(The following article is based on part of a presentation that Mr. Heft made at the AAMGA University Weekend, which was held last August in Scottsdale, Ariz.) The demand for environmental insurance is definitely growing. In 1999 the market stood at approximately $1.3 billion in premium. It was expected to end 2007 at about $2.8 billion. Such growth is in stark contrast to the insurance industry in general and indicates that revenue opportunities are available to agents and brokers who have the necessary product knowledge and insurance market access to seize them.
In this article, I will review some of the more common forms of environmental insurance available to producers and their clients. I also will provide a brief overview of the state of the market. I hope you will find this information useful to your efforts to write more environmental insurance in 2008.
o Pollution legal liability insurance (PLL). This product, which sometimes is referred to as environmental impairment liability or goes by other names, is what I call the “bread and butter” pollution insurance form. It’s been around for more than 20 years, and has been refined and rewritten many times. PLL provides liability and cleanup coverage for unknown pollution conditions or events on, at, under or emanating from a covered location. It provides claims-made coverage applicable to scheduled locations. The policy covers environmental risks associated with both the ownership and leasing of property and is written for many industries, including real estate, health care and manufacturing.
Today, coverage under this policy can be quite broad. It can be written to provide not only liability coverage for unknown pre-existing contamination but also cleanup coverage–for third-party claims only–for known pollution conditions. Coverage for nonowned disposal sites (NODS) that accept an insured’s waste can also be added to the policy by endorsement. This is a key issue, since under federal regulations the generator of waste is ultimately responsible for cleaning it up and may become responsible for cleanup of an NOD site, if such is mandated.
Although it’s more difficult to obtain today, coverage for a third-party contractor’s “soft costs” (e.g. for construction delays necessitated by discovery and cleanup of pollution at a covered site that is under development) can be included in a pollution legal liability policy. PLL can even be written broadly enough to provide a form of property insurance: business income coverage, including loss of rental income. This is a key feature for commercial real estate insureds. If asbestos, mold or some other pollutant is discovered in an office building, the tenants may have to vacate during remediation.
Another optional coverage is bodily injury and legal defense associated with the presence of asbestos or lead-based paint. Coverage can be added if such materials are contained, are not deteriorating and are monitored via an operations and maintenance plan. (First-party cleanup or abatement coverage for such materials, however, is not included.)
Mold coverage can also be added to a PLL policy. Five years ago, mold struck fear into the hearts of pollution insurance underwriters, and coverage was practically nonexistent. But in a recent survey we conducted, an increasing number of PLL markets indicated a willingness to provide mold coverage, including for onsite cleanup. The additional premium can be considerable, however, and coverage is carefully underwritten. Underwriters require procedures for preventing and detecting water intrusion, which can lead to mold. An insured must present certificates documenting that its building maintenance staff has undergone mold awareness training, so they know how to respond if they see water-stained ceilings or other signs of water intrusion or mold.
There are about 15 to 20 domestic carriers in the PLL marketplace, and they account for approximately half of the market’s premium. Up to $300 million in limits are available from the market, with no more than $50 million available from any one insurer. The minimum retention is $10,000, although $25,000 is more typical. The minimum premium is usually $5,000. Policy terms for ongoing coverage may be provided for up to five years in most cases, while terms of up to 10 years are available for real-estate transactions, where legacy or historic coverage only is warranted.
o Cost cap coverage. The purpose of this policy is to reduce financial uncertainty associated with the cleanup of a site on which pollution conditions are known to exist. For instance, if it is discovered during remediation of a site that the contamination is greater than expected (or if an entirely new contaminant is found), a cost cap policy will cover the additional cost to remove it. It can also respond to such issues as regulatory changes that require further treatment (“re-openers”) on a previously remediated site.
Cost cap policies are typically written for projects with at least $2 million in anticipated cleanup costs. The insurance carriers’ own engineers make an independent assessment of the projected remediation expenses as part of their underwriting. Above this amount, the insured is required to absorb a “buffer layer”–in essence, a deductible–that is equal to 10% to 30% of the remediation estimate. The insurance layer, usually 100% to 200% of the remediation estimate, applies above the “buffer layer.” To ensure that the client has an incentive to see that the cleanup is expedited, should cleanup costs pierce the insurance layer, the insured also may be required to meet a coinsurance requirement, typically 10% to 20% of the risk transfer limit.
Because of the uncertainty surrounding cleanup costs and the significant claims carriers have incurred, cost cap coverage can be expensive; the minimum premium may be $150,000 or more. Carriers offering the product include AIG, ACE-USA, Zurich and XL.
o Liability buyout/liability transfer. This product is typically used for cleanup projects estimated to cost $5 million or more. Essentially, an insured pays an insurer the estimated cost at a discounted rate to complete the remediation. It then manages the cleanup and remediation project for the insured. The funds are placed into a “commutation” account from which the insurer pays the contractor who is cleaning up the site.
By purchasing this product, the owner of a contaminated site may be able to not only cap its cleanup costs but also possibly transfer its environmental liability to a third party–either the insurance company itself or a consulting firm, which will assume the environmental liability at an agreed-upon price, then clean up the site and return it to the owner with a clean bill of health from applicable regulators. By using this pre-funding mechanism to transfer its liability, the site owner may be able to remove the balance-sheet reserves it otherwise would have to maintain for the life of the cleanup, which often can be 10 years or more for major remediation projects. At the end of the cleanup, any unused funds in the commutation account may be distributed to the remediation contractor, providing the contractor an incentive to finish the project on time and under budget.
