In the past, standalone environmental coverages required technical evaluation and specialized skills that fell outside the scope of generalist brokers. The policies were also considered too costly for many small and midsized businesses.

As the environmental insurance market has matured, however, underwriters have begun offering more affordable, streamlined coverages for a broader range of businesses. The underwriting of some environmental policies has been simplified to the point that they can be sold over the Internet.

Whether it's a small chain of drycleaners, a midsized manufacturer, a printing firm, an auto repair shop, a hotel or a construction contractor, there are few commercial enterprises that don't have some potential environmental exposure.

Many low-risk businesses handle or store hazardous chemicals–such as cleaning solvents and degreasers–that can contaminate soil and water.

As the use of mold exclusions has grown in commercial liability policies, contractors, property owners and managers may find themselves exposed to this area of construction defect litigation. Yet these businesses may not have a thorough understanding of these risks and the coverage gaps created by pollution and mold exclusions.

Environmental insurance presents risks and opportunities for brokers. Agents and brokers who do not help commercial clients consider environmental exposures may lose business to competitors who do. They also are vulnerable to uncovered professional liability claims, as more errors and omissions policies have exclusions for environmental damages.

To help commercial insurance clients effectively manage their risk, agents and brokers should give serious consideration to recent changes in the environmental risk marketplace. Three of the most significant changes include modularization, globalization and alternative distribution.

o Modularization

Many businesses will continue to require standalone coverages that demand a comprehensive technical evaluation. However, insurers have recognized that not every class of business must be underwritten as if it were a hazardous waste facility.

Today, we are seeing the evolution of basic environmental coverages that are blended with traditional casualty programs. Environmental coverage, both for premises and services risk, can be a modular addition to the primary casualty, umbrella or international coverage.

Consider the example of a midsized industrial machinery manufacturer. Traditionally, this insured would not be considered a high-hazard business, but it certainly would face liability if a chemical solvent were to spill or if groundwater contamination were traced to a leaking fuel storage tank.

A broker cognizant of environmental risk could reduce the exposure of this manufacturer with an affordable policy that packages commercial general liability with first-party coverage for property cleanup and third-party coverage for property damage and bodily injury.

These add-on coverages are a reflection of the solid track record that environmental underwriters have gained over time assessing and pricing pollution risks for a wide range of businesses.

o Globalization

With federal pollution liability laws evolving over the last 35 years, the United States has been the largest market for environmental insurance. Today, however, demand for environmental risk policies is growing internationally. Two major factors are driving that demand–the rapid rate at which U.S. businesses are expanding overseas and the growth of environmental liability schemes in other countries.

The most obvious example is in Europe. Last year, the European Union adopted a sweeping environmental law that holds polluters liable for environmental damage. The 25 member countries of the EU must adapt their environmental regulations or create new ones from scratch to comply with the “EU Directive on Environmental Liability.”

The directive acknowledges the importance of financial security in any scheme built upon the “polluter pays” principle. Although the directive does not make environmental insurance compulsory, the EU guidance specifically calls on member states to evaluate the use of environmental insurance as a way to address these newly codified liabilities.

Countries in the Pacific Rim also are tightening environmental regulations in a way that will have a financial consequence for U.S. businesses with international operations. In the last few years, Japan has broadened the scope of its environmental laws and tightened financial responsibility requirements. In 2003, for example, the Soil Contamination Countermeasures Law took effect, placing the ultimate responsibility for cleaning up polluted soil on landowners.

In Australia, environmental laws in various jurisdictions hold not just corporations but their directors, officers and managers liable for violations of environmental laws.

Indonesia and Malaysia, once known for lax environmental regulation, also have placed a renewed emphasis on strengthening anti-pollution laws and policies designed to protect biodiversity. The trend is also apparent in Latin America. After years of environmental degradation, Brazil has created legal mechanisms for enforcing laws and regulations aimed at protecting the environment.

As more small and midsized businesses expand globally–whether they are merging with, acquiring or setting up new facilities–they are finding they need to post evidence of insurance for environmental liabilities.

o Alternative Distribution

Specialty brokers with technical underwriting expertise remain critical for high-hazard industries as well as complex business and property transactions. Today, however, for the environmental coverages most commonly sought by small and middle-market risks, brokers need not be environmental experts.

For some classes of business, such as storage tank and contractors pollution liability policies, coverages have become standardized, allowing brokers, in some cases, to apply, get a quote and bind coverage online, then receive the policy and certificate of insurance electronically. Other environmental coverages for specific classes of business are likely to be made available online in the future.

The evolution of affordable, modular policies with international reach opens avenues for profitable growth while helping clients manage environmental risk.

Karl Russek is senior vice president of ACE Environmental Risk, an environmental underwriting unit of ACE USA that provides environmental liability products and services.

“Producers who do not help clients consider environmental exposures risk losing business to competitors who do, while exposing themselves to E&O claims.”

Karl Russek

Risk Alert!

Many low-risk businesses handle or store hazardous chemicals–such as cleaning solvents and degreasers–that can contaminate soil and water.