Fund IV will contribute the remaining equity of approximately Nine Million Five Hundred Thousand Dollars ($9,500,000). The Commonwealth commitment letter was executed on July 8, 2022. Critically, the financing is conditioned on the completion of satisfactory environmental due diligence. The Lender's commitment letter specifically requires Phase I Environmental Site Assessments on all target real property, with no unaddressed Recognized Environmental Conditions ("RECs"), or, in the alternative, acceptable PLL insurance in place at closing. This financing condition is a key driver of Crestline's interest in securing PLL coverage and is discussed in further detail in Section VII below.
A draft Stock Purchase Agreement was circulated on August 12, 2022, by counsel for the Seller. Environmental representations and warranties, indemnification provisions, and escrow arrangements remain under active negotiation. The interplay between the contractual risk allocation provisions and the PLL policy terms is discussed in Section V of this memorandum.
B. The Target's Facilities
ACC operates four facilities in Pennsylvania and West Virginia. The following provides a summary of each facility relevant to the PLL policy analysis:
Facility 1 — McKeesport Main Plant. The McKeesport Main Plant is located at 2200 Iron Works Boulevard, McKeesport, Pennsylvania 15132, in Allegheny County. The site encompasses approximately 14.3 acres and includes approximately 185,000 square feet of manufacturing space and approximately 12,000 square feet of office space. This facility serves as ACC's primary manufacturing location for solvent-based and epoxy coating products. ACC has owned the property in fee simple since 1987, when the Kessler family acquired the site from a predecessor entity. Prior to ACC's ownership, the site was used for steel fabrication by Keystone Metalworks, a company that is now defunct. The McKeesport facility is the location of the most significant environmental findings identified through the due diligence process, as discussed in detail in Section II.C below.
Facility 2 — Charleroi Specialty Coatings Plant. The Charleroi Specialty Coatings Plant is located at 450 Industrial Park Road, Charleroi, Pennsylvania 15022, in Washington County. The site encompasses approximately 8.7 acres and includes approximately 92,000 square feet of manufacturing space and approximately 4,500 square feet of combined office and laboratory space. This facility produces water-based and UV-curable coatings. ACC has owned the property since 2003. The site was developed on a greenfield parcel, and no environmental concerns have been identified through the due diligence process.
Facility 3 — Clarksburg Resin Blending Facility. The Clarksburg Resin Blending Facility is located at 1875 Route 50 West, Clarksburg, West Virginia 26301, in Harrison County. The site encompasses approximately 5.2 acres and includes approximately 48,000 square feet of warehouse and blending space and approximately 3,000 square feet of office space. ACC operates this facility under a triple-net lease with Mountainview Properties LLC, the fee owner of the property. The lease was executed on January 1, 2015, and expires on December 31, 2029. The landlord contact is Gerald Boothe. The Clarksburg facility is subject to ongoing Phase II investigation, as discussed below.
Facility 4 — Weirton Warehouse & Distribution Center. The Weirton Warehouse & Distribution Center is located at 600 Commerce Way, Weirton, West Virginia 26062, in Hancock County. The site encompasses approximately 3.1 acres and includes approximately 65,000 square feet of warehouse space and approximately 2,000 square feet of office space. ACC operates this facility under a double-net lease with Northern Panhandle Realty Corp., the fee owner of the property. The lease was executed on March 1, 2018, and expires on February 28, 2028. The landlord contact is Susan Delvecchio. The Weirton site is a remediated brownfield property that received a Certificate of Completion under the West Virginia Voluntary Remediation and Development Program ("VRDP") in September 2015. Engineering and institutional controls remain in effect, and a deed restriction is recorded at the Hancock County Clerk, Book 487, Page 89.
C. Summary of Environmental Diligence Findings
Phase I and Phase II Environmental Site Assessments were conducted by TerraVerde Environmental Consulting LLC. The TerraVerde project team consists of Dr. Nina Sorensen, P.E., CHMM, Principal-in-Charge; Kevin O'Malley, P.G., Project Manager; and Alicia Reyes, P.G., Senior Scientist and Phase II Field Lead.
1. McKeesport Main Plant
The Phase I ESA for the McKeesport facility is dated August 15, 2022. The Phase II ESA field investigation was completed on September 26, 2022, and analytical laboratory results were received on October 10, 2022.
Phase I Findings. The Phase I ESA identified the following conditions:
Recognized Environmental Conditions (RECs):
(a) REC-1: Subsurface Contamination and Vapor Intrusion Near Building C. Elevated volatile organic compound ("VOC") readings and a potential vapor intrusion pathway were identified in the vicinity of Building C, associated with residual subsurface contamination beneath a former underground storage tank ("UST") field. Building C houses ACC's primary solvent-based coating mixing and blending operations and employs approximately fifty or more personnel on regular shifts.
(b) REC-2: Eastern Boundary Staining. Staining and stressed vegetation were observed along the eastern property boundary near an unlined stormwater drainage channel, suggesting potential releases of chemicals or process waste to the subsurface and surface drainage system.
Historical Recognized Environmental Condition (HREC):
(c) HREC-1: Former UST Release (Resolved). A 1994 Act 2 release was documented in connection with former underground storage tanks that were removed in 1993. The Pennsylvania Department of Environmental Protection ("PA DEP") issued a No Further Action ("NFA") letter on May 7, 2001, confirming that remedial activities associated with the UST release had been satisfactorily completed. This condition was classified as an HREC in accordance with ASTM E1527-21.
Phase II Findings. The Phase II ESA analytical results revealed the following exceedances of applicable environmental standards:
TerraVerde prepared a preliminary remediation cost estimate dated October 18, 2022, which estimates remediation costs in the range of $1.2 million to $2.8 million for groundwater treatment (pump-and-treat or in-situ chemical oxidation) and vapor mitigation system installation (sub-slab depressurization system for Building C).
Additionally, TerraVerde's Phase I and Phase II assessments identified the following building materials concerns at the McKeesport facility:
• Asbestos-Containing Materials ("ACM"): Pipe insulation in Buildings A and B, encompassing approximately 2,400 linear feet, and floor tiles in Building A, encompassing approximately 14,000 square feet. These materials are currently being managed in place pursuant to an Operations & Maintenance Plan dated September 2019. The estimated cost of full abatement is $180,000 to $310,000.
• Lead-Based Paint ("LBP"): Lead-based paint was identified in the office building, which was constructed circa 1955. The lead-based paint is currently being managed in place. The estimated cost of full abatement is $45,000 to $85,000.
2. Charleroi Specialty Coatings Plant
The Phase I ESA for the Charleroi facility is dated August 18, 2022. No RECs, Controlled Recognized Environmental Conditions ("CRECs"), or HRECs were identified. The site is considered environmentally clean, and no Phase II ESA was conducted.
3. Clarksburg Resin Blending Facility
The Phase I ESA for the Clarksburg facility is dated August 22, 2022. The Phase II ESA field investigation commenced on October 3, 2022, and sampling was completed on October 7, 2022. Samples were submitted to Keystone Analytical Laboratories, Inc. for analysis. As of the date of this memorandum, analytical results have not been received.
Phase I Findings. The Phase I ESA identified the following conditions:
• CREC-1: Residual Diesel-Range Organics with Institutional Controls. The site has a documented history of residual diesel-range organic contamination associated with former petroleum storage. Institutional controls are in place, recorded at the Harrison County Clerk, Book 1245, Page 312, under West Virginia Department of Environmental Protection ("WV DEP") Site ID WVUST-2012-04887.
• REC-1: Drum Storage Area Staining. Staining was observed on the concrete floor in the northeast corner of the warehouse building in the area used for drum storage. The staining is consistent with releases of chemical products from drum handling operations.
Phase II Status. Analytical results from Keystone Analytical Laboratories remain pending. TerraVerde has prepared a preliminary, contingent remediation cost estimate assuming contamination is confirmed: $350,000 to $750,000 for soil excavation and off-site disposal, with an additional $150,000 to $400,000 if groundwater is also impacted.
4. Weirton Warehouse & Distribution Center
The Phase I ESA for the Weirton facility is dated August 25, 2022.
Phase I Findings. The Phase I ESA identified the following condition:
• CREC-1: VRDP Site with Engineering and Institutional Controls. The Weirton site is a former brownfield property that underwent remediation under the West Virginia Voluntary Remediation and Development Program. A Certificate of Completion was issued in September 2015. Engineering and institutional controls remain in place, and a deed restriction is recorded at the Hancock County Clerk, Book 487, Page 89. A de minimis hydraulic fluid stain (approximately 4 square feet) was observed during the site inspection but was not considered a REC. No Phase II ESA was conducted.
5. Aggregate Estimated Environmental Liabilities
Based on the findings across all four facilities, the total estimated environmental liabilities range from $1.925 million (low estimate) to $4.345 million (high estimate). This range encompasses remediation costs for known conditions at McKeesport, contingent remediation costs at Clarksburg (subject to Phase II confirmation), and abatement costs for asbestos-containing materials and lead-based paint. These estimates are preliminary and subject to revision as additional data becomes available, particularly the Clarksburg Phase II results.
D. Regulatory Compliance Considerations Relevant to PLL Coverage
The McKeesport facility is subject to a number of regulatory programs that have implications for the scope and applicability of PLL coverage:
• RCRA Status: McKeesport is classified as a Large Quantity Generator ("LQG") under the Resource Conservation and Recovery Act, operating under EPA Identification Number PAD-098-721-445.
• Title V Air Permit: McKeesport operates under Title V Operating Permit No. TV-0383-0125 as a major source of Hazardous Air Pollutants ("HAPs"), with reported HAP emissions of 38.2 tons per year, exceeding the 25-ton major source threshold.
• NPDES Permit: McKeesport operates under NPDES Permit No. PA0025631. A Total Suspended Solids ("TSS") exceedance was documented in March 2022, with a measured discharge of 48 mg/L against a permitted limit of 40 mg/L.
• Reportable Spills: Two reportable spill events have occurred at McKeesport within the past ten years: a xylene release in June 2017 and an epoxy hardener release in February 2020. The February 2020 incident resulted in a PA DEP fine of $4,500.