For a variety of reasons, liability buyout/liability transfer insurance is not often placed. One reason is because the total cost of the cleanup must be pre-funded. When a corporation’s board of directors is asked, in essence, to transfer a sum that could exceed $20 million or $30 million to a third party, many decide not to move forward. Liability buyout/liability transfer coverage is available from AIG and ACE. Policy terms are up to 15 years.
o Lenders liability pollution/secured creditor insurance. This product protects financial institutions from defaults on loans taken out to buy property on which pollution conditions may exist. The policy pays for the outstanding loan balance or the cost of remediation, whichever is less.
While a number of carriers sell the product, which can be written for individual loans or for a real-estate portfolio, few are actively selling this coverage because of significant losses that occurred in the writing of portfolios of loans. When offered, coverage can be provided for up to 10 years. Up to $50 million in coverage is available in the marketplace. The minimum premium is $20,000 and retentions start at $25,000.
o Storage tank liability insurance. This product provides third-party property-damage liability coverage for losses resulting from the escape of pollutants from storage tanks. It also covers the costs of corrective action and cleanup. A key use of the product is to enable tank owners to comply with federal and state financial responsibility requirements for cleanup of contamination.
Storage tank liability insurance is relatively inexpensive–the minimum premium is typically $500–which makes it something of a “commodity” product. Several domestic carriers, including AIG, Zurich, ACE, and Liberty Mutual, offer the coverage, and it is often written on admitted paper. Most carriers have an online system to handle the processing efficiently.
o Combined CGL/PLL policies. Several environmental carriers offer combined commercial general liability and pollution legal liability contracts. The main buyers of this product are commercial/industrial risks, including chemical distributors, manufacturers and landfills. Agents selling these products must take care to inform clients that a single aggregate limit applies to both the CGL and PLL exposures.
o Contractors pollution liability. This coverage is now widely written for both environmental and nonenvironmental contractors. Increasingly, project owners are requiring contractors to carry stand-alone environmental coverage. The policies typically respond to pollution incidents associated with job-site operations, transportation and disposal activities.
Coverage is available on either a claims-made or occurrence basis, and it typically applies to work performed by a contractor or on the contractor’s behalf (e.g., by a subcontractor). Usually there are no lead or asbestos exclusions, and a blanket additional insured provision applies to the contractor’s clients.
Coverage is available from 15 to 20 domestic insurers. Up to $300 million in coverage can be arranged in the marketplace, with as much as $50 million available from a single carrier. Premiums and deductible/retentions generally start at $5,000.
o Professional liability for environmental services. This coverage can be written for contractors, consultants or testing labs offering environmental services of a professional nature. It covers liability arising from acts, errors or omissions made in connection with environmental assessment, testing, supervision, etc. It can cover an insured’s vicarious professional liability for work performed on its behalf by subconsultants or other third parties. In some cases, coverage can be extended to cover mold claims.
Coverage, which is claims-made, can be written on a blanket or project basis. In some cases, it can be combined with contractors pollution liability insurance, written on either a claims-made or occurrence basis, and with occurrence-based commercial general liability insurance. In such cases, the liability limits are shared by all three coverages.
Some 15 carriers offer the product. About $100 million in coverage is available from the marketplace, with capacity of individual carriers limited to about $25 million. The minimum premium and required deductible/retention are typically both $5,000.
State of the market
The outlook for the environmental insurance market appears to be favorable. In a growing number of instances, coverage is being mandated by state or federal regulation or is being required contractually. For instance, in leases applicable to industrial facilities, warehouses, strip malls, etc., landlords increasingly are requiring tenants to have environmental coverage that makes the landlords additional insureds. In loans governing the purchase or development of commercial property, financial institutions are likely to require borrowers to carry pollution insurance.
Contracts governing mergers and acquisitions often have environmental-insurance requirements. Indeed many environmental law firms advise their M&A and other clients to buy environmental insurance. Because of the complexity of the exposures, these attorneys often take part in the negotiating process between clients and insurance carriers. Coverage often is written on a surplus-lines basis and can be manuscripted.
The U.S. Dept. of the Interior’s Natural Resource Damage Assessment and Restoration Program, along with similar programs operated by the various states, also has become a major driver of environmental insurance sales. Under the applicable federal and state laws, business found to be responsible for damage to streams, forests, beaches, wetlands and other natural resources can be assessed for the cost of restoration. These statutes can add considerably to the exposure, and thus the cost, of environmental insurance for facilities located near natural resource areas. While mold and microbial-matter contamination is not receiving the attention it once did in the media, it is still an ongoing concern too.
In general, we see commercial and habitational real estate, including strip malls and Class A office buildings, as the most rapidly growing market for environmental insurance. The cost of coverage is relatively cheap–just pennies per square foot, in many cases. “Brownfields” redevelopment projects and contractors of all types will continue to be significant buyers of environmental insurance. In contrast, while hazardous-waste haulers and other transportation-oriented environmental risks will continue to need coverage, this class has undergone a lot of consolidation. Consequently, we do not expect the segment to grow significantly. The environmental insurance market for hazardous-waste landfills–e.g., treatment, storage and disposal facilities–likely will be fairly static as well.
Overall, however, we are confident the environmental insurance market will continue to grow. As more agents become aware of how the coverage protects their clients, and as clients become more proactive in managing their environmental risks, the markets, variety of products and total premium only will increase. John Heft is vice president of New Day Underwriting Managers, a specialty intermediary with expertise in environmental insurance, environmental risk management and construction-related professional liability. Mr. Heft has 18 years of environmental underwriting experience. Prior to joining New Day Underwriting Managers, he was a vice president/client adviser in Marsh’s environmental practice. He also previously worked at ECS/XL. He holds a master’s of science degree in water resource and environmental engineering from Villanova University. He can be reached at email@example.com or at (609) 298-3516, Ext. 105.