As we have become a more eco-friendly society—focusing on waysto protect and preserve our environment—the market forenvironmental risk coverages has emerged as one of the cleargrowth-oriented areas of the insurance industry. Although theproduct has been available for some time in the surplus linesmarket, recent disasters like the April 2010 Deepwater Horizon oilspill have brought increased attention from brokers, carriers, andconsumers.

“Environmental insurance first became available almost 30 yearsago,” explains Jim Hamilton, a vice president with Crump Environmental Brokerage, adivision of Crump Insurance Services. “In the late 80s and early90s environmental insurance coverage was expensive because it wasfairly new and there was not a lot of actuarial data on which tobase rates. Much of the underwriting then was done by environmentalengineers who set prices subjectively. But as we got into the mid-to late-90s, more actuarial data became available, and as a resultthe pricing for environmental insurance became much moreobjective.”

Bob Hallenbeck, senior vice president of sales and marketingwith XL Insurance,Environmental, concurs. “Back in the 1980s we relied a lot moreon taking educated guesses based on science rather than thefact-based underwriting that we are able to do today,” he says. “Wehave much more factual experience in assessing potential exposuresto, let's say, an oil spill or groundwater pollution. Years ofhandling just about every kind of environmental claim imaginablehas helped make pricing the product less complicated.”

As the ability to more accurately underwrite exposure andestablish prices for environmental insurance has improved, thefield of competitors has enlarged. “Within the last 6 years thenumber of carriers in the U.S. market has increased from about ahalf-dozen to about three dozen,” says Kristen Sebesky, assistantvice president of strategic marketing and distribution for theenvironmental division of Chartis. “Recognizing that environmental insurance can be aprofitable line has led carriers to be more creative and get intothe game. We definitely have seen an increase in competition.”

And while the increased competition generally is good for themarket, it also can create some operational risks. MicheleSchroeder, head of environmental risk management with Zurich in NorthAmerica, emphasizes that carriers writing environmentalinsurance must be disciplined and avoid the temptation to maketheir coverage too broad in an effort to grow their businesses.

“You must find the right balance of terms and conditions withthe right price to be able to pay for projected losses and besustainable,” she says. “If you write this coverage too broadly,you will have too many claims and will not have collected enoughmoney to pay them.”

Who Needs It?
What businesses should consider purchasing environmental insurancetoday?

“Generally speaking, most people would assumeoil companies need this coverage, but it is everyone fromreal estate agents to contractors and developers to even pigfarmers who also need to have it,” explains Laura Warren, presidentof StateInsurance Group in Stuart.

“The spectrum of buyers is very broad,” Sebesky agrees.“It is more than just those who deal with hazardous materials attheir facilities. Media coverage of environmental disasters ismaking business owners ask whether they are protected, and many arefinding that they are not.”

“This market includes businesses of every size, small businessesto Fortune 500 companies,” adds Barbara Deas, division president,ACE Westchester Environmental. Deas' colleague CraigRichardson, vice president and director, field operations withACEEnvironmental, says, “Businesses in every industry havepotential environmental exposures. They often purchaseenvironmental insurance to address exposures that are normallyexcluded under more general insurance products.”

“The recognition of the additional exposure dates back to the1980s,” Sebesky says. “Denials under traditional general liabilitypolicies caused businesses to realize that they have potentialexposures that require the separate environmental insurancecoverage.”

“As more and more exposures such as water quality, indoor airquality, bacteria and mold now are being characterized asenvironmental issues, it is much more important for a business toconsider an environmental insurance policy in addition to a generalliability policy,” adds Schroeder.

One unique aspect of environmental insurance coverage thatdistinguishes it from more traditional liability coverages is thatit protects against environmental exposures that might be hidden.Hallenbeck explains that this is especially the case with what iscalled brownfield redevelopment, where a developer buys a piece ofland that previously was used for some type of manufacturing andthat might have unknown environmental contamination but isotherwise in a desirable location.

“In cases like this, environmental insurance helps to protectthe developer from liability for possible hidden contamination atthe site while at the same time enabling the property to bereclaimed for productive uses as a result of its good location,”Hallenbeck says.

Pricing Considerations
As businesses have started to turn a keener eye toward assessingtheir need for environmental insurance and as claims-handlingexperience along with volumes of hard data have contributedsignificantly to a more fact-based underwriting process,environmental insurance has become more affordable. However,because the exposure each business faces is unique, the price rangestill varies greatly. 

Chartis' Sebesky says that a lower-risk business might be ableto get $300,000 in coverage for only about $1,500 per year,although she cautions that the “typical limits are about $1million, and pricing will depend on the specific client'sexposure.”