• TRI Reporting: ACC's 2021 Toxics Release Inventory ("TRI") Form R filings reported releases of 12,400 pounds of toluene and 8,700 pounds of xylene from the McKeesport facility.
These regulatory compliance matters are directly relevant to the scope of the PLL policy. In particular, they raise questions regarding whether the policy will cover third-party bodily injury or property damage claims arising from permitted emissions, regulatory cleanup obligations imposed in connection with ongoing operations, and claims arising from or related to pre-existing releases that may be subject to regulatory enforcement. The interplay between these regulatory programs and the policy's exclusions — particularly the Known Conditions Exclusion, the Intentional Acts / Willful Non-Compliance exclusion, and the scope of coverage for regulatory reopeners — must be carefully evaluated as the policy terms are refined.
E. Insurance Broker Engagement
Crestline retained Whitfield & Calder Insurance Advisors LLC to evaluate and place PLL insurance in connection with the proposed ACC acquisition. C&H transmitted the relevant environmental due diligence reports — including the Phase I ESAs for all four facilities and the McKeesport Phase II ESA results — to Whitfield & Calder on or about October 5, 2022, for submission to Ironclad Specialty Insurance Company as part of the PLL underwriting package. Sean McAllister, Underwriter at Ironclad, is the primary underwriting contact. Ironclad's non-binding indication of interest was received by Whitfield & Calder on or about October 14, 2022, and transmitted to Crestline and C&H for review. This memorandum constitutes C&H's analysis of the indicative terms and identification of coverage gaps requiring further negotiation.
III. Summary of Ironclad Specialty Indicative PLL Policy Terms
The following sections set forth a detailed summary of the principal terms reflected in the non-binding indication of interest received from Ironclad Specialty Insurance Company on or about October 14, 2022. A copy of the indication is attached as Appendix A. The reader is cautioned that the indication is preliminary and non-binding, and the final policy terms may differ materially from those described below. All terms remain subject to Ironclad's completion of its underwriting review, receipt and review of the Clarksburg Phase II analytical results, submission and acceptance of a formal application, and execution of a binding policy.
A. Named Insured and Insured Parties
The Named Insured under the policy would be Crestline Packaging Solutions LLC and/or a to-be-formed acquisition subsidiary through which Crestline may complete the stock purchase. The indication contemplates the following Additional Insureds to be named on the policy:
• Briarwood Capital Partners LP, as the equity sponsor of the transaction.
• Commonwealth National Bank, N.A., as the senior secured lender providing the term loan and revolving credit facility, consistent with the financing conditions set forth in the commitment letter.
Coverage under the policy is indicated to extend to successors and assigns of the Named Insured with respect to the covered locations. The precise scope of "successor and assign" coverage, including whether it extends to subsequent purchasers of individual facilities or the ACC business as a whole, will need to be clarified in the formal policy language.
B. Covered Locations
The indication identifies four covered locations, corresponding to the four ACC operating facilities:
1. McKeesport Main Plant — 2200 Iron Works Boulevard, McKeesport, PA 15132
2. Charleroi Specialty Coatings Plant — 450 Industrial Park Road, Charleroi, PA 15022
3. Clarksburg Resin Blending Facility — 1875 Route 50 West, Clarksburg, WV 26301
4. Weirton Warehouse & Distribution Center — 600 Commerce Way, Weirton, WV 26062
Coverage applies to "pollution conditions" on, at, under, or migrating from the covered locations. The definition of "pollution conditions" in the formal policy will be a critical term, as it determines the threshold for triggering coverage and the scope of conditions that fall within the policy's insuring agreements.
C. Policy Limits
The indication provides for the following policy limits:
• Aggregate Limit: Fifteen Million Dollars ($15,000,000) for all claims during the policy period.
• Per-Occurrence Limit: Ten Million Dollars ($10,000,000).
Both the aggregate and per-occurrence limits apply to indemnity payments and defense costs combined. In other words, defense costs erode the policy limits — a structure commonly referred to as "burning limits" or a "wasting" policy. The implications of this structure are discussed in detail in Section IV.D below.
D. Self-Insured Retention (SIR)
The indication specifies a self-insured retention of Two Hundred Fifty Thousand Dollars ($250,000) per pollution condition. The SIR applies to both first-party claims (e.g., cleanup costs at covered locations) and third-party claims (e.g., bodily injury or property damage claims by neighboring property owners or workers). The SIR must be fully exhausted by the Named Insured before the policy's coverage obligations are triggered. This means that Crestline will bear the first $250,000 of costs attributable to each distinct pollution condition, including investigation, remediation, defense, and indemnity costs within the SIR.
It should be noted that the characterization of what constitutes a single "pollution condition" versus multiple distinct conditions can be a significant source of coverage dispute. For example, at the McKeesport facility, it is unclear whether the toluene groundwater contamination at MW-3 and the TCE vapor intrusion beneath Building C would be treated as a single pollution condition (arising from common subsurface contamination associated with the former UST field) or as two separate pollution conditions, each subject to its own $250,000 SIR. This question should be addressed with Ironclad during the underwriting process.
E. Policy Period and Extended Reporting Period
The indication proposes a ten-year policy term, with the inception date to coincide with the closing date of the acquisition. The ten-year term provides a substantial period of coverage for the discovery and reporting of pollution conditions and related claims.
