CALDERWOOD & HARKNESS LLP Attorneys at Law
1900 Euclid Avenue, Suite 3200 Cleveland, Ohio 44115
Telephone: (216) 555-8400 Facsimile: (216) 555-8401 www.calderwoodharkness.com
October 23, 2022
VIA EMAIL (with hard copy to follow)
Lauren Petrov Account Executive Whitfield & Calder Insurance Advisors LLC 227 West Monroe Street, Suite 1800 Chicago, Illinois 60606
Re: Review and Comments on Non-Binding Indication of Interest — Pollution Legal Liability Policy, Ironclad Specialty Insurance Company; Proposed Acquisition of Allegheny Chemical Coatings, Inc. by Crestline Packaging Solutions LLC
C&H Matter No.: 1006-00003
cc:
Douglas Whitfield, Senior Vice President, Whitfield & Calder Insurance Advisors LLC Beatrice Holloway, Partner, Calderwood & Harkness LLP Derek Huang, General Counsel, Crestline Packaging Solutions LLC Patricia Okonkwo, Vice President, Environmental Health & Safety, Crestline Packaging Solutions LLC
Dear Ms. Petrov:
I. Introduction
This firm represents Crestline Packaging Solutions LLC, an Ohio limited liability company and portfolio company of Briarwood Capital Partners LP (Fund IV) ("Crestline" or the "Buyer"), in connection with Crestline's proposed acquisition (the "Transaction") of one hundred percent (100%) of the outstanding common stock of Allegheny Chemical Coatings, Inc., a Pennsylvania corporation ("ACC" or the "Target"). ACC is a specialty industrial coatings manufacturer operating four facilities across the Commonwealth of Pennsylvania and the State of West Virginia. The proposed purchase price for the Transaction is approximately $94.5 million, reflecting a 7.0x EBITDA multiple on ACC's fiscal year 2021 EBITDA of $13.5 million.
We acknowledge receipt of the non-binding indication of interest (the "Indication") issued by Ironclad Specialty Insurance Company ("Ironclad Specialty" or the "Carrier") for a Pollution Legal Liability ("PLL") insurance policy in connection with the Transaction. The Indication was transmitted by Whitfield & Calder Insurance Advisors LLC ("Whitfield & Calder" or the "Broker") to Calderwood & Harkness LLP ("C&H") on or about October 17, 2022.
The purpose of this letter is to provide C&H's detailed review of, and comments on, the indicative PLL policy terms set forth in the Indication. Specifically, this letter: (a) identifies coverage gaps in the indicative terms relative to the environmental conditions identified during our ongoing environmental due diligence investigation of the Target and its facilities; (b) explains the significance of those gaps in the context of the Transaction's environmental risk profile; and (c) requests specific modifications to the indicative terms for Ironclad Specialty's consideration in any formal underwriting process that may follow.
We note that C&H's environmental due diligence is ongoing. In particular, as discussed in greater detail in Section VI of this letter, the Phase II Environmental Site Assessment ("Phase II ESA") at the Clarksburg Resin Blending Facility in Clarksburg, West Virginia was recently completed and analytical results remain pending. Additionally, the Transaction itself is subject to continued negotiation between the parties, particularly with respect to environmental risk allocation provisions in the Stock Purchase Agreement ("SPA"). This letter is accordingly provided subject to those qualifications and is based on the information available to us as of the date hereof.
II. Summary of Indicative PLL Policy Terms
For reference and to establish the basis for our analysis, we summarize below the principal terms reflected in the Indication as we understand them:
Covered Locations. The Indication identifies all four ACC operating facilities as covered locations:
1. McKeesport Main Plant — 2200 Iron Works Boulevard, McKeesport, Pennsylvania 15132 (Parcel ID: 0383-M-00125-0000-00)
2. Charleroi Specialty Coatings Plant — 450 Industrial Park Road, Charleroi, Pennsylvania 15022 (Parcel ID: 120-015-00-03-0018-00)
3. Clarksburg Resin Blending Facility — 1875 Route 50 West, Clarksburg, West Virginia 26301 (Parcel ID: 04-0012-0056-0000)
4. Weirton Warehouse & Distribution Center — 600 Commerce Way, Weirton, West Virginia 26062 (Parcel ID: 07-0304-0012-0000)
Coverage Scope. The Indication describes the following general categories of coverage:
• Third-party bodily injury and property damage claims arising from pollution conditions at, on, under, or migrating from the covered locations;
• On-site and off-site cleanup costs, including costs incurred in connection with investigation, remediation, monitoring, and closure of pollution conditions;
• Regulatory defense costs, including costs associated with responding to administrative orders, consent decrees, and enforcement actions by federal, state, or local environmental regulatory authorities;
• Transportation and disposal liability, including liability arising from the transport, treatment, storage, or disposal of waste materials generated at the covered locations; and
• Emergency response costs related to sudden and accidental pollution events.
Key Exclusions. The Indication identifies the following exclusions or limitations, among others:
• Known conditions exclusion (excluding pollution conditions "known" to the insured as of the policy inception date);
• Intentional non-compliance with environmental laws and regulations;
• Contractual liability (liability assumed under contract except to the extent such liability would exist absent the contract);
• Certain pre-existing contamination (as defined in the policy form);
• Asbestos and lead-based paint (subject to a separate exclusion endorsement, to be discussed);
• Employer liability / workers' compensation claims.
We note that the Indication is expressly non-binding and that the foregoing terms are subject to formal underwriting, review of complete submission materials, and issuance of a binding quotation by Ironclad Specialty. With this understanding, we proceed to our detailed analysis.
III. Environmental Diligence Context — Summary of Identified Conditions
To provide context for the coverage analysis that follows, we summarize below the material environmental findings at each of the four covered locations. A comprehensive treatment of these findings is set forth in C&H's draft environmental diligence summary memorandum dated October 22, 2022, as well as in the associated Phase I and Phase II ESA review memoranda that were previously transmitted to Whitfield & Calder via the insurance submission package transmittal letter dated approximately October 5, 2022. The findings discussed below are based on Phase I and Phase II ESAs prepared by TerraVerde Environmental Consulting, Inc. ("TerraVerde") and C&H's independent review and analysis thereof.
A. McKeesport Main Plant — Identified Conditions
The McKeesport Main Plant is the Target's principal operating facility and the site presenting the most significant identified environmental liabilities. The facility is located at 2200 Iron Works Boulevard, McKeesport, Pennsylvania 15132, on an approximately 12-acre parcel that has been used for industrial purposes since the early twentieth century. ACC has operated at the facility since 1987, following acquisition from Keystone Metalworks (now defunct), which had used the site for steel fabrication operations.
Phase I ESA Findings. The Phase I ESA prepared by TerraVerde, dated August 15, 2022, identified two Recognized Environmental Conditions ("RECs") and one Historical Recognized Environmental Condition ("HREC") at the McKeesport facility:
• REC 1: Evidence of releases from historical pigment manufacturing and solvent handling operations, including staining and odors in the vicinity of Building C and the former solvent storage area, suggesting potential subsurface contamination by volatile organic compounds ("VOCs") and heavy metals.
• REC 2: Potential impacts to groundwater from historical operations, based on the site's proximity to the Youghiogheny River and the known shallow groundwater table in the McKeesport industrial corridor, combined with the absence of comprehensive subsurface investigation data.
• HREC: A 1994 release associated with three former underground storage tanks ("USTs"), which were removed in 1993. The release was addressed under the Pennsylvania Land Recycling and Environmental Remediation Standards Act (35 P.S. §§ 6026.101–6026.908) ("Act 2"), and a No Further Action ("NFA") letter was issued by the Pennsylvania Department of Environmental Protection ("PA DEP") in May 2001 under the Statewide Health Standard for soils. This condition was classified as an HREC because the release was addressed to the satisfaction of the applicable regulatory authority.
Phase II ESA Findings. Based on the RECs identified in the Phase I ESA, TerraVerde conducted a Phase II subsurface investigation at the McKeesport facility, which commenced on September 12, 2022, with field sampling completed on September 26, 2022. Analytical results were received from Keystone Analytical Laboratories on October 10, 2022. The Phase II investigation confirmed the presence of several constituents of concern at concentrations exceeding or approaching applicable regulatory standards:
• Toluene in Groundwater at Monitoring Well MW-3: Detected at 1,420 µg/L. The applicable Pennsylvania Act 2 Statewide Health Standard for toluene in groundwater is 1,000 µg/L. This represents a 42% exceedance of the applicable standard, confirming a groundwater pollution condition requiring further evaluation and potential remediation.
• Xylene in Groundwater at Monitoring Well MW-3: Detected at 8,200 µg/L. The applicable Act 2 Statewide Health Standard for xylenes in groundwater is 10,000 µg/L. While this concentration is below the applicable standard, the detection is noteworthy because it indicates the presence of a commingled solvent plume in the vicinity of MW-3 and may warrant continued monitoring.
• Tetrachloroethylene (PCE) in Soil at Boring SB-7: Detected at 3.8 mg/kg. The Act 2 Statewide Health Standard for PCE in soil is 2.4 mg/kg (residential) and 14 mg/kg (non-residential). The detected concentration exceeds the residential standard by approximately 58% but remains below the non-residential standard. Given that the site is currently used for industrial purposes, the non-residential standard is the applicable benchmark; however, a change in land use could trigger the more restrictive residential standard.
• Lead in Soil at Boring SB-14: Detected at 680 mg/kg. The Act 2 Statewide Health Standard for lead in soil is 450 mg/kg (residential) and 1,000 mg/kg (non-residential). The detected concentration exceeds the residential standard by approximately 51% but is below the non-residential standard. As with PCE, the non-residential standard is currently applicable, but future land use changes could implicate the residential standard.
• Trichloroethylene (TCE) in Sub-Slab Soil Gas Beneath Building C: Detected at 42 µg/m³. The applicable PA DEP vapor intrusion screening level for TCE in sub-slab soil gas is 21 µg/m³. The detected concentration represents a 100% exceedance of the screening level, indicating the presence of an active vapor intrusion pathway into Building C. This finding is particularly significant because it implicates potential human health exposure risks for current building occupants (ACC employees) and potential regulatory obligations to investigate and mitigate the vapor intrusion condition.
Estimated Remediation Costs. TerraVerde prepared a preliminary remediation cost estimate dated October 18, 2022, which estimates the cost of addressing the confirmed groundwater contamination and vapor intrusion pathway at McKeesport at between $1.2 million and $2.8 million. This range encompasses groundwater treatment (likely involving a combination of in-situ chemical oxidation and monitored natural attenuation) and the installation of a sub-slab depressurization ("SSD") system beneath Building C to mitigate vapor intrusion.
Asbestos-Containing Materials. The Phase I ESA and a limited asbestos survey identified asbestos-containing materials ("ACM") at the McKeesport facility, including approximately 2,400 linear feet of asbestos pipe insulation in Buildings A and B and approximately 14,000 square feet of asbestos-containing floor tiles in Building A. The ACM is presently managed under an operations and maintenance ("O&M") plan and is in generally fair condition, but future renovation or demolition activities would necessitate abatement. Estimated abatement costs range from $180,000 to $310,000.
Lead-Based Paint. Lead-based paint ("LBP") was identified in the site office building, which dates to approximately 1955 construction. The LBP is present primarily on interior surfaces (door frames, window sashes, and trim) and is generally in fair to poor condition with localized deterioration. Estimated abatement costs range from $45,000 to $85,000.
B. Charleroi Specialty Coatings Plant
The Charleroi Specialty Coatings Plant is located at 450 Industrial Park Road, Charleroi, Pennsylvania 15022. The Phase I ESA prepared by TerraVerde, dated August 18, 2022, identified no RECs, Controlled Recognized Environmental Conditions ("CRECs"), or HRECs at this facility. The site is a relatively modern facility constructed in 1998 within a planned industrial park, and the Phase I assessment revealed no evidence of recognized environmental conditions. Accordingly, no Phase II investigation was conducted or recommended at Charleroi. This facility presents minimal environmental risk for purposes of the PLL coverage analysis.
C. Clarksburg Resin Blending Facility
The Clarksburg Resin Blending Facility is located at 1875 Route 50 West, Clarksburg, West Virginia 26301. This is a leased facility; ACC occupies the premises under a triple-net lease with Mountainview Properties LLC as landlord. The lease term runs from January 1, 2015 through December 31, 2029, and the lease imposes on the tenant (ACC) an obligation to remediate contamination caused by the tenant's operations.
Phase I ESA Findings. The Phase I ESA prepared by TerraVerde, dated August 22, 2022, identified one CREC and one REC:
• CREC: Residual diesel-range organics in subsurface soils associated with a historical UST release that was addressed under the West Virginia Department of Environmental Protection ("WV DEP") Underground Storage Tank program (WV DEP Site ID: WVUST-2012-04887). The release was remediated to the satisfaction of WV DEP, and institutional controls were recorded at the Harrison County Clerk's Office (Book 1245, Page 312). The institutional controls restrict certain land uses and require maintenance of the existing building slab as an engineered barrier over residual impacted soils. This condition is classified as a CREC because institutional controls remain in place.
• REC: Visible staining on the concrete floor in the northeast corner of the warehouse, observed in the vicinity of a drum storage area where ACC stores resin blending feedstocks, including various organic solvents. The staining suggests a potential release of chemical substances to the subsurface and warranted further investigation.
Phase II Investigation — Results Pending. Based on the REC identified at Clarksburg, TerraVerde conducted a Phase II subsurface investigation from October 3 through October 7, 2022. Soil and groundwater samples were collected and submitted to Keystone Analytical Laboratories in Monroeville, Pennsylvania, for analysis. As of the date of this letter, the analytical results have not been received. Results were initially expected by approximately October 28, 2022, but the laboratory has not yet issued its final report. C&H will review and transmit the Clarksburg Phase II results to Whitfield & Calder and Ironclad Specialty promptly upon receipt.
Preliminary Remediation Cost Estimate. In the event that the Phase II results confirm contamination at Clarksburg, TerraVerde has provided a preliminary range of estimated remediation costs: $350,000 to $750,000 for soil excavation and off-site disposal, with an additional $150,000 to $400,000 if groundwater contamination is identified.
Lease Considerations. As noted, the Clarksburg facility is leased. The triple-net lease structure allocates to the tenant the obligation to remediate tenant-caused contamination. The legacy diesel contamination (the CREC) predates ACC's tenancy and is a pre-existing landlord condition subject to institutional controls. The allocation of responsibility for any newly discovered contamination attributable to ACC's operations, as distinguished from pre-existing conditions, may become a point of dispute between ACC (or Crestline as successor) and the landlord.
D. Weirton Warehouse & Distribution Center
The Weirton Warehouse & Distribution Center is located at 600 Commerce Way, Weirton, West Virginia 26062. This is also a leased facility; ACC occupies the premises under a double-net lease with Northern Panhandle Realty Corp. as landlord. The lease term runs from March 1, 2018 through February 28, 2028. Notably, the lease is silent on environmental obligations beyond a general requirement that the tenant comply with applicable law.
Phase I ESA Findings. The Phase I ESA prepared by TerraVerde, dated August 25, 2022, identified one CREC and a de minimis condition:
• CREC: The Weirton facility was formerly enrolled in the West Virginia Voluntary Remediation and Redevelopment Program ("VRDP"), and a Certificate of Completion was issued by WV DEP in September 2015. Engineering and institutional controls remain in place, including a deed restriction recorded at the Hancock County Clerk's Office (Book 487, Page 89). The institutional controls restrict groundwater use and require maintenance of the existing surface cap.
• De Minimis Condition: A hydraulic fluid stain of approximately four square feet was observed on the warehouse floor near the loading dock area. This condition was assessed as de minimis and does not constitute a REC.
No Phase II investigation was conducted or recommended at the Weirton facility.
E. Aggregate Environmental Liability Estimate
Based on the foregoing findings, C&H and TerraVerde have developed the following aggregate environmental liability estimate for the four covered locations:
These estimates are preliminary and subject to revision based on the pending Clarksburg Phase II results, further delineation of the McKeesport groundwater plume, and the ultimate remediation approach approved by the applicable regulatory agencies. Actual costs could exceed these estimates if, for example, contamination is more widespread than currently understood, if regulatory agencies require more aggressive remediation approaches, or if third-party claims are asserted.
IV. Detailed Comments on Indicative Terms — Coverage Gaps and Requested Modifications
We turn now to our detailed analysis of the indicative PLL policy terms and the specific modifications we request for Ironclad Specialty's consideration. Our comments are organized by topic and presented in order of priority, beginning with the issues of greatest significance to Crestline.
A. Known Conditions Exclusion
The known conditions exclusion is, in our assessment, the most significant coverage gap in the Indication and the issue of paramount importance to Crestline.
As we understand the indicative terms, the proposed policy would exclude from coverage any "pollution condition" that is "known" to the insured as of the policy inception date. The Indication does not provide a complete definition of "known," but based on our review of Ironclad Specialty's standard policy form language (Ironclad Form PLL-2021, Rev. 04/2022), we understand that a pollution condition is generally deemed "known" if it has been identified in, or is reasonably inferable from, any environmental assessment, report, investigation, or correspondence provided to or available to the insured, its agents, or its consultants prior to the policy inception date.
This definition poses a fundamental problem in the context of the Transaction. The Phase I and Phase II ESAs, and C&H's comprehensive diligence summary, were transmitted to Whitfield & Calder via the insurance submission package for the express purpose of obtaining PLL coverage. These materials identify specific contamination at the McKeesport facility — including the toluene groundwater exceedance at monitoring well MW-3, the PCE in soil at boring SB-7, the lead in soil at boring SB-14, and the TCE vapor intrusion condition beneath Building C — as well as the Clarksburg CREC (legacy diesel contamination with institutional controls). Under the known conditions exclusion as currently drafted, these conditions would be excluded from coverage.
