Environmental coverage is one that 10 or 15 years ago only aselect few companies bought, primarily manufacturers that hadobvious exposures. But environmental coverage has grown into a lotmore than that over the last five years, said William P. Hazelton,executive vice president, environmental and construction for ACEGroup, in a meeting with National Underwriter and PC360 atRIMS 2015.

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In the U.S., environmental coverage, especially for contractors,is "a vital component" and is expanding, with increased demand ascompanies become more multinational. "It's a coverage contractorshave in the U.S. so they buy it while working abroad too," headded.

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Much of the value in environmental coverage is that it's amulti-year policy, which also covers regulatory risk and damage toreputation, added J. Craig Richardson, senior vice president,environmental risk, for ACE USA. The policies often provide expertcatastrophe management services that include public relationsassistance and legal counsel as well as business interruptioncoverage.

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Hazelton noted that the recent escalation in the demand forenvironmental coverage is primarily because most constructioncontracts now include a requirement for the coverage along withother insurance. About five years ago, contractors didn't need anenvironmental policy to bid on many projects, but now they do."It's in there almost all the time," he said.

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Contractors generally buy environmental liability insurance tocover gaps in their commercial general liability (CGL) policies orto deal with caps on the limits of their pollution coverage.Richardson believes that reported claims are increasing basedsolely on the fact that more companies are buying coverage. "Wedon't know how many claims were denied on the GL [generalliability] side because companies didn't have the right coverage,"he added.

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Rusty-old-pipes-SS-momente

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(Photo: Shutterstock/momente)

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Mold is biggest hazard

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Contractors are finding that the biggest environmental hazardthey're now dealing with is mold, Richardson said. It's insidiousand can be found in existing buildings that are being remodeled orit can be introduced into new construction if supplies are exposedto the elements before walls are closed up or roofs are put inplace, for instance. Mold also may become an issue duringconstruction, for example, if pipes burst or the property isflooded and it takes some time to clean up any water damage.

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"Environmental coverage for contractors is typically occurrencebased," Hazelton explained, so the insurance buyer is reassuredthat the company is protected for a long time. That said, thereality is that contractors are more concerned with an immediateevent that makes an existing environmental condition worse. Forexample, a contractor may be required to remove leaking undergroundstorage tanks before being allowed to begin a new constructionproject. During the removal process, equipment could puncture thetank, causing a more serious leak, requiring remediation. Withoutthe appropriate coverage the contractor could incur significantout-of-pockets costs.

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In addition, the U.S. Environmental Protection Agency is turningits attention to the intrusion of potentially harmful vapors intocommercial and residential buildings, particularly fromenvironmental contaminants in the subsurface that can be disturbedduring construction. Companies also need to be aware of air qualityissues from vapors from carpeting or furniture, or even fromexhaust fumes from a loading dock located too close to a building'sventilation system. These hazards can be addressed with premises pollution liability coverage, Richardson said, whichis often purchased along with more traditional environmentalcoverage.

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Pile-of-envelopes-with-word-Regulations-as-official notifications-SS-iQoncept

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(Photo: Shutterstock/iQoncept)

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Tougher global environmental regulation

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Most geographies are growing, and demand for constructionprojects is increasing around the world as is environmentalregulation. For example, according to a March 2015 ACE Advisory,Meeting the Challenges of Environmental Risks in InternationalConstruction, China amended its environmental protectionlaw for the first time in 25 years, setting tougher penalties forpollution infractions. The amendments, effective Jan. 1, 2015,would allow fines based on the length of time illegal pollutionoccurs, rather than one-time penalties, and would permit approvednon-governmental organizations to bring lawsuits over pollution.The Advisory—authored by Hazelton and Diana Eichfeld, assistantvice president, ACE Environment Risk—also noted that Mexico adopteda comprehensive law in 2013 establishing guidelines forenvironmental liability and civil actions.

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Hazelton, who began his insurance career in claims, explainedthat underwriters look at the contractor's experience in a specificjurisdiction—whether it's in a different state or a differentcountry—when making their risk assessment. Richardson pointed outthat some U.S. policies are not effective in all foreign countriesor cities. Contractors may need to obtain coverage from localinsurers, rather than the large multinational carrier they're usedto dealing with. Richardson and Hazelton recommend that you reviewall the details of every project with your risk manager or brokerto ensure that you have the most appropriate coverage available foryour situation and your project's location.

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[Related: Improving Quality Control Is Critical for Success in theStrengthening Construction Market]

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A growth opportunity?

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Property owners want construction projects completed properlyand on time, no matter where they're located. They also want to besure that if there is an environmental incident it's cleaned upwith no reputational harm to any of the parties and with minimaldelays.

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Richardson views the international construction boom as a greatselling opportunity for agents and brokers. "About 30% ofcontractors don't buy environmental insurance," he said, makingthem likely prospects when the risks are explained to them. "Ifyou're a property expert, the coverage is easy to explain becauseit covers property. If you're casualty expert, it's easy to explainbecause it can cover gradual, as well as sudden and accidental,first-party and third-party liability, which are typical claims onthe casualty side."

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Growth-in-gold-letters-on-black-compass-SS-Tashatuvango

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(Photo: Shutterstock/Tashatuvango)

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Companies who have been through litigation are the biggestbuyers, Richardson observed. More sophisticated risk managers areencouraging their companies to buy coverage, even in smallerorganizations. There is more awareness of how to integrate riskmanagement into the business overall. Companies then take thosebest practices global, he said.

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Hazelton explained that ACE's Construction Industry Practicegroup brings together all product lines that may be necessary forconstruction contractors or projects. When a broker contacts ACEabout excess casualty for a contractor or on a wrap-up, forexample, the group reviews the potential client needs and presentsa package of coverage that could include primary construction,environmental and builder's risk, among others. This provides across-sell opportunity to expand the construction coverage that iseffective with existing clients and new customers as well.

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Richardson observed that there's a coverage solution forcompanies of all sizes, so small and mid-sized companies alsoshould consider adding environmental coverage to their projectpolicies. He noted that the policies include the duty to defend,which is good for smaller companies that may not have the sameresources as much larger ones. In addition, risk managementconsultants are available to help smaller and mid-sized companiesevaluate their situations and determine the appropriate coverage aswell as to deal with environmental incidents.

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Added Hazelton, "Environmental coverage doesn't have to be asale to a new client. It can and should be an easy sell to anexisting contractor client." He agreed with Richardson that it's aprice sensitive market, but more and more contracts are requiringthe coverage, which should increase the client's interest,especially as part of a comprehensive construction contractorpackage.

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Rosalie Donlon

Rosalie Donlon is the editor in chief of ALM's insurance and tax publications, including NU Property & Casualty magazine and NU PropertyCasualty360.com. You can contact her at [email protected].