Environmental insurance market looks up in 2005

As they often do when confronted with new, high-profile exposures, the standard markets quickly excluded coverage for mold in an effort to keep losses from exploding out of control. Where insurers were prohibited from excluding the risk, many simply stopped writing at all, leaving homeowners, contractors, manufacturers and property owners without coverage.

Mold presents a unique challenge for many reasons. First, it is naturally occurring, potentially present anywhere it can find moisture, warmth and a food source. As an organic substance, it also has the propensity to recur whenever the minimum requirements are met. Removing mold is not enough. It will grow back unless the root causes are fixed. Furthermore, the typical root cause-water damage-can occur in any number of places and for any number of reasons, including construction defect, faulty maintenance and product failure. This can make it difficult to determine the responsible party in many cases.

Another challenge comes from mold's defense mechanisms. When threatened, mold releases millions of microscopic spores, which land wherever they are carried by air currents. This phenomenon allows mold to migrate from one location to another. It also complicates the removal process; specific protocols need to be followed to avoid making the problem worse.

Environmental insurers have been excluding mold coverage from their policies for about as long as standard carriers have, generally for the reasons outlined above. Over the past year or so, however, environmental insurance carriers have provided more coverage to a growing number of commercial clients. After a great deal of study, these insurance companies have concluded that the mold risk is manageable for certain types of clients, if they take proper precautions. Coverage is becoming more available for commercial contractors and for commercial-property owners and managers. It remains hard, though possible, to find coverage for residential contractors and habitational sites. For agents, coverage is more available for many of their clients than it has been since the end of the 1990s. Here's the situation for some typical insureds:

• Contractors: To buy mold coverage, contractors need to prove they have received formal "mold awareness" training. Such a course will examine industry-specific causes of mold; procedures for preventing common problems; and mold issues related to the contracting process, post-work inspections, subcontractor management, etc. The course also will instruct contractors how to avoid getting involved in existing mold problems at work sites. After completing such a course, a contractor should create new job-site and safety procedures that incorporate what the contractor has learned. These procedures become an insurance company's assurance that the insured actually does what he or she was taught to do.

  Not all training is of the same quality. Agents considering writing mold coverage for their clients should determine in advance which vendors their insurance companies approve. Training costs several thousand dollars at a minimum, so it's important to be sure it will pass muster. Certain carriers now furnish training themselves, building the cost into the coverage premium. This enables the insurer to control the quality of the training its insureds receive.

• Facilities: To qualify for coverage, facilities need to show they have a detailed maintenance program that will enable them to find water intrusion before it leads to mold. They need to have a program for notification by which each tenant is required to abide. They need formal programs to monitor all work performed at their facilities by outside contractors. To ensure their programs will meet with insurance-company approval, many facilities managers, like contractors, undergo formal mold awareness training.

  An issue unique to facilities is the construction of the building itself. Carriers will take a close look at its age, construction and property loss history. Loss runs will be vital for successful submissions.

Habitational facilities and residential contractors still have a difficult time finding mold coverage, although the task is becoming a little easier. They'll need to meet the aforementioned requirements in regard to training and property condition. They also may have to accept lower limits than other environmental insureds, or deal with coverage restrictions. For instance, there may be no coverage for mold cleanup, only for third-party bodily injury-or just the opposite. By exploring what the market has to offer, agents can counsel clients about other risk-management strategies for any remaining exposures.

As 2005 unfolds, coverage for mold will become more readily available for several reasons. First, more insureds have taken mold-awareness training and incorporated it into their procedures, making them more insurable. Additionally, carriers are becoming more comfortable with the mold exposure. Finally, there are more insurance companies rs interested in writing environmental insurance, and mold coverage will be seen as an entr?e to the marketplace. While mold coverage will not be easy to obtain, it will be available to insureds who put in the required effort.

Silica: Trouble on the horizon

Just as insurers are beginning to drop some exclusions for mold, they are adding them for silica. Silicosis is a disabling and potentially fatal lung disease caused by overexposure to respirable crystalline silica. Silica is the second-most common mineral in the earth's crust and is a major component of sand, rock and mineral ores. Exposure to the microscopic particles that make up crystalline silica, either in small amounts over prolonged periods, or in large amounts for periods as short as a few weeks or even days, can cause irreparable damage to the lungs. Unfortunately this exposure potentially exists at many different work environments.

To many carriers, silica sounds a lot like asbestos in the early days of its emergence as a major source of claims. For that reason, silica exclusions are common on standard carriers' policies, as well as on many specialty insurers' environmental policies. As is often the case with exclusions, insureds are learning about the reduction in coverage at renewal, usually without knowing a great deal about the exposure beforehand.

Because of the exclusion, agents need to learn about the silica exposure to properly inform their clients of the exclusion's implications. Agents also should obtain their insurance companies' rationale for the exclusion as they prepare for their renewal meetings with clients.

As with mold in its early stages, even companies specializing in environmental insurance are being cautious about extending coverage for silica. Some environmental insurers exclude coverage for silica on everything they write. Others exclude it only on those accounts they think have a significant exposure, granting the coverage for others.

For clients and their agents seeking silica coverage from environmental carriers, it is important to review carefully what is offered, to determine if it is acceptable. As with all environmental policies, no two carriers offer coverage in exactly the same way.

It is hard to predict how available silica coverage will be in the next 12 months. While the exposure presents a significant challenge because of its widespread nature, it does not have some of the "organic" characteristics that have made mold such a challenge. Over time the insurance industry will find the balance point between risk and reward and provide coverage accordingly. It will then be up to agents and brokers to decide how to integrate whatever coverage is offered into their clients' overall risk management programs.

The environmental marketplace in 2005

The environmental marketplace has been "firming" over the last few years. While it didn't really "harden" like some segments of the market, carrier pricing did become more realistic. Rate increases of 10% to 20% were the norm in 2004. In 2005, however, carriers likely will retreat from that "firm" stance.

The environmental insurance industry is a casualty of its own success. After many years of profitability, the line naturally is drawing interest from new carriers. Indeed, several significant players, including Westchester Insurance and Hudson Insurance Co., entered the environmental-insurance market in 2004. (There also was one notable withdrawal, Gulf Insurance Group.) As a result, the core environmental coverages are becoming more competitively structured and priced. When the premium goals of the new players are added to the aggressive growth objectives of many of the existing carriers, the result should be a buyer-friendly market in 2005.

While increased availability of coverage may seem like a good thