As we have become a more eco-friendly society—focusing on ways to protect and preserve our environment—the market for environmental risk coverages has emerged as one of the clear growth-oriented areas of the insurance industry. Although the product has been available for some time in the surplus lines market, recent disasters like the April 2010 Deepwater Horizon oil spill have brought increased attention from brokers, carriers, and consumers.
“Environmental insurance first became available almost 30 years ago,” explains Jim Hamilton, a vice president with Crump Environmental Brokerage, a division of Crump Insurance Services. “In the late 80s and early 90s environmental insurance coverage was expensive because it was fairly new and there was not a lot of actuarial data on which to base rates. Much of the underwriting then was done by environmental engineers who set prices subjectively. But as we got into the mid- to late-90s, more actuarial data became available, and as a result the pricing for environmental insurance became much more objective.”
Bob Hallenbeck, senior vice president of sales and marketing with XL Insurance, Environmental, concurs. “Back in the 1980s we relied a lot more on taking educated guesses based on science rather than the fact-based underwriting that we are able to do today,” he says. “We have much more factual experience in assessing potential exposures to, let’s say, an oil spill or groundwater pollution. Years of handling just about every kind of environmental claim imaginable has helped make pricing the product less complicated.”
As the ability to more accurately underwrite exposure and establish prices for environmental insurance has improved, the field of competitors has enlarged. “Within the last 6 years the number of carriers in the U.S. market has increased from about a half-dozen to about three dozen,” says Kristen Sebesky, assistant vice president of strategic marketing and distribution for the environmental division of Chartis. “Recognizing that environmental insurance can be a profitable line has led carriers to be more creative and get into the game. We definitely have seen an increase in competition.”
And while the increased competition generally is good for the market, it also can create some operational risks. Michele Schroeder, head of environmental risk management with Zurich in North America, emphasizes that carriers writing environmental insurance must be disciplined and avoid the temptation to make their coverage too broad in an effort to grow their businesses.
“You must find the right balance of terms and conditions with the right price to be able to pay for projected losses and be sustainable,” she says. “If you write this coverage too broadly, you will have too many claims and will not have collected enough money to pay them.”
Who Needs It?
What businesses should consider purchasing environmental insurance today?
“Generally speaking, most people would assume oil companies need this coverage, but it is everyone from real estate agents to contractors and developers to even pig farmers who also need to have it,” explains Laura Warren, president of State Insurance Group in Stuart.
“The spectrum of buyers is very broad,” Sebesky agrees. “It is more than just those who deal with hazardous materials at their facilities. Media coverage of environmental disasters is making business owners ask whether they are protected, and many are finding that they are not.”
“This market includes businesses of every size, small businesses to Fortune 500 companies,” adds Barbara Deas, division president, ACE Westchester Environmental. Deas’ colleague Craig Richardson, vice president and director, field operations with ACE Environmental, says, “Businesses in every industry have potential environmental exposures. They often purchase environmental insurance to address exposures that are normally excluded under more general insurance products.”
“The recognition of the additional exposure dates back to the 1980s,” Sebesky says. “Denials under traditional general liability policies caused businesses to realize that they have potential exposures that require the separate environmental insurance coverage.”
“As more and more exposures such as water quality, indoor air quality, bacteria and mold now are being characterized as environmental issues, it is much more important for a business to consider an environmental insurance policy in addition to a general liability policy,” adds Schroeder.
One unique aspect of environmental insurance coverage that distinguishes it from more traditional liability coverages is that it protects against environmental exposures that might be hidden. Hallenbeck explains that this is especially the case with what is called brownfield redevelopment, where a developer buys a piece of land that previously was used for some type of manufacturing and that might have unknown environmental contamination but is otherwise in a desirable location.
“In cases like this, environmental insurance helps to protect the developer from liability for possible hidden contamination at the site while at the same time enabling the property to be reclaimed for productive uses as a result of its good location,” Hallenbeck says.
As businesses have started to turn a keener eye toward assessing their need for environmental insurance and as claims-handling experience along with volumes of hard data have contributed significantly to a more fact-based underwriting process, environmental insurance has become more affordable. However, because the exposure each business faces is unique, the price range still varies greatly.
Chartis’ Sebesky says that a lower-risk business might be able to get $300,000 in coverage for only about $1,500 per year, although she cautions that the “typical limits are about $1 million, and pricing will depend on the specific client’s exposure.”