An optional extended reporting period ("ERP") of three years is available at additional premium. The premium for the ERP has not yet been quoted by Ironclad. The ERP would extend the period during which the insured may report claims for pollution conditions first discovered during the base policy period, providing an additional three years of reporting runway after the expiration of the ten-year base term. The total potential coverage period, including the ERP, would be thirteen years from inception.
F. Premium
The indicative premium for the ten-year base policy term is One Hundred Eighty-Seven Thousand Five Hundred Dollars ($187,500). This premium is quoted as fully earned at inception, meaning it is non-refundable regardless of whether claims are made under the policy, the policy is cancelled, or the underlying transaction does not close. However, Ironclad may agree, subject to negotiation, to return premium if the policy is voided prior to inception in the event the acquisition does not close. This point should be addressed in any formal policy negotiation.
The indicative premium does not include applicable taxes and surcharges, which will vary by jurisdiction. The premium for the optional three-year ERP has not been determined. The premium analysis set forth in Section VI of this memorandum evaluates the indicative premium in the context of market rates and the risk profile of the covered locations.
G. Coverage Grants (as Described in Indication)
The indication describes the following principal coverage grants:
First-Party Cleanup Costs. The policy would cover remediation costs incurred to address pollution conditions at the covered locations, including costs of investigation, monitoring, and corrective action required by environmental law or voluntarily undertaken with the insurer's prior written consent. This coverage grant is the primary source of coverage for on-site cleanup obligations at the ACC facilities. The scope of "environmental law" as defined in the policy will determine whether this coverage extends to cleanup obligations arising under state voluntary cleanup programs (e.g., PA DEP Act 2, WV VRDP) as well as regulatory enforcement orders.
Third-Party Bodily Injury and Property Damage. The policy would cover claims by third parties for bodily injury or property damage arising from pollution conditions at or emanating from the covered locations. This coverage is relevant to potential claims from neighboring property owners, residents in proximity to the McKeesport facility, and workers exposed to contamination (subject to the workers' compensation exclusion discussed below).
Third-Party Cleanup Costs. The policy would cover costs imposed on the insured to remediate pollution conditions that have migrated off-site from the covered locations onto adjacent or nearby properties. This coverage is relevant if subsurface contamination at McKeesport or Clarksburg has migrated beyond property boundaries.
Legal Defense Costs. The policy would cover the costs of defending covered claims, including attorney fees, expert witness fees, and related litigation expenses. As noted above, defense costs erode the policy limits rather than being provided in addition to the limits.
Transportation Coverage. The indication references coverage for claims arising from the transport of materials to and from the covered locations, subject to a limited sublimit. The amount of the sublimit has not been specified. Given that ACC ships and receives chemical products, raw materials, and hazardous waste to and from its facilities by truck and common carrier, transportation incidents present a realistic exposure.
Business Interruption. Business interruption coverage is not included in the indicative terms. It is available by endorsement at additional premium, which has not yet been quoted. As discussed in Section IV.G below, the absence of business interruption coverage is a notable gap given the potential for operational disruptions related to environmental remediation activities.
Non-Owned Disposal Site ("NODS") Coverage. NODS coverage is not included in the indicative terms. It is available by endorsement at additional premium. This coverage would address potential CERCLA contribution claims arising from contamination at off-site disposal facilities to which ACC has shipped hazardous waste, which is a relevant exposure for a RCRA Large Quantity Generator.
H. Key Exclusions (as Described in Indication)
The indication describes the following principal exclusions from coverage:
Known Conditions Exclusion. The policy excludes pollution conditions known to the insured prior to the policy inception date, as disclosed in the application or environmental reports provided to the insurer in connection with the underwriting of the policy. This exclusion is the most significant coverage concern and is analyzed in detail in Section IV.A below.
Intentional Acts / Willful Non-Compliance. The policy excludes claims arising from the intentional discharge, dispersal, release, or escape of pollutants, or from the willful violation of environmental law by or at the direction of the insured. This is a standard PLL exclusion and is generally not negotiable. It is worth noting, however, that the March 2022 NPDES TSS exceedance and the prior reportable spill incidents at McKeesport should be evaluated to confirm they do not create a factual basis for the insurer to invoke this exclusion in connection with future claims.
Asbestos and Lead-Based Paint. Claims arising from or relating to asbestos or lead-based paint are covered but subject to a sublimit. The amount of the sublimit has not been specified in the indication but may be $2,000,000 or less. This sublimit is discussed further in Section IV.E.
Mold / Legionella / Indoor Air Quality. Claims arising from mold, Legionella, or indoor air quality conditions (other than those resulting from a covered pollution condition) are excluded unless an endorsement is purchased. Given the manufacturing nature of ACC's operations and the identified vapor intrusion concern, this exclusion should be reviewed to ensure it does not inadvertently encompass indoor air contamination caused by TCE or other VOC vapor intrusion.
CERCLA / Superfund Liability as PRP. The indication provides that liability as a Potentially Responsible Party under CERCLA is covered only for on-site conditions at the covered locations. Third-party liability at non-owned Superfund sites is excluded. This limitation underscores the importance of the NODS endorsement discussed above.