“We don't work off a rate card for these policies,” adds XL'sHalllenbeck. “Policy formulation is unique to each circumstance andits risks. Costs could be as much as $20,000 to $25,000 a year forjust $1 million of coverage for a riskier business; or a 5-yearpolicy with $10 million in coverage could cost under $100,000 overthe 5-year period. It just depends on the exposure.”

A small, local business like a flower shop, for instance “mightpay as little as $1,500 to $2,500 for a $1 million/$2 millionpolicy,” says Crump's Hamilton. “It all just depends on thebusiness location, the size of its operation and the potentialenvironmental exposure.”

Hallenbeck explains that traditional environmental insurancepolicies tend to be multi-year in scope—usually 3, 5 or up to 10years, depending on the projected length of the buyer's project orbusiness operation plan. “A land developer, for example, is goingto want a longer term policy to give him time to do everything heneeds to do and to maximize protection for the type of exposure hefaces,” Hallenbeck says.

Policy Types
Hamilton explains that the unique, “manuscripted” environmentalinsurance policies come in basically two types: 1) Pollution andLegal Liability (PLL) and 2) Contractor Pollution Liability(CPL).

The PLL provides coverage at the actual physical location of thebusiness and for all operations preformed there. The CPL, on theother hand, provides coverage for work that the policyholderperforms, or has performed for him, at offsite locations. Examplesinclude utility contractors who might damage a sewer or pipelinewhile digging a utility trench and even plumbers and electricians,since most of their work is done for clients off the main propertyof their business.

“Clients normally try to match their coverageto what they perceive their financial exposures to be.Alternatively, the amount of coverage can also be drivenby applicable government regulations or the requirementsof private contractual counter-parties,” adds Richardson fromACE.

Regulatory Enforcement
In addition to tailored coverage and more affordable pricing,regulatory enforcement is playing a key role in the increasedimportance of environmental insurance policies.

“The Obama administration has added funding to the EPA, and thatalmost certainly promises that there will be an increase inregulatory enforcement,” explains XL's Hallenbeck. “If nothing elseit will probably lead CFOs in larger companies to realize that ifmore enforcement is possibly coming, they will need to be preparedto protect themselves from potentially significant financialrisks.”

Zurich's Schroeder agrees. “Water quality is a big issue, as isemissions from facilities and pollution control,” she says. “Moreregulation means it will be more expensive for companies to dobusiness. They will have to monitor more of their activities froman environmental perspective than they ever have.”

“In 2011 the EPA has fined a number of power companies for notmeeting coal fired plant emissions standards, and even federalcorrection institutes have been fined for having boilers that didnot meet standards,” says Russ Morley, vice president of marketingwith OrganicGreen Solutions, a biomass processing company based in CoralSprings. 

“There definitely has been an increase in regulatoryenforcement; and there are potentially new regulations coming,”adds Sebesky of Chartis. “Even new international regulations arebecoming more publicized and may become relevant to U.S. companiesthat transact business internationally.”

The Florida Department ofEnvironmental Protection (DEP) agrees that regulatoryenforcement is important but emphasizes that its role is muchbroader. “Environmental protection goes beyond just issuing andcollecting penalties. It is DEP's responsibility to protectFlorida's environment through management and stewardship, as wellas enforcing environmental laws,” says Dee Ann Miller, deputy presssecretary for the Florida DEP. “Our regulation, inspection and datacollection efforts are successful, and result in compliance ratesthat average more than 90 percent. By improving ourregulatory processes to make them more consistent statewide, andincreasing our focus on customer service, we will help Florida'sindustries better understand and adhere to environmentalregulations.”

Give Me a Reason
In weighing all of the potential environmental issues, there aremany reasons for businesses to consider purchasing an environmentalinsurance policy.

“Environmental insurance is unique, but most people don't yethave a full understanding of what the product can do,” explainsHallenbeck. “It always has been important but it has not alwaysbeen appreciated as a protection because environmental exposure isoften hidden. Taking time to learn more about the product can bevery helpful. Environmental insurance solutions now are lessexpensive, so any business owner who feels he has any possibilityof an environmental exposure can protect himself againstsignificant costs for remediation while also possibly enabling aproject that might otherwise not get off the ground.”

“In planning budgets for any business or company that emitsanything other than oxygen, produces anything other than cleanwater, or stores or utilizes anything other than sand, there shouldbe an expense line for environmental insurance,” adds Morley.“Having a contingency fund is good, but there are unforeseencircumstances that could halt operations, or through fines andlawsuits, literally bankrupt a business.”