Environmental Insurance: Crucial Coverage In A VolatileClimate

What every broker should know to protect their clientsand themselves

In today's marketplace, firms in every sector from energy companiesand chemical manufacturers to financial institutions and realestate developers must regard environmental risk, includingenvironmental insurance, as a core element of their overall riskmanagement program.

Yet, environmental risk remains an area that isunder-represented by the greater brokerage community. Many brokersperceive environmental insurance to be highly specialized anddiscretionary, and therefore only appropriate in very specificsituations or transactions. This can be a costly oversight.

Environmental exposures are much more pervasive than generallybelieved. Brokers must look beyond the obvious exposures such asrusting drums filled with hazardous chemicals in the back lot of anabandoned factory when assessing their clients' environmentalinsurance needs.

For instance, manufacturers of microprocessors or computer chipsuse hazardous chemicals that, if stored or disposed of improperly,may result in significant cleanup, bodily injury or property damagecosts.

In another example, a water utility accidentally spilled lightlychlorinated drinking water into a stream, killing many fish andexposing the utility to potentially high-cost natural resourcedamage claims.

While environmental science is a complex subject, identifyingenvironmental exposures associated with a client's businessoperations is comparatively straightforward. Brokers caneffectively gauge a client's environmental risks, if they ask a fewsimple questions.

(1) First, brokers should determine if their clients handle oruse any hazardous materials, such as cleaning solvents, degreasersand fuels, in any aspect of their manufacturing, processing orwaste handling operations.

Whether or not hazardous substances are present in the endproduct, their use in day-to-day operations may create exposure toenvironmental liabilities associated with on- or off-site cleanupcosts and bodily injury and property damage claims.

Use of, or contact with hazardous materials is widespread.Manufacturers, food processors, car and truck dealerships,pharmaceutical companies, contractors, environmental engineering orconsulting firms, wholesale trade operations, mining companies, andlandfill owners/operators all have contact with hazardoussubstances in some aspect of their business or face exposure toother environmental risks and are known to purchase significantamounts of environmental insurance.

(2) Second, brokers should ask what steps customers take toensure that third-party hazardous waste haulers are in compliancewith federal and state environmental regulations.

Companies are ultimately liable for the improper disposal oftoxic waste, even if they use third-party refuse haulers.

Environmental insurance can cover the accidental release of apollutant during the waste disposal process, protecting insuredsfrom the potential financial impact of an environmentalproblem.

(3) Third, if the company handles hazardous materials, how doesit plan to pay for the associated cleanup costs, fines andpenalties, or third-party claims associated with a release ofcontaminants?

The financial and reputational costs of a toxic discharge intothe environment can be staggering. Take the case of a chemicaldistribution company that suffered a highway accident during aroutine shipment of benzene (a flammable liquid used as a solventand in the making of plastics, detergents, insecticides andpaints). The driver veered off the road while passing over a bridgefrom one state into another, leaking benzene into the surroundingenvironment. Consequently, 80,000 people were forced to flee theirhomes and businesses.

While no serious injuries were reported, many of those exposedcomplained of dizziness, headaches and burning eyes. Thousands offish and vegetation along the riverbank were destroyed by theaccident. The company paid $2.5 million in settlement costs, and anadditional $500,000 fund was set aside to reimburse residents whobelieved the spill increased their chances of getting cancer andother diseases.

An effective environmental insurance program can help protectcompanies from first- and third-party losses resulting from suchaccidental pollution releases.

(4) Brokers should also inquire if clients have exploredpotential legacy environmental liabilities inherited from a mergeror acquisition. Such inherited exposures can have a negative impacton a company's balance sheet.

Increasingly, parties in merger and acquisition transactions arerecognizing the value of insurance when reporting environmentalliabilities on financial statements. Environmental insurance canhelp companies mitigate uncertainties involving the disclosure andmanagement of legacy environmental risks, as well as aid inalleviating the effects of operational risks.

(5) Finally, brokers should determine if clients own or maintainunderground storage tanks.

Gas service stations, fuel distribution centers and garages,trucking operations, and convenience store chains commonly usestorage tanks. These businesses are liable for pollution conditionsemanating from storage tanks, including cleanup and correctiveaction expenses in the event of a release, as well as off-sitethird-party bodily injury and property damage claims. Storage tankliability insurance is available to cover such costly claims.

In today's business climate, environmental coverage warrants“core line” status. An effective environmental risk management andinsurance program can protect corporate assets, enhance a company'sdisclosure practices, and ensure shareholder confidence.

Given that much of the brokerage marketplace is not adequatelyaddressing the subject, engaging clients in a consultative fashionon environmental matters can help brokers distinguish themselvesfrom the competition.

By overlooking environmental insurance opportunities withintheir existing book of clients, brokers not only risk losingprofitable growth opportunities but also may expose themselves toprofessional liability risks that could significantly threatentheir business. In the event a client suffers a loss, new mold- andenvironmental-related damages exclusions on risk advisors'professional liability policies leave brokers unprotected forerrors and omissions claims should they be found to have failed toproperly address environmental risks.

By asking a few key questions, brokers can effectively assesstheir clients' environmental exposures, profitably grow their bookof business, and better insulate themselves from E&Oclaims.

Peter A. Gilbertson is the director of marketing, AIGEnvironmental in New York.

Reproduced from National Underwriter Edition, April 9, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.