Contractual Liability. The policy excludes liability assumed under contract, with an exception for indemnification obligations arising by operation of environmental law. This exclusion is analyzed in Section IV.F in the context of ACC's lease obligations at the Clarksburg and Weirton facilities.
Employer Liability / Workers' Compensation. Claims for bodily injury to employees of the insured that are covered by workers' compensation laws are excluded. This is a standard exclusion. However, it is important to note that TCE vapor intrusion at Building C may give rise to both workers' compensation claims (excluded) and third-party tort claims by employees who may argue that ACC's concealment or failure to disclose the vapor intrusion condition takes their claims outside the workers' compensation exclusive remedy framework. This distinction should be monitored.
War, Terrorism, Nuclear. Standard exclusions for war, terrorism, and nuclear hazards are included.
Punitive Damages. Punitive damages are excluded from coverage unless insurable by law in the applicable jurisdiction. Under Pennsylvania law, the insurability of punitive damages is a matter of ongoing judicial analysis, and public policy considerations may preclude coverage. West Virginia law is similarly restrictive. This exclusion is standard and not likely to be negotiable.
I. Retroactive Date
The indication specifies an unlimited retroactive date, meaning the policy would, in principle, cover pre-existing unknown pollution conditions regardless of when the original release or contamination event occurred. This is a favorable term that is particularly important given the legacy industrial history of the McKeesport site (former Keystone Metalworks operations predating ACC's 1987 acquisition) and the documented history of petroleum contamination at the Clarksburg site.
However, the practical value of the unlimited retroactive date is significantly limited by the Known Conditions Exclusion. While the retroactive date provides temporal coverage for releases that occurred decades ago, the Known Conditions Exclusion removes from coverage any conditions that have been identified in the Phase I or Phase II ESAs provided to the insurer. The interplay between these two provisions is a central focus of the coverage gap analysis in Section IV.
J. Reporting Requirements
The indication describes the policy as a claims-made and reported policy form. Under this form, a claim must be first made against the insured and reported to the insurer during the policy period (or, if purchased, during the extended reporting period) in order to trigger coverage. This is in contrast to an occurrence-based policy, which covers claims arising from occurrences that take place during the policy period regardless of when the claim is made.
The claims-made structure introduces timing risk for Crestline. If a pollution condition is discovered late in the policy period and the resulting claim is not made and reported before the policy expires (and no ERP has been purchased, or the ERP has also expired), coverage would not be available. The indication references a "notice of circumstances" provision, which would allow the insured to notify the insurer of facts or circumstances that may reasonably give rise to a future claim, thereby preserving coverage for a subsequently filed claim. The details of this provision have not been specified in the non-binding indication and will need to be evaluated carefully in the formal policy language.
IV. Coverage Gap Analysis
This section identifies and analyzes the principal coverage gaps in the Ironclad indicative PLL policy terms. For each identified gap, we provide a detailed assessment of the risk to Crestline and specific recommendations for negotiation with the insurer.
A. Known Conditions Exclusion — Critical Issue
1. Scope of the Exclusion
The indication states that the policy will exclude "pollution conditions known to any insured or disclosed in any environmental site assessment, report, or investigation provided to the insurer in connection with the underwriting of this policy." This is a broad formulation that encompasses not only conditions actually known to Crestline's management or employees, but also any condition identified in the environmental reports submitted as part of the underwriting package — regardless of whether Crestline's personnel have reviewed or are aware of the specific finding.
2. Impact on McKeesport Phase II Findings
As noted in Section II.E above, C&H transmitted the Phase I ESAs for all four facilities and the McKeesport Phase II ESA analytical results to Whitfield & Calder on or about October 5, 2022, for inclusion in the underwriting submission to Ironclad. Accordingly, the following conditions identified in the McKeesport Phase II are now "known" within the meaning of the exclusion and would likely be excluded from coverage under the indicative terms:
(a) Toluene contamination in groundwater at monitoring well MW-3, measured at 1,420 µg/L, which exceeds the Pennsylvania Act 2 Statewide Health Standard of 1,000 µg/L by 42%;
(b) Trichloroethylene (TCE) in sub-slab soil gas beneath Building C, measured at 42 µg/m³, which exceeds the PA DEP vapor intrusion screening level of 21 µg/m³ by 100%;
(c) Tetrachloroethylene (PCE) in soil at soil boring SB-7, measured at 3.8 mg/kg, which exceeds the residential standard of 2.4 mg/kg (though it falls below the non-residential standard of 14 mg/kg);
(d) Lead in soil at soil boring SB-14, measured at 680 mg/kg, which exceeds the residential standard of 450 mg/kg (though it falls below the non-residential standard of 1,000 mg/kg); and
(e) All contamination identified in connection with the Phase I RECs, including staining and stressed vegetation along the eastern boundary and VOC readings near Building C.
