Environmental Insurance: No Longer Why, But Why Not?

"With exclusions and the explosion of mold claims, contractors have to have coverage," observed Bill Pritchard, president of Beacon Hill Associates Inc., a wholesaler based in Charlottesville, Va. "Potentially, any construction defect can turn into a contractors worst nightmare."

"The business practice has changed a lot over the last 50 years," said Neil R. Hughes, account executive in charge of HUB Environmental Practice, a part of insurance broker HUB International, headquartered in Chicago. "There is more regulation than there was years ago, and that can lead to a higher risk of the unknown environmental condition of a property."

More business owners are looking to sell their business and retire or are turning to mergers and acquisitions for growth, noted Mr. Hughes. The acts of due diligence involved in these transactions are opening the doors to environmental claims, he said.

As part of any deal, the buyers seek an environmental study of the property. If a condition is found during that study, he said, without the coverage in place to do the remediation, the value of that company can be impacted dramatically.

"It makes a lot of sense to have the insurance in place if the client has the idea of selling or doing a merger," Mr. Hughes advised.

In one incident, Mr. Hughes related, a manufacturer had no obvious environmental problem. A Phase I assessment of the property, which is an inspection to detect any possible contaminants, discovered that some oils from the machinery had seeped into the ground. A Phase II check, which tests the level of contamination, showed that the seepage was not extensive enough to require cleanup, but it did prompt the client to get the insurance in case a cleanup was ever required.

There have been other instances, Mr. Anderson said, where what was thought to be a benign industry turned out to have serious environmental exposure.

One case he knew of involved a warehouse storing butter that saw a malfunction in the refrigeration system. The butter melted, flowing into a nearby stream, killing the fish.

In another case, a bourbon distillery saw a leak in its piping. The bourbon leaked into a river, doing serious damage to the wildlife.

And the exposure is not limited to foodstuffs, he suggested. It can even affect cemeteries, where fluids leaching from burial plots could cause contamination.

Banks, surprisingly, fail to understand the significance of getting the coverage, Mr. Anderson observed. If it becomes the property owner, through default, or is identified in an environmental suit as a leaseholder, the financial institution can be exposed to the cost of cleanup.

And the exposure, he added, is not limited to privately held companies. It can also extend to public entities and non-profit organizations that become property holders and are not aware of pollution conditions on the property.

Ms. Holmes said she knew of a case where a lease required the clients clothing store to have pollution coverage. The landlord was concerned that if the store had chemicals on the premises, such as cleaning fluid, and anything happened, there was insurance in place for cleanup.

The issue over mold contamination and cleanup has sparked greater awareness of the need for environmental insurance, these broker representatives also said.

Mr. Pritchard said that the primary purchasers of environmental coverage remain the hazardous material transportation industry. However, within the past five years, he has secured coverage for such risks as hospitals and nursing homes, driven by mold pollution concerns.

What is interesting, he noted, is that the main driving force behind securing this coverage is the traditional insurance market. Carriers are either not renewing policies because of mold risk or excluding it. Once clients secure the pollution or environmental coverage, they are able to go back to the standard markets. Because the client has this coverage, the carriers are willing to extend general coverage.

Turning to specifics of coverage in environmental insurance policies, generally, executives said that the policies that clients are buying cover the cleanup of a site, even in the event of pollution left behind by a third party, such as chemical drums left on a remote part of a property. The policies can also cover pollution contamination caused during work performed at a site, such as a digger who breaks a gas pipe that was not recorded in the area.

Policies can also cover secured creditors who can have a financial interest in a site, and cost overruns for cleanups.

In some cases, if the laws do not prohibit it, Mr. Anderson said, the policies can cover defense costs and fines. But there is no coverage for illegal activities, he added.

When looking at the whole insurance picture, Mr. Hughes said, the policies are affordable, accounting for between four to five percent of the total insurance cost.

And there is plenty of room for growth. Mr. Anderson said Gallagher feels that only 10 percent of the potential market has been penetrated. The remaining 90 percent have either not evaluated the risk or are assuming the risk on their own.

"I think many of these sales boil down to agents or brokers sitting down with their clients, explaining the risks and pointing out the availability of the insurance," observed Ms. Holmes. "Most of them dont realize that the pollution exposure exists in virtually any business. They should be advising clients of exposures that the insured probably doesnt realize are out there.

"When looking at the whole picture, it is very cost effective when clients understand the coverage being provided," she added.

Reproduced from National Underwriter Edition, March 24, 2003. Copyright 2003 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.