Once in the realm of niche coverages requiring a lot of education and persuasion to get buyers interested, Environmental policies are now in high demand by a wide audience. Part of that is attributable to progress in the economic recovery, as more construction and development leads to a greater number of risks to insure.
But experts say it's not just an increase in the sheer number of projects: A greater percentage of clients are showing interest in Environmental cover as pricing remains favorable, and as insureds gain a better understanding of their exposures to potential loss.
“We’re seeing more traction,” says Louis G. Fey Jr., vice president of risk management for BancorpSouth Insurance Services in Baton Rouge, La. Clients, he says, are “starting to realize claims happen that are not covered [under General Liability policies]. And that's the way the industry tends to learn — the hard way.”
For example, the contractor field, he says, tends to be a “pretty close-knit community. Word gets around.”
For Contractors’ Pollution Liability (CPL) policies, Renee Miller, program manager for the Environmental Engineers Contractors & Consultant Group at Freberg Environmental Insurance, says coverage is being pursued more by non-environmental contractors due to contractual requirements. CPL, she says “is more affordable these days, there's quite a few markets offering it, and for the cost to cover that exposure to a contractor, it makes sense across the board.”
Likewise, for Site Pollution Liability, David Brereton — vice president, Environmental Impairment Liability program manager at Freberg — says, “I think folks are realizing how affordable it is, and that these kinds of things aren't covered under General Liability.” There is interest even among companies that have not traditionally thought about the coverage in the past, he adds: “There's really no limit to the range of facilities we’re asked to cover these days. Anything from a parking lot to cold storage to hotels and hospitality — it's really across the board.”
According to Marcel Ricciardelli, senior vice president, Environmental Division at Allied World, several factors are driving interest in Pollution Liability coverage. “We’re seeing lender requirements drive a lot of placement for Site Pollution Liability,” he says, partly because a lot of development is taking place in former industrial areas, such as Brooklyn, N.Y.
A second and related driver, he says, is that so much of the construction in these former industrial areas is multi-family rental and habitational. “People are worried,” he says, “and they’re thinking, ‘If we turn the earth and find pollution, we have coverage, but what do we do if there is contamination that seeps into the building after the fact?’ We’ve seen a lot of business in that space for long-term coverage.”
Craig Richardson, senior vice president, Chubb Environmental, says mergers and acquisitions activity — the high level of real estate transactions taking place — is also encouraging Site Pollution Liability take-up, as buyers seek to protect themselves against legacy pollution exposures from the companies they’re acquiring.
News reports about environmental hazards, from Legionella outbreaks in New York City this past summer to a number of pipeline leaks over the last few years, have also helped drive interest in insurance protections. “Open the newspaper, and there's often a story about a spill or something becoming polluted,” Brereton notes.
Richardson adds that over time, keeping Environmental coverage top-of-mind is becoming integrated into buyers’ risk management processes and procedures — making what was once a tougher sell more routine today: “As sales cycles go by, more people have purchased Environmental coverage, and it's [becoming] part of their insurance program on an annual basis now.”
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Competition and capacity
Those in the business of selling Environmental cover maintain that capacity is high and pricing is competitive. It's easier to underwrite and procure than it used to be, says Fey, and is readily available.
Drilling down into the various risks and coverages, however, shows some nuances in the marketplace. In AmWINS’ Fall 2015 “State of the Market” report, Joe Constantine, the brokerage's Environmental practice co-leader, compares pricing for the various Environmental risks and coverages to a pyramid.
“There's plenty of capacity at the bottom of the pyramid for writing traditional ‘vanilla’ Environmental contractors and consultants,” Constantine notes in the report. “That's not always the case as you get closer to the top of the pyramid, where there are more restrictions for tougher Environmental impairment risks and energy-related businesses.” This includes coverage for real estate transactions supporting lenders’ indemnity agreements associated with contaminated properties.
AmWINS adds that the past year has seen new managing general agents enter the market, along with a few standard markets. “While none of these new entrants have introduced anything truly unique, they are impacting pricing at the bottom of the pyramid,” the report states.
Richardson agrees that some new players are dabbling in Environmental, but are hardly transforming the marketplace. “They’ll start up an underwriting entity and have three to five people. And they’re just kind of what I call a ‘me, too!’ underwriter,” he says. “With this 'follow-the-leader' mentality, they’re not bringing much to the table.”