3. Significance of the Gap
The exclusion of these conditions from PLL coverage is particularly consequential because they represent the primary identified environmental liabilities at the McKeesport facility — and, indeed, across all four ACC facilities. TerraVerde's preliminary remediation cost estimate of $1.2 million to $2.8 million is driven almost entirely by the groundwater treatment and vapor mitigation costs associated with these conditions. If the Known Conditions Exclusion operates as indicated, the PLL policy would provide no coverage for the most significant known environmental exposure, effectively limiting the policy's utility to coverage of truly unknown conditions at the McKeesport, Clarksburg, and Weirton sites, plus the clean Charleroi site.
Furthermore, the Clarksburg Phase I findings — specifically the CREC for legacy diesel-range organics and the REC for drum storage staining — have also been disclosed to the insurer and may be excluded as known conditions. When the Clarksburg Phase II analytical results are received from Keystone Labs and shared with Ironclad as part of the underwriting process, any contamination identified in those results will similarly become known conditions subject to the exclusion. Given TerraVerde's contingent estimate of $350,000 to $750,000 for soil remediation at Clarksburg (plus $150,000 to $400,000 if groundwater is impacted), the cumulative effect of the Known Conditions Exclusion across both facilities could remove the majority of identified environmental liabilities from the policy's scope.
4. Recommendation. C&H recommends that Crestline, through Whitfield & Calder, request that Ironclad offer one or both of the following:
(a) Known Conditions Buyback / Scheduled Pollutant Endorsement. A scheduled pollutant endorsement or known conditions coverage buyback that explicitly covers the identified McKeesport contamination (and, upon receipt and review, the Clarksburg Phase II findings). This endorsement would list the specific known conditions and provide coverage for remediation and third-party claims arising from those conditions, likely at an additional premium and/or a higher SIR applicable to the scheduled conditions. Known conditions buybacks are available in the market, though they are underwritten more selectively and at higher cost than standard PLL terms.
(b) Narrower Definition of "Known Conditions." In the alternative, or in addition, Crestline should negotiate a narrower definition of "known conditions" in the policy. Specifically, we recommend proposing that "known conditions" be limited to conditions for which the insured has received a governmental enforcement order or directive requiring remediation, rather than conditions that have merely been identified through voluntary environmental investigation. Under this narrower formulation, the McKeesport Phase II exceedances — which have not been the subject of any PA DEP enforcement action — would not be excluded. This is a more aggressive negotiating position and may not be accepted by Ironclad, but it establishes a favorable starting point for discussions.
B. Pre-Existing Contamination Definition
1. Ambiguity in the Indication
The indication uses the phrase "pre-existing pollution conditions" without providing a clear definition. The distinction between "pre-existing" contamination and "new" contamination is critical to the operation of the policy, particularly given the unlimited retroactive date. In principle, the unlimited retroactive date means that pre-existing unknown conditions should be covered. However, the interplay between the undefined "pre-existing pollution conditions" language and the Known Conditions Exclusion creates ambiguity that could result in unintended coverage gaps.
2. Legacy Contamination at McKeesport
This ambiguity is of particular concern with respect to legacy contamination at the McKeesport facility. Prior to ACC's acquisition of the property in 1987, the site was used for steel fabrication by Keystone Metalworks, a defunct company. While the 1994 Act 2 release from the former USTs received an NFA letter in May 2001, there is reason to believe that residual contamination may exist beyond the scope of the 1994 investigation. Notably, the PCE detected at soil boring SB-7 at 3.8 mg/kg may originate from the pre-ACC industrial use of the site rather than from ACC's own coating operations. PCE was commonly used as a degreasing solvent in steel fabrication, whereas ACC's coating operations primarily involve toluene, xylene, and epoxy-based compounds.
If "pre-existing pollution conditions" is defined broadly to include any contamination existing in the subsurface prior to the policy inception date, and the Known Conditions Exclusion applies to any contamination identified or referenced in the Phase II ESA, a problematic coverage gap emerges: legacy conditions that have been partially characterized through Phase II sampling would be excluded as "known," while the full scope and extent of legacy contamination — which may be far greater than what has been identified in the limited Phase II investigation — would remain uncertain and potentially uninsured.
3. Recommendation. C&H recommends that Crestline request clear policy language establishing the following three categories:
(a) Pre-existing unknown conditions — pollution conditions that existed prior to the policy inception date but were not identified in the environmental reports provided to the insurer. These conditions should be fully covered, consistent with the unlimited retroactive date.
(b) Pre-existing known conditions — pollution conditions that existed prior to the policy inception date and were identified in the environmental reports provided to the insurer. These conditions would be subject to the Known Conditions Exclusion, but Crestline should negotiate a buyback endorsement as described in Section IV.A.4 above.
(c) New conditions — pollution conditions first arising or first discovered after the policy inception date. These conditions should be fully covered without limitation.
Additionally, the policy language should explicitly address the scenario in which a known condition migrates or worsens beyond the boundaries of the existing investigation area. For example, if toluene contamination currently delineated at MW-3 migrates to a previously unaffected portion of the McKeesport site or off-site to a neighboring property, the resulting additional contamination and associated claims should be treated as new conditions or, at minimum, should not be excluded under the Known Conditions Exclusion simply because they are related to a previously identified source area. This "migration and worsening" issue is a common point of negotiation in PLL placements and should be addressed explicitly.