The practical consequence is that the most significant environmental risks associated with the Transaction — those conditions that have been specifically identified and quantified, and that are driving both the environmental risk allocation negotiations in the SPA and the decision to procure PLL insurance — would fall outside the scope of coverage. This result would defeat the primary purpose for which Crestline is seeking the PLL policy. Crestline's environmental due diligence has been conducted precisely to identify and characterize these conditions so that they can be managed through a combination of contractual protections and insurance. An exclusion that penalizes Crestline for having performed thorough diligence is, in practical terms, an exclusion that renders the policy of limited value.
We recognize that known conditions exclusions serve a legitimate underwriting function — they prevent moral hazard and adverse selection by ensuring that insureds do not purchase coverage for liabilities they already intend to incur. However, the environmental risks at McKeesport are not fixed or fully quantified. The $1.2 million to $2.8 million remediation cost estimate is a preliminary range, and actual costs could be substantially higher depending on the ultimate extent of contamination, the remediation approach mandated by PA DEP, the duration of groundwater treatment, and whether third-party bodily injury or property damage claims are asserted. It is precisely this "tail risk" — the risk that actual liabilities will exceed current estimates — that the PLL policy should address.
Requested Modification. We request that Ironclad Specialty remove or substantially narrow the known conditions exclusion. Specifically, we propose one of the following alternatives, listed in order of preference:
(a) Full removal of the known conditions exclusion, with coverage for all identified and unidentified pollution conditions at the covered locations, subject to appropriate pricing adjustments (i.e., an increased premium reflecting the known risk profile).
(b) Coverage for known conditions subject to a higher SIR or "cost cap" sublimit. Under this approach, the policy would provide coverage for remediation and third-party costs arising from known conditions, but only after the insured has borne a higher retention amount (e.g., $500,000 to $750,000 per known-condition claim, as compared to the standard $250,000 SIR) or after aggregate expenditures for known conditions exceed a specified cost cap threshold (e.g., $3.0 million, approximating the midpoint of the current remediation cost estimate).
(c) Coverage for known conditions limited to claims arising from migration, exacerbation, or third-party liability. Under this approach, first-party cleanup costs for known conditions within the scope of the current remediation cost estimate would remain the insured's responsibility, but the policy would cover: (i) costs arising from the migration or worsening of known conditions beyond current delineated boundaries or concentrations; (ii) third-party bodily injury claims attributable to known conditions (e.g., worker exposure to TCE vapors at Building C); and (iii) third-party property damage claims (e.g., off-site groundwater contamination affecting adjacent properties).
We believe any of these alternatives would appropriately balance Ironclad Specialty's underwriting concerns with Crestline's need for meaningful coverage, and we are prepared to discuss these options in greater detail with the Ironclad underwriting team.
B. Pre-Existing Contamination Definition
Closely related to the known conditions exclusion, but conceptually distinct, is the definition of "pre-existing pollution condition" in the indicative terms. As we understand the proposed definition, a "pre-existing pollution condition" encompasses not only contamination that is known from the Phase I and Phase II diligence reports, but also any contamination that existed prior to the policy inception date — even if that contamination is not discovered until after inception — if it is subsequently determined to have been present at or before that date.
This definition creates an unreasonable gap in coverage. If applied literally, it would mean that legacy contamination from ACC's 35-plus years of industrial operations at the McKeesport facility (dating back to 1987), or from the site's prior use as a steel fabrication facility by Keystone Metalworks prior to 1987, would be excluded from coverage whenever it is discovered — simply because the contamination predated the policy inception. This is precisely the category of risk that the PLL policy is designed to address: undiscovered legacy contamination that may surface during future operations, renovation, redevelopment, or regulatory investigation.
The historical context underscores the magnitude of this risk. The McKeesport site was used for steel fabrication by Keystone Metalworks for decades prior to ACC's acquisition in 1987. Chemicals of concern associated with steel fabrication and surface coating operations — including VOCs, heavy metals (lead, chromium, zinc), polycyclic aromatic hydrocarbons, and petroleum constituents — may be present in subsurface soils and groundwater at locations not investigated during the Phase II ESA. The 1993 UST removal and subsequent 1994 Act 2 remediation addressed only a limited portion of the site (the former UST area), and the resulting NFA letter applies only to the specific area of concern delineated in the Act 2 process. Significant portions of the McKeesport property — including areas beneath active production buildings, former waste handling areas, and upgradient parcels — have not been subject to subsurface investigation.
Requested Modification. We request that the pre-existing contamination definition be revised to provide affirmative coverage for pre-existing conditions discovered after the policy inception date, using a "Discovery trigger" approach. Under this framework, coverage would be triggered by the first discovery of a previously unknown pre-existing pollution condition during the policy term, regardless of when the contamination originated. At a minimum, we request:
(a) Coverage for previously unknown pre-existing pollution conditions (i.e., conditions not identified in or reasonably inferable from the Phase I and Phase II ESAs or other diligence materials provided to Ironclad Specialty); and
(b) Coverage for the worsening, migration, or exacerbation of known pre-existing conditions beyond the levels identified and delineated in the diligence reports (e.g., if toluene concentrations at McKeesport increase above currently measured levels, or if the groundwater plume migrates beyond the currently delineated area).
C. Vapor Intrusion Coverage
The indicative terms appear to contemplate the inclusion of vapor intrusion claims within the scope of coverage, but subject to a sublimit. The specific sublimit amount is not stated in the Indication and remains to be determined during formal underwriting.
The significance of vapor intrusion coverage in the context of this Transaction cannot be overstated. As discussed in Section III.A above, the Phase II investigation at McKeesport detected TCE in sub-slab soil gas beneath Building C at a concentration of 42 µg/m³, which is exactly double the PA DEP vapor intrusion screening level of 21 µg/m³. This finding indicates an active vapor intrusion pathway through which TCE vapors are migrating from subsurface contamination (likely a dissolved-phase groundwater plume or residual soil source) into the indoor air of Building C.
The implications of this finding are twofold:
First, from a regulatory perspective, the vapor intrusion exceedance will likely trigger PA DEP review and potential enforcement action. PA DEP's vapor intrusion guidance (Technical Guidance Document No. 261-0300-101, as amended) requires that vapor intrusion conditions exceeding screening levels be further evaluated and, if necessary, mitigated. Remediation measures — principally the installation of a sub-slab depressurization system — are included in the $1.2 million to $2.8 million remediation cost estimate for McKeesport. However, regulatory proceedings under Act 2 for vapor intrusion remediation can be protracted, technically complex, and subject to evolving regulatory standards, and actual costs may exceed current estimates.
Second, from a liability perspective, the vapor intrusion condition creates a basis for potential third-party bodily injury claims. TCE is classified as a probable human carcinogen (EPA IRIS assessment, 2011) and is associated with adverse health effects including liver damage, kidney damage, and increased cancer risk at chronic low-level exposures. ACC employees currently working in Building C, as well as any future occupants, may have been or may be exposed to TCE vapors at concentrations above health-protective levels. Such exposures could give rise to personal injury tort claims, including claims for medical monitoring, property damage, or diminution in value.
Vapor intrusion is, in our assessment, among the highest-profile environmental liabilities in this Transaction. It implicates both regulatory cleanup obligations and potential tort liability, and it is the single environmental issue most likely to generate claims during the 10-year policy term. Any sublimit on vapor intrusion coverage would, in practical effect, cap the available insurance protection for the liability that presents the greatest risk.
We also note that C&H has prepared a separate Vapor Intrusion Risk Assessment Memorandum dated October 16, 2022, which was included in the insurance submission package. That memorandum provides additional detail on the vapor intrusion pathway, exposure modeling, and risk characterization.
Requested Modification. We request that the PLL policy provide explicit, full-limits coverage for vapor intrusion claims — encompassing both cleanup costs (including SSD system installation, operation, and maintenance, as well as indoor air monitoring) and third-party bodily injury and property damage claims — without any sublimit. If Ironclad Specialty determines that a sublimit for vapor intrusion is non-negotiable from an underwriting standpoint, we request that the sublimit be set at no less than $5,000,000 per occurrence, with a corresponding aggregate sublimit of no less than $7,500,000.
D. Defense Cost Treatment
The Indication is ambiguous as to the treatment of defense costs under the proposed policy. Specifically, it is unclear whether defense costs — including the costs of retaining environmental counsel, expert consultants, and technical advisors in connection with regulatory proceedings, enforcement actions, or third-party litigation — are included within the stated policy limits (i.e., defense costs erode the $15 million aggregate and $10 million per occurrence limits) or are provided in addition to the stated limits (i.e., "defense outside limits" or "DOL").
This distinction has significant practical consequences. Environmental regulatory proceedings — particularly Act 2 remediation proceedings in Pennsylvania and VRDP proceedings in West Virginia — are inherently complex and lengthy. They typically involve multiple phases of investigation, feasibility analysis, remedial design, remedial implementation, and long-term monitoring, each of which may require the engagement of environmental counsel and technical experts. Third-party bodily injury claims arising from environmental contamination (including vapor intrusion claims) are similarly complex and may involve extensive scientific and medical expert testimony, epidemiological studies, and multi-year litigation.
If defense costs erode the policy limits, the effective indemnity coverage available for actual remediation expenditures and third-party claim payments is correspondingly reduced. Depending on the complexity and number of claims, defense costs could consume a significant portion of the available limits, leaving inadequate coverage for the underlying liabilities. In our experience, defense costs in environmental regulatory proceedings and related tort litigation commonly range from 15% to 35% of total claim costs, and in contested matters, they can exceed 50%.
Requested Modification. We request confirmation that defense costs under the PLL policy are provided outside of and in addition to the stated policy limits. If defense outside limits is not available, we request one of the following alternatives:
(a) A separate defense cost sublimit (e.g., $3,000,000) that does not erode the indemnity limits; or
(b) An increase in the aggregate policy limit from $15,000,000 to $20,000,000 to account for anticipated defense cost erosion, with the per-occurrence limit increased proportionally to $13,000,000.
E. Asbestos and Lead-Based Paint Coverage
The indicative terms list asbestos and lead-based paint as exclusions, or as conditions subject to a separate exclusion endorsement. We understand that this is a standard feature of many PLL policy forms and that asbestos and LBP exclusions reflect the Carrier's desire to avoid coverage for liabilities that are often addressed through specialized abatement programs rather than traditional environmental remediation.
However, the environmental diligence for this Transaction has specifically identified ACM and LBP at the McKeesport facility. As detailed in Section III.A above, the McKeesport site contains approximately 2,400 linear feet of asbestos pipe insulation in Buildings A and B, approximately 14,000 square feet of asbestos-containing floor tiles in Building A, and LBP in the office building (circa 1955 construction). Combined estimated abatement costs range from $225,000 to $395,000.
While these materials are presently maintained under management-in-place programs (an O&M plan for ACM and a lead management plan for LBP), future abatement obligations may arise in several scenarios: (a) planned renovation or expansion of Buildings A or B that would disturb ACM; (b) deterioration of ACM or LBP to a condition requiring removal under applicable NESHAP or OSHA standards; (c) demolition of existing structures; or (d) third-party claims alleging exposure-related injury. In any of these scenarios, the asbestos and LBP exclusions would eliminate coverage for what could be a material liability.
Requested Modification. We request that asbestos and lead-based paint coverage be included in the PLL policy, at a minimum as a sublimit endorsement. Our proposed sublimit for combined asbestos and LBP coverage is $2,000,000. This sublimit would cover both first-party abatement costs and third-party claims arising from ACM or LBP at the covered locations.
F. Coverage for Leased Facilities
Two of the four covered locations — the Clarksburg Resin Blending Facility and the Weirton Warehouse & Distribution Center — are leased by ACC rather than owned. The treatment of leased facilities under the PLL policy requires clarification, as the lease structures at these locations create distinct insurance coverage issues.
