Main Street Clients Need Pollution Covers

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Modularization, online initiatives ease sales to small,mid-market businesses

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For many years, environmental insurance was a product soldlargely by specialty brokers to high-risk industries with obviousenvironmental liabilities.

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Today, however, commercial insurance buyers are awakening to anew reality–the fact that many middle-market and Main Streetbusinesses also face environmental exposures, and those risks existboth inside and outside the United States.

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In the past, standalone environmental coverages requiredtechnical evaluation and specialized skills that fell outside thescope of generalist brokers. The policies were also considered toocostly for many small and midsized businesses.

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

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Whether it's a small chain of drycleaners, a midsizedmanufacturer, a printing firm, an auto repair shop, a hotel or aconstruction contractor, there are few commercial enterprises thatdon't have some potential environmental exposure.

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Many low-risk businesses handle or store hazardouschemicals–such as cleaning solvents and degreasers–that cancontaminate soil and water.

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

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Environmental insurance presents risks and opportunities forbrokers. Agents and brokers who do not help commercial clientsconsider environmental exposures may lose business to competitorswho do. They also are vulnerable to uncovered professionalliability claims, as more errors and omissions policies haveexclusions for environmental damages.

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To help commercial insurance clients effectively manage theirrisk, agents and brokers should give serious consideration torecent changes in the environmental risk marketplace. Three of themost significant changes include modularization, globalization andalternative distribution.

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o Modularization

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Many businesses will continue to require standalone coveragesthat demand a comprehensive technical evaluation. However, insurershave recognized that not every class of business must beunderwritten as if it were a hazardous waste facility.

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Today, we are seeing the evolution of basic environmentalcoverages that are blended with traditional casualty programs.Environmental coverage, both for premises and services risk, can bea modular addition to the primary casualty, umbrella orinternational coverage.

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

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A broker cognizant of environmental risk could reduce theexposure of this manufacturer with an affordable policy thatpackages commercial general liability with first-party coverage forproperty cleanup and third-party coverage for property damage andbodily injury.

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These add-on coverages are a reflection of the solid trackrecord that environmental underwriters have gained over timeassessing and pricing pollution risks for a wide range ofbusinesses.

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o Globalization

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

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The most obvious example is in Europe. Last year, the EuropeanUnion adopted a sweeping environmental law that holds pollutersliable for environmental damage. The 25 member countries of the EUmust adapt their environmental regulations or create new ones fromscratch to comply with the “EU Directive on EnvironmentalLiability.”

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The directive acknowledges the importance of financial securityin any scheme built upon the “polluter pays” principle. Althoughthe directive does not make environmental insurance compulsory, theEU guidance specifically calls on member states to evaluate the useof environmental insurance as a way to address these newly codifiedliabilities.

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Countries in the Pacific Rim also are tightening environmentalregulations in a way that will have a financial consequence forU.S. businesses with international operations. In the last fewyears, Japan has broadened the scope of its environmental laws andtightened financial responsibility requirements. In 2003, forexample, the Soil Contamination Countermeasures Law took effect,placing the ultimate responsibility for cleaning up polluted soilon landowners.

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In Australia, environmental laws in various jurisdictions holdnot just corporations but their directors, officers and managersliable for violations of environmental laws.

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Indonesia and Malaysia, once known for lax environmentalregulation, also have placed a renewed emphasis on strengtheninganti-pollution laws and policies designed to protect biodiversity.The trend is also apparent in Latin America. After years ofenvironmental degradation, Brazil has created legal mechanisms forenforcing laws and regulations aimed at protecting theenvironment.

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

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o Alternative Distribution

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

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For some classes of business, such as storage tank andcontractors pollution liability policies, coverages have becomestandardized, allowing brokers, in some cases, to apply, get aquote and bind coverage online, then receive the policy andcertificate of insurance electronically. Other environmentalcoverages for specific classes of business are likely to be madeavailable online in the future.

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The evolution of affordable, modular policies with internationalreach opens avenues for profitable growth while helping clientsmanage environmental risk.

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

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“Producers who do not help clients consider environmentalexposures risk losing business to competitors who do, whileexposing themselves to E&O claims.”

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Karl Russek

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Risk Alert!

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Many low-risk businesses handle or store hazardouschemicals–such as cleaning solvents and degreasers–that cancontaminate soil and water.

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