C. Vapor Intrusion Sublimit
1. The Gap
The indication references vapor intrusion coverage but suggests that it may be subject to a sublimit. The amount of the sublimit has not been specified in the non-binding indication. This is a significant concern because TCE vapor intrusion at McKeesport Building C is one of the most consequential environmental findings identified through the due diligence process.
2. Significance. The Phase II sub-slab soil gas sampling beneath Building C detected TCE at 42 µg/m³, which is double the PA DEP vapor intrusion screening level of 21 µg/m³. This exceedance indicates an active vapor intrusion pathway from subsurface contamination into the Building C enclosed space. Building C houses ACC's primary solvent-based coating mixing and blending operations, with approximately fifty or more employees working on regular shifts.
If the vapor intrusion sublimit is set at a low amount — for example, $1,000,000 or $2,000,000 — the sublimit would be inadequate relative to several categories of potential exposure:
(a) Remediation Costs. The installation of a sub-slab depressurization system at Building C, including system design, installation, startup, and ongoing monitoring, is a component of TerraVerde's overall $1.2 million to $2.8 million remediation cost estimate for the McKeesport facility. If the vapor intrusion remediation costs alone approach or exceed a low sublimit, the effective coverage for this condition would be consumed by first-party cleanup costs alone, leaving no coverage for third-party claims.
(b) Third-Party Bodily Injury Claims. If the TCE vapor intrusion has resulted in indoor air contamination exceeding Occupational Safety and Health Administration ("OSHA") permissible exposure limits, employees working in Building C may have been exposed to harmful concentrations of TCE for an extended period. TCE is a recognized human carcinogen (classified by the U.S. Environmental Protection Agency as "carcinogenic to humans" and by the International Agency for Research on Cancer as a Group 1 carcinogen). Third-party bodily injury claims arising from long-term occupational TCE exposure — particularly cancer claims — could result in significant damages far exceeding a $1,000,000 or $2,000,000 sublimit.
(c) Regulatory Compliance Costs. Vapor intrusion may trigger regulatory obligations under PA DEP's vapor intrusion guidance (Technical Guidance Document 150-0810-003), potentially requiring ongoing indoor air monitoring, institutional controls, and activity and use limitations. If the 2001 NFA letter did not address vapor intrusion pathways — and there is no indication in the record that it did — PA DEP may issue an Act 2 reopener requiring additional investigation and remediation. The costs associated with a regulatory reopener could be substantial and ongoing.
3. Recommendation. C&H recommends that Crestline request one of the following:
(a) Removal of Sublimit. Request that Ironclad remove the vapor intrusion sublimit entirely, so that vapor intrusion claims share the full per-occurrence and aggregate limits.
(b) Adequate Sublimit. If removal is not feasible, request that the vapor intrusion sublimit be set at no less than $5,000,000, which is commensurate with the potential exposure from both remediation costs and third-party bodily injury claims.
(c) Classification of Ongoing Monitoring Costs. Request that the policy explicitly treat ongoing monitoring costs associated with a sub-slab depressurization system as covered remediation costs, rather than characterizing them as maintenance or operational expenses that might be excluded under the policy's definition of covered "cleanup costs."
D. Defense Costs Erosion of Limits
1. The Gap
Ironclad's indication specifies that defense costs are included within — and therefore erode — the policy's aggregate and per-occurrence limits. This structure, commonly referred to as "burning limits" or a "wasting" policy, means that every dollar spent defending a covered claim reduces the amount available to pay indemnity for that claim and all other claims during the policy period.
2. Significance. In complex environmental claims, defense costs can be substantial. This is particularly true in multi-party CERCLA contribution actions, state regulatory enforcement proceedings involving contested liability allocation, and toxic tort or bodily injury litigation. In C&H's experience, defense costs in environmental matters routinely consume between thirty percent (30%) and fifty percent (50%) or more of available policy limits, particularly where expert testimony, environmental consulting, and extended discovery are involved.
With a $15,000,000 aggregate limit and a $10,000,000 per-occurrence limit, the erosion of limits by defense costs could significantly reduce the effective indemnity coverage available to Crestline. Consider the following illustrative scenario:
If Crestline faces both a PA DEP enforcement action regarding the McKeesport groundwater contamination and a third-party bodily injury claim arising from TCE vapor intrusion exposure at Building C, the defense costs for both proceedings — assuming they are treated as arising from a single occurrence — could easily reach $1,000,000 to $3,000,000 or more. This would reduce the effective per-occurrence limit from $10,000,000 to as low as $7,000,000. If additional claims arise at Clarksburg or from off-site migration at McKeesport, cumulative defense costs across all claims could consume a significant portion of the $15,000,000 aggregate limit, leaving inadequate indemnity coverage for the underlying liabilities.
3. Recommendation. C&H recommends that Crestline pursue the following, in order of preference:
(a) Defense Outside Limits. Request that defense costs be provided in addition to — rather than within — the policy limits. Under a "defense outside limits" or "supplementary payments" structure, the policy would provide defense cost coverage that does not reduce the indemnity limits available for cleanup, bodily injury, and property damage claims. This is the preferred structure and is available from some PLL carriers, though it typically commands a higher premium.