Clarksburg. The Clarksburg facility is occupied under a triple-net lease from Mountainview Properties LLC. The lease obligates the tenant (ACC) to remediate contamination caused by the tenant's operations. The legacy diesel contamination identified as a CREC (WV DEP Site ID: WVUST-2012-04887) is a pre-existing landlord condition with institutional controls and predates ACC's occupancy of the premises. If the pending Phase II investigation reveals additional contamination attributable to ACC's resin blending operations, the lease would allocate remediation responsibility to ACC. Conversely, if newly discovered contamination is attributable to pre-existing conditions or conditions caused by the landlord or prior tenants, responsibility may be disputed.
Weirton. The Weirton facility is occupied under a double-net lease from Northern Panhandle Realty Corp. The lease is notably silent on environmental obligations beyond a general requirement that the tenant comply with all applicable laws and regulations. The Weirton site is a former VRDP site with ongoing engineering and institutional controls. The allocation of environmental responsibility between landlord and tenant at Weirton is ambiguous under the lease, creating potential for disputes and claims between the parties.
In both cases, Crestline (as successor to ACC's lease obligations) may face environmental claims from multiple directions: regulatory agencies may mandate cleanup regardless of the source of contamination; landlords may assert claims against ACC for contamination affecting the leased premises; and third parties may bring claims against ACC as the current occupant and operator. The PLL policy should provide coverage in each of these scenarios.
Requested Modification. We request that the policy explicitly address coverage for pollution conditions at leased facilities, including:
(a) First-party cleanup obligations arising under the terms of the applicable lease (including contractual remediation obligations under the Clarksburg triple-net lease);
(b) Third-party claims asserted by landlords against the insured tenant in connection with pollution conditions at the leased premises; and
(c) Regulatory cleanup costs mandated by federal, state, or local environmental agencies at leased facilities, irrespective of whether the pollution condition was caused by the insured tenant, the landlord, or a prior occupant, subject to appropriate subrogation rights in favor of the Carrier against responsible third parties.
G. Self-Insured Retention (SIR)
The proposed SIR of $250,000 per claim is reasonable as a general matter and is within the range we would expect for a PLL policy of this type and scope. However, the appropriateness of the SIR should be evaluated in the context of the known conditions issue discussed in Section IV.A above.
If Ironclad Specialty agrees to provide coverage for known conditions (as requested), it is our understanding that a higher SIR for known-condition claims may be an appropriate mechanism to address the Carrier's increased risk. Crestline is prepared to accept a higher retention for claims arising from identified conditions as a compromise to obtain the broader coverage that is essential to the Transaction.
We also note that the draft SPA currently under negotiation includes a general representation basket/deductible of $475,000. A tiered SIR structure for the PLL policy that aligns with or complements the contractual risk allocation in the SPA would be advantageous from Crestline's perspective.
Requested Modification. If known conditions coverage is provided, Crestline would accept a tiered SIR structure as follows:
• $250,000 per claim for unknown/newly discovered pollution conditions; and
• $500,000 per claim (or up to $750,000 per claim) for claims arising from known/identified pollution conditions.
We request that Ironclad Specialty indicate whether a tiered SIR structure would be acceptable and, if so, whether it would influence the premium, aggregate limits, or other policy terms.
H. Policy Limits Adequacy
The proposed policy limits of $15,000,000 aggregate and $10,000,000 per occurrence were established based on a preliminary risk profile provided during the initial Whitfield & Calder submission. In light of the environmental diligence findings summarized in Section III above, we offer the following observations:
The currently identified environmental liabilities are estimated at $1,925,000 to $4,345,000 in the aggregate. On their face, the proposed limits appear adequate to cover these identified conditions with significant headroom. However, the adequacy analysis must account for several factors that could increase the total environmental exposure:
• Unknown conditions. ACC has operated at the McKeesport facility for over 35 years, and the site has a longer industrial history dating back to the early twentieth century. The Phase II investigation sampled a limited number of locations and may not have identified all areas of contamination. Unknown conditions could materially increase remediation costs.
• Clarksburg Phase II results. The Clarksburg Phase II results remain pending. If significant contamination is confirmed, the preliminary estimate of $350,000 to $1,150,000 (soil plus groundwater) could increase the aggregate environmental liability substantially.
• Third-party claims. The aggregate estimate of $1.925 million to $4.345 million reflects primarily first-party cleanup costs. Third-party bodily injury and property damage claims — particularly claims related to vapor intrusion exposure — are not included in this estimate and could be significant.
• Regulatory escalation. If PA DEP or WV DEP require more aggressive remediation than currently anticipated, costs could increase materially.
We also note that the lender for the Transaction — Commonwealth National Bank, N.A. (Victoria Chen, Managing Director) — has conditioned the financing on satisfactory environmental due diligence or acceptable PLL insurance. The lender's comfort with the proposed $15 million aggregate limit has not yet been confirmed, and the lender may require higher limits as a condition of closing.
Requested Modification. We do not request a change to the proposed policy limits at this time. However, we reserve the right to request increased limits once the Clarksburg Phase II results are received and the full scope of environmental liabilities is known. We also reserve the right to request increased limits if required by Commonwealth National Bank as a condition of financing.
I. Additional Insured / Lender Requirements
Commonwealth National Bank, N.A. is providing a proposed $65 million senior secured term loan and a $20 million revolving credit facility to finance the Transaction. The credit agreement (currently in draft) is expected to require that the lender be named as an additional insured or loss payee under the PLL policy, and that certain lender-protective endorsements be included.
Requested Modification. We request that the PLL policy:
(a) Permit the addition of Commonwealth National Bank, N.A. (and its successors and assigns) as an additional insured or loss payee, as may be required under the terms of the credit facility;
(b) Include a lender's loss payable endorsement in a form reasonably acceptable to Commonwealth National Bank; and
(c) Include non-cancellation notice provisions requiring the Carrier to provide no less than sixty (60) days' prior written notice to Commonwealth National Bank before any cancellation, material modification, or non-renewal of the policy.