Ricciardelli says new carriers that have come in during the last year, as well as the managing general agents and managing general underwriters entering the market, have been thinning out the talent pool as demand for employees outpaces the ability to properly train experts. “It creates what I call ‘naive capacity,’” he explains. “Markets are willing to step into spaces they don't fully understand, and brokers and clients need to look carefully at carriers they’re partnering with. Do they have a risk control staff that can provide technical support? Do they really know the business?”
As far as this new capacity's impact on pricing, Ricciardelli says Environmental tends to follow the general casualty market: “Right now, overall pricing is not as robust in terms of therating increases we were getting a year or two ago. What we see is that you have to pick your spots.”
Ricciardelli adds that pricing pressure is more risk-to-risk rather than across one particular area. Pricing in CPL, for example, is particularly aggressive, he notes, with certain deals indicating that market players may not possess a deep understanding of the exposures involved.
For Site Pollution Liability risks, Brereton says some carriers are now willing to throw in coverages “that five years ago they might have gotten some money for, so there's broadening of coverage in addition to lower rates.”
In its “2016 Marketplace Realities” report, Willis says it expects rates this year to be minus-10% to flat for both CPL and Site Pollution Liability, but its analysts predict that capacity could tighten with some of the recent mergers — in particular, XL and Catlin and ACE and Chubb.
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Willis also says the frequency of Environmental claims continues to climb by 20% to 30% each year, with claims related to Indoor Air Quality (IAQ), such as mold and Legionella, on the rise. The brokerage continues to see ample capacity for most Environmental risks, but if trends in market consolidation and claims continue, a market hardening may not be far behind—something that could happen sooner for larger, layered programs.
Carriers likewise mentioned IAQ as an area they’re keeping an eye on. Ricciardelli says mold claims are picking up in the hospitality space: That industry suffered during the recession and slow recovery, and from 2008 to 2011 many hotels held back on spending on improvements to their properties. Now that purse strings have loosened and hotels are beginning to renovate, the work is uncovering mold issues that need to be addressed. Contractors on those types of projects are much more aware of mold, Legionella and other types of contamination issues, and they are either buying polices or pushing for owner-controlled CPL policies as a result.
Richardson says the healthcare industry is likewise facing IAQ issues as companies in that industry merge and move to a full-service campus model. “It's ultimately a habitational exposure,” Richardson says, noting that he tries to educate healthcare companies on areas of concern that arise from combining multiple facilities onto one location.
Fey sees increasing claims related to fallout from severe weather events, such as tornadoes. For example, a building could be destroyed that contains asbestos, and hazardous substances or chemicals could be released into the environment. “There's been an uptick in [claims] from catastrophic losses,” he says.
Marsh has previously warned of extreme examples of these types of losses after such major events as Superstorm Sandy. In these cases, sewage treatment plants or historically contaminated ground may become inundated by storm water, resulting in large losses to facilities and properties with otherwise environmentally benign operations. During Sandy, 10 treatment plants in New York reported partially treated or untreated sewage discharges into local waterways.
Claims issues from such events can be numerous, Marsh says, and include third-party liability from affected surrounding property owners; cleanup liability; claims viability, as the inability to access sites after a storm may result in delays in the reporting of a loss; and mold and IAQ issues during recovery and rebuilding.
Yet even with extra competition and increasing claims in some areas, experts are optimistic about their plans in the Environmental space. “What I find interesting is that each carrier has its own niche,” Ricciardelli says. “There are areas I don't want to go into that other carriers may want to.” He says Allied World is strong in construction and real estate, but he tries to manage capacity around catastrophic exposure — large tanks, pipelines, and tough chemical reactions with fire, fume and vapor exposures.
Richardson says Chubb's strategy is to meet a client's needs across the board, “from a Tank policy to the Fixed Site Premises Pollution Liability policy, all the way to the contractor area” for companies of all sizes. He's encouraged by the high level of interest in risk-mitigation products.
Fey says the increased demand for Environmental cover is also being driven by insurers increasingly excluding coverage from General Liability policies. “It's getting to the point where there are so many exclusions used the wrong way, you almost need a Pollution form to cover cases that probably should be covered under GL,” he says. He blames “overzealous and under-trained adjusters” for applying exclusions to GL policies in ways they were not intended to be applied.
Or, as Ricciardelli adds, “If you really want certainty on whether or not you have Pollution coverage, you should buy a Pollution policy.”
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