(b) Separate Defense Cost Sublimit. If Ironclad is unwilling to provide defense outside limits, request a separate defense cost sublimit (for example, $2,500,000) that operates independently of the indemnity limits. Under this structure, defense costs up to the sublimit amount would not erode the indemnity limits; only defense costs exceeding the sublimit would be applied against the aggregate and per-occurrence limits.
(c) Higher Aggregate Limit. As an alternative, negotiate an increase in the aggregate limit to account for anticipated defense cost erosion. For example, increasing the aggregate limit from $15,000,000 to $20,000,000 would provide an additional $5,000,000 of headroom to absorb defense costs without materially reducing indemnity coverage.
E. Asbestos and Lead-Based Paint Sublimit
1. The Gap
The indication notes that claims arising from or relating to asbestos and lead-based paint are subject to a sublimit, the amount of which has not been specified but may be $2,000,000 or less.
2. Significance. The McKeesport facility has documented asbestos-containing materials (pipe insulation in Buildings A and B, approximately 2,400 linear feet; floor tiles in Building A, approximately 14,000 square feet) and lead-based paint (in the office building, constructed circa 1955). These materials are currently managed in place pursuant to existing management plans.
While the current estimated abatement costs are relatively modest — $180,000 to $310,000 for ACM and $45,000 to $85,000 for LBP, for a combined range of $225,000 to $395,000 — the more significant exposure is potential third-party bodily injury claims. Asbestos-related personal injury claims, in particular, can result in substantial jury verdicts and settlements, and a low sublimit would provide inadequate protection against this category of risk. Lead-based paint exposure claims, while generally less common in commercial/industrial settings, could also arise if the LBP is disturbed during renovation or demolition activities.
3. Recommendation. C&H recommends that Crestline request disclosure of the proposed sublimit amount and negotiate a combined asbestos/LBP sublimit of at least $5,000,000. The sublimit should apply separately from the environmental remediation limits so that asbestos or LBP claims do not reduce the coverage available for groundwater contamination, vapor intrusion, or other pollution-related claims.
F. Contractual Liability Exclusion
1. The Gap
The indication includes a standard contractual liability exclusion, which bars coverage for liability "assumed under contract." The only exception to this exclusion is for indemnification obligations arising by operation of environmental law.
2. Significance. This exclusion raises concerns for the Clarksburg and Weirton facilities, both of which are leased properties:
Clarksburg. The triple-net lease between ACC (as tenant) and Mountainview Properties LLC (as landlord) includes provisions requiring the tenant to remediate contamination caused by the tenant's operations. Post-acquisition, Crestline — as the successor to ACC's stock and thereby the indirect successor to ACC's lease obligations — will inherit this contractual remediation obligation. If the Clarksburg Phase II ESA confirms contamination in the drum storage area, and that contamination is determined to be tenant-caused, the remediation costs Crestline incurs would be pursuant to a contractual obligation. Under the contractual liability exclusion as indicated, the PLL policy would not cover these costs because the obligation to remediate arises from the lease rather than from a regulatory directive or environmental statute.
Weirton. The double-net lease between ACC and Northern Panhandle Realty Corp. includes provisions requiring compliance with all applicable laws. Any VRDP maintenance obligations — such as monitoring, reporting, or maintenance of engineering controls — could arguably be characterized as contractual obligations arising under the lease, potentially triggering the contractual liability exclusion.
3. Recommendation. C&H recommends that Crestline request a carve-back from the contractual liability exclusion for environmental remediation obligations arising under leases or occupancy agreements where the obligation relates to a pollution condition at a covered location. This is a standard market request in PLL placements for acquisitions involving leased properties and is generally accepted by PLL underwriters. The carve-back should specify that coverage applies to remediation obligations assumed under leases for the covered locations, irrespective of whether the obligation is contractual in origin, so long as the underlying condition constitutes a "pollution condition" as defined in the policy.
G. Additional Coverage Considerations
Beyond the principal coverage gaps identified above, the following additional coverage considerations merit attention in the policy negotiation:
1. Business Interruption
Business interruption coverage is not included in the indicative terms. If environmental remediation activities at the McKeesport facility — particularly vapor mitigation work at Building C — require curtailment of operations, temporary evacuation, or shutdown of mixing and blending equipment, the resulting business interruption losses could be significant. ACC's annual revenue is approximately $78,000,000, and the McKeesport Main Plant is the company's primary manufacturing facility. Even a short-duration shutdown of Building C could result in substantial lost revenue and continuing fixed cost obligations.
Recommendation: Request a quotation from Ironclad for a business interruption endorsement providing coverage for loss of business income and extra expense arising from covered pollution conditions at the covered locations.
2. Non-Owned Disposal Site Coverage
NODS coverage is not included in the indicative terms. As a RCRA Large Quantity Generator, ACC ships hazardous waste from the McKeesport facility to off-site treatment, storage, and disposal facilities. Under CERCLA Section 107, generators of hazardous waste that is disposed of at a facility that later requires cleanup may be held jointly and severally liable as Potentially Responsible Parties ("PRPs") for cleanup costs. Without NODS coverage, Crestline would have no PLL insurance protection against CERCLA contribution claims from off-site disposal facility cleanups.