J. Successor Liability / Change of Ownership
The Transaction is structured as a stock purchase, pursuant to which Crestline will acquire 100% of the outstanding common stock of ACC. Following the closing, ACC will continue to exist as a Pennsylvania corporation and will become a wholly-owned subsidiary of Crestline. ACC's assets, liabilities, and operations — including its environmental liabilities — will remain with the entity.
Because the PLL policy is being procured in connection with the stock acquisition, it is essential that the policy provide coverage for claims arising from ACC's pre-closing operations and environmental conditions, regardless of the change in share ownership that occurs at closing. In addition, given that Crestline is a portfolio company of Briarwood Capital Partners LP (Fund IV), it is foreseeable that ACC or Crestline may undergo subsequent ownership changes during the 10-year policy term (e.g., a secondary sale, recapitalization, or initial public offering).
Requested Modification. We request:
(a) Confirmation that the policy covers claims arising from ACC's pre-closing operations and environmental conditions, without any interruption or limitation by reason of the stock purchase transaction;
(b) Confirmation that the policy does not terminate, lapse, or become voidable upon the closing of the Transaction or upon any subsequent change of ownership of ACC or Crestline during the policy term; and
(c) Confirmation that no re-underwriting, re-evaluation, or additional premium will be required in connection with any change of ownership of ACC or Crestline during the policy term.
V. Relationship Between PLL Coverage and Contractual Risk Allocation
We think it important to bring to Ironclad Specialty's attention the broader transactional context in which the PLL policy will function.
Crestline is simultaneously negotiating the environmental indemnification and escrow provisions of the Stock Purchase Agreement with the Seller (through the Seller's counsel, Hargrove, Dalton & Speer LLP). The parties' respective positions on environmental risk allocation remain significantly apart:
The $2.5 million gap in the proposed escrow amount, the significant disagreement over the indemnity cap (uncapped versus $3.5 million), and the four-year disparity in the proposed survival periods reflect fundamentally different assessments of environmental risk. The Seller contends that the identified conditions are manageable and that a modest escrow and capped indemnity are appropriate. Crestline, based on the diligence findings summarized herein, believes the environmental risk profile warrants more robust contractual protections.
PLL insurance is being evaluated by Crestline as a potential mechanism to bridge this gap. If the PLL policy provides sufficiently robust coverage — particularly with respect to the known conditions, vapor intrusion, and pre-existing contamination issues discussed above — it may be possible to structure a compromise in which: (a) the contractual escrow amount is reduced (potentially to the Seller's proposed level or an intermediate amount) in exchange for PLL coverage that supplements or replaces the escrow function; and/or (b) the indemnity cap is reduced or the survival period shortened, on the basis that the PLL policy provides equivalent or superior protection over a longer term (10 years versus the 3–7 year survival period under discussion).
For this approach to succeed, however, the PLL policy must address the specific coverage gaps identified in Section IV above. The known conditions exclusion, in particular, is the critical issue: the conditions driving the contractual dispute — the toluene groundwater exceedance, the TCE vapor intrusion pathway, and the potential Clarksburg contamination — are the same conditions that the known conditions exclusion would remove from PLL coverage. If the exclusion remains in its current form, the PLL policy cannot serve as an effective bridge between the parties' positions, and the Transaction may require either a larger escrow (increasing the Seller's burden and potentially jeopardizing deal terms) or Crestline assuming greater uninsured environmental risk than is commercially acceptable to Briarwood Capital Partners.
We request that Ironclad Specialty consider this dual function of the PLL policy — protecting the Buyer against environmental liabilities and potentially facilitating the closure of the Transaction — when evaluating the requested modifications set forth in this letter.
VI. Pending Matters — Clarksburg Phase II Results
As noted in Section III.C above, the Phase II subsurface investigation at the Clarksburg Resin Blending Facility was conducted by TerraVerde from October 3 through October 7, 2022. Soil and groundwater samples were collected from multiple locations in and around the northeast warehouse area (the location of the identified REC) and submitted to Keystone Analytical Laboratories in Monroeville, Pennsylvania, for analysis of a comprehensive suite of analytes, including VOCs, semi-volatile organic compounds, metals, and diesel-range organics.
The analytical results were initially expected by approximately October 28, 2022, but have not been received as of the date of this letter (October 23, 2022). We understand from TerraVerde that Keystone Analytical has experienced a backlog in its sample processing queue, and we anticipate that results may be available within the next one to two weeks.
Upon receipt of the Clarksburg Phase II analytical results, C&H will promptly review and analyze the data, prepare a supplemental memorandum, and transmit the results and our analysis to Whitfield & Calder for inclusion in Ironclad Specialty's underwriting file. If the Phase II results confirm contamination at Clarksburg — and the preliminary estimate of $350,000 to $750,000 for soil remediation, with an additional $150,000 to $400,000 if groundwater is impacted, suggests that material contamination is plausible — the risk profile for the PLL policy may change in ways that affect premium, SIR, coverage terms, or limits.
We request that Ironclad Specialty preserve the terms of the current Indication pending receipt and supplementation of the Clarksburg Phase II data. We do not believe it is appropriate or prudent to proceed to formal underwriting or binding quotation until the Clarksburg data is available and the full environmental risk profile of the four covered locations is understood.
VII. Status of the Transaction and Underwriting Timeline
As of the date of this letter, negotiations between Crestline and the ACC shareholders regarding the Stock Purchase Agreement are ongoing. Significant open issues include the environmental risk allocation provisions discussed in Section V above, as well as other customary closing conditions. The Transaction is being managed by Crestline's deal team under the oversight of Briarwood Capital Partners, with C&H serving as environmental and land use counsel and Beatrice Holloway of this firm serving as lead transactional counsel.
The originally targeted closing date for the Transaction was November 30, 2022, with the objective of completing the acquisition within the fourth quarter of 2022. However, this timeline is subject to revision based on several factors, including: (a) the resolution of the environmental indemnification and escrow issues in the SPA; (b) the receipt and analysis of the Clarksburg Phase II results; (c) the outcome of the PLL insurance placement process; and (d) the satisfaction of Commonwealth National Bank's diligence and insurance requirements as conditions to the financing.