“We don’t work off a rate card for these policies,” adds XL’s Halllenbeck. “Policy formulation is unique to each circumstance and its risks. Costs could be as much as $20,000 to $25,000 a year for just $1 million of coverage for a riskier business; or a 5-year policy with $10 million in coverage could cost under $100,000 over the 5-year period. It just depends on the exposure.”
A small, local business like a flower shop, for instance “might pay as little as $1,500 to $2,500 for a $1 million/$2 million policy,” says Crump’s Hamilton. “It all just depends on the business location, the size of its operation and the potential environmental exposure.”
Hallenbeck explains that traditional environmental insurance policies tend to be multi-year in scope—usually 3, 5 or up to 10 years, depending on the projected length of the buyer’s project or business operation plan. “A land developer, for example, is going to want a longer term policy to give him time to do everything he needs to do and to maximize protection for the type of exposure he faces,” Hallenbeck says.
Hamilton explains that the unique, “manuscripted” environmental insurance policies come in basically two types: 1) Pollution and Legal Liability (PLL) and 2) Contractor Pollution Liability (CPL).
The PLL provides coverage at the actual physical location of the business and for all operations preformed there. The CPL, on the other hand, provides coverage for work that the policyholder performs, or has performed for him, at offsite locations. Examples include utility contractors who might damage a sewer or pipeline while digging a utility trench and even plumbers and electricians, since most of their work is done for clients off the main property of their business.
“Clients normally try to match their coverage to what they perceive their financial exposures to be. Alternatively, the amount of coverage can also be driven by applicable government regulations or the requirements of private contractual counter-parties,” adds Richardson from ACE.
In addition to tailored coverage and more affordable pricing, regulatory enforcement is playing a key role in the increased importance of environmental insurance policies.
“The Obama administration has added funding to the EPA, and that almost certainly promises that there will be an increase in regulatory enforcement,” explains XL’s Hallenbeck. “If nothing else it will probably lead CFOs in larger companies to realize that if more enforcement is possibly coming, they will need to be prepared to protect themselves from potentially significant financial risks.”
Zurich’s Schroeder agrees. “Water quality is a big issue, as is emissions from facilities and pollution control,” she says. “More regulation means it will be more expensive for companies to do business. They will have to monitor more of their activities from an environmental perspective than they ever have.”
“In 2011 the EPA has fined a number of power companies for not meeting coal fired plant emissions standards, and even federal correction institutes have been fined for having boilers that did not meet standards,” says Russ Morley, vice president of marketing with Organic Green Solutions, a biomass processing company based in Coral Springs.
“There definitely has been an increase in regulatory enforcement; and there are potentially new regulations coming,” adds Sebesky of Chartis. “Even new international regulations are becoming more publicized and may become relevant to U.S. companies that transact business internationally.”
The Florida Department of Environmental Protection (DEP) agrees that regulatory enforcement is important but emphasizes that its role is much broader. “Environmental protection goes beyond just issuing and collecting penalties. It is DEP’s responsibility to protect Florida’s environment through management and stewardship, as well as enforcing environmental laws,” says Dee Ann Miller, deputy press secretary for the Florida DEP. “Our regulation, inspection and data collection efforts are successful, and result in compliance rates that average more than 90 percent. By improving our regulatory processes to make them more consistent statewide, and increasing our focus on customer service, we will help Florida’s industries better understand and adhere to environmental regulations.”
Give Me a Reason
In weighing all of the potential environmental issues, there are many reasons for businesses to consider purchasing an environmental insurance policy.
“Environmental insurance is unique, but most people don’t yet have a full understanding of what the product can do,” explains Hallenbeck. “It always has been important but it has not always been appreciated as a protection because environmental exposure is often hidden. Taking time to learn more about the product can be very helpful. Environmental insurance solutions now are less expensive, so any business owner who feels he has any possibility of an environmental exposure can protect himself against significant costs for remediation while also possibly enabling a project that might otherwise not get off the ground.”
“In planning budgets for any business or company that emits anything other than oxygen, produces anything other than clean water, or stores or utilizes anything other than sand, there should be an expense line for environmental insurance,” adds Morley. “Having a contingency fund is good, but there are unforeseen circumstances that could halt operations, or through fines and lawsuits, literally bankrupt a business.”