Environmental Insurance: Crucial Coverage In A Volatile Climate

What every broker should know to protect their clients and themselves

In today's marketplace, firms in every sector from energy companies and chemical manufacturers to financial institutions and real estate developers must regard environmental risk, including environmental insurance, as a core element of their overall risk management program.

Yet, environmental risk remains an area that is under-represented by the greater brokerage community. Many brokers perceive environmental insurance to be highly specialized and discretionary, and therefore only appropriate in very specific situations or transactions. This can be a costly oversight.

Environmental exposures are much more pervasive than generally believed. Brokers must look beyond the obvious exposures such as rusting drums filled with hazardous chemicals in the back lot of an abandoned factory when assessing their clients' environmental insurance needs.

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

In another example, a water utility accidentally spilled lightly chlorinated drinking water into a stream, killing many fish and exposing the utility to potentially high-cost natural resource damage claims.

While environmental science is a complex subject, identifying environmental exposures associated with a client's business operations is comparatively straightforward. Brokers can effectively gauge a client's environmental risks, if they ask a few simple questions.

(1) First, brokers should determine if their clients handle or use any hazardous materials, such as cleaning solvents, degreasers and fuels, in any aspect of their manufacturing, processing or waste handling operations.

Whether or not hazardous substances are present in the end product, their use in day-to-day operations may create exposure to environmental liabilities associated with on- or off-site cleanup costs 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 or consulting firms, wholesale trade operations, mining companies, and landfill owners/operators all have contact with hazardous substances in some aspect of their business or face exposure to other environmental risks and are known to purchase significant amounts of environmental insurance.

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

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

Environmental insurance can cover the accidental release of a pollutant during the waste disposal process, protecting insureds from the potential financial impact of an environmental problem.

(3) Third, if the company handles hazardous materials, how does it plan to pay for the associated cleanup costs, fines and penalties, or third-party claims associated with a release of contaminants?

The financial and reputational costs of a toxic discharge into the environment can be staggering. Take the case of a chemical distribution company that suffered a highway accident during a routine shipment of benzene (a flammable liquid used as a solvent and in the making of plastics, detergents, insecticides and paints). The driver veered off the road while passing over a bridge from one state into another, leaking benzene into the surrounding environment. Consequently, 80,000 people were forced to flee their homes and businesses.

While no serious injuries were reported, many of those exposed complained of dizziness, headaches and burning eyes. Thousands of fish and vegetation along the riverbank were destroyed by the accident. The company paid $2.5 million in settlement costs, and an additional $500,000 fund was set aside to reimburse residents who believed the spill increased their chances of getting cancer and other diseases.

An effective environmental insurance program can help protect companies from first- and third-party losses resulting from such accidental pollution releases.

(4) Brokers should also inquire if clients have explored potential legacy environmental liabilities inherited from a merger or acquisition. Such inherited exposures can have a negative impact on a company's balance sheet.

Increasingly, parties in merger and acquisition transactions are recognizing the value of insurance when reporting environmental liabilities on financial statements. Environmental insurance can help companies mitigate uncertainties involving the disclosure and management of legacy environmental risks, as well as aid in alleviating the effects of operational risks.

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

Gas service stations, fuel distribution centers and garages, trucking operations, and convenience store chains commonly use storage tanks. These businesses are liable for pollution conditions emanating from storage tanks, including cleanup and corrective action expenses in the event of a release, as well as off-site third-party bodily injury and property damage claims. Storage tank liability insurance is available to cover such costly claims.

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

Given that much of the brokerage marketplace is not adequately addressing the subject, engaging clients in a consultative fashion on environmental matters can help brokers distinguish themselves from the competition.

By overlooking environmental insurance opportunities within their existing book of clients, brokers not only risk losing profitable growth opportunities but also may expose themselves to professional liability risks that could significantly threaten their business. In the event a client suffers a loss, new mold- and environmental-related damages exclusions on risk advisors' professional liability policies leave brokers unprotected for errors and omissions claims should they be found to have failed to properly address environmental risks.

By asking a few key questions, brokers can effectively assess their clients' environmental exposures, profitably grow their book of business, and better insulate themselves from E&O claims.

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

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

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Environmental Insurance: Crucial Coverage In A Volatile Climate

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