If the Transaction is paused, materially delayed, or terminated, C&H will promptly advise Whitfield & Calder, and we recommend that formal PLL underwriting not proceed until the Transaction path is clarified and the Clarksburg Phase II data is available. In the interim, we request that Ironclad Specialty extend the validity of the non-binding Indication for ninety (90) days from October 17, 2022 (i.e., through January 15, 2023) to accommodate potential delays in the Transaction timeline without requiring a new submission or re-underwriting.
VIII. Summary of Requested Modifications
For Ironclad Specialty's convenience, we summarize below all requested modifications to the indicative PLL policy terms:
1. Known Conditions Exclusion. Remove or substantially narrow the known conditions exclusion. Provide affirmative coverage for identified Phase II conditions, subject to a higher SIR or cost-cap sublimit for known conditions. Alternatively, provide coverage for migration, exacerbation, or third-party claims arising from known conditions.
2. Pre-Existing Contamination Definition. Revise the pre-existing contamination definition to include a discovery trigger for previously unknown conditions and coverage for worsening or migration of known conditions beyond levels identified in the diligence reports.
3. Vapor Intrusion Coverage. Provide explicit, full-limits vapor intrusion coverage (both cleanup costs and third-party bodily injury/property damage claims) without sublimit. If a sublimit is required, the minimum acceptable sublimit is $5,000,000 per occurrence.
4. Defense Costs. Confirm that defense costs are provided outside of and in addition to policy limits. If defense costs erode limits, increase the aggregate limit to $20,000,000 or establish a separate defense cost sublimit.
5. Asbestos and Lead-Based Paint. Include asbestos and lead-based paint coverage via a sublimit endorsement with a proposed combined sublimit of $2,000,000.
6. Leased Facilities. Confirm and provide explicit coverage for pollution conditions at leased facilities, including first-party cleanup obligations under lease terms, third-party landlord claims, and regulatory cleanup mandated at leased facilities irrespective of contamination source.
7. Tiered SIR Structure. If known conditions coverage is granted, implement a tiered SIR of $250,000 for unknown conditions and $500,000 to $750,000 for known conditions.
8. Lender Requirements. Permit the addition of Commonwealth National Bank, N.A. as additional insured or loss payee, with lender's loss payable endorsement and 60-day non-cancellation notice provisions.
9. Change of Ownership. Confirm that coverage survives the stock purchase change of ownership and that no re-underwriting or additional premium will be required upon subsequent ownership changes during the policy term.
10. Indication Validity. Extend the validity of the non-binding Indication for ninety (90) days from October 17, 2022 (i.e., through January 15, 2023).
IX. Request for Revised Indication
We respectfully request that Ironclad Specialty, through Whitfield & Calder, issue a revised non-binding indication reflecting the Carrier's responses to each of the requested modifications set forth above. For each modification, we request that Ironclad Specialty indicate: (a) whether the modification is acceptable; (b) if acceptable, any impact on premium, SIR, limits, or other policy terms; and (c) if not acceptable, the Carrier's reasoning and any alternative terms that might be available.
A revised indication addressing these items will enable Crestline to evaluate whether PLL insurance can serve as an effective component of the overall environmental risk allocation strategy for the Transaction. As discussed in Section V above, the availability of robust PLL coverage may directly influence the contractual terms of the Stock Purchase Agreement, and Crestline's ability to negotiate a commercially reasonable outcome with the Seller depends in significant part on the scope and adequacy of the insurance protection available.
We are available and willing to schedule a conference call with Sean McAllister (Ironclad Specialty underwriter), Douglas Whitfield and Lauren Petrov (Whitfield & Calder), and C&H to discuss the requested modifications in detail. We believe a direct discussion with the underwriter may be the most efficient way to resolve certain of the outstanding issues, particularly the known conditions exclusion and vapor intrusion coverage. Please advise of the Ironclad team's availability, and we will coordinate scheduling.
X. Confidentiality and Privilege
This letter and the environmental due diligence materials previously provided to Whitfield & Calder and Ironclad Specialty in connection with the proposed Transaction — including without limitation the Phase I and Phase II Environmental Site Assessments, the C&H environmental diligence summary memorandum, the Phase II results analysis memoranda, the vapor intrusion risk assessment memorandum, and the TerraVerde preliminary remediation cost estimates — are confidential and proprietary. These materials are protected by the attorney-client privilege and the attorney work product doctrine, and their transmission to Whitfield & Calder and Ironclad Specialty for purposes of the PLL insurance placement does not constitute a waiver of any applicable privilege or protection.
All materials should be used solely for the purpose of evaluating and placing the PLL policy in connection with the proposed acquisition of Allegheny Chemical Coatings, Inc. by Crestline Packaging Solutions LLC and may not be disclosed, distributed, or made available to any third party without the prior written consent of Calderwood & Harkness LLP and Crestline Packaging Solutions LLC. We request that Whitfield & Calder and Ironclad Specialty maintain all such materials in confidence and take appropriate measures to restrict access to individuals directly involved in the underwriting and placement of the PLL policy.
XI. Closing
We thank you and Douglas Whitfield for your diligent efforts in securing the Ironclad Specialty Indication on behalf of Crestline. The Indication provides a constructive starting point for the PLL placement, and we are optimistic that the modifications requested in this letter can be addressed through productive dialogue with the Ironclad underwriting team.
We invite any questions regarding the foregoing comments and request your response at the earliest practicable opportunity. Given the Transaction timeline considerations discussed in Section VII above, we would appreciate receiving Ironclad Specialty's preliminary responses to the requested modifications, even on an informal basis, within the next two to three weeks.
Should you have any questions or wish to discuss any aspect of this letter, please do not hesitate to contact me directly at the information provided below.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Harrison Caldwell Of Counsel Environmental & Land Use Practice
1900 Euclid Avenue, Suite 3200 Cleveland, Ohio 44115 Direct: (216) 555-8437
Email: hcaldwell@calderwoodharkness.com
Enclosures:
1. Phase II Results Analysis Memorandum — McKeesport Main Plant (C&H, dated October 14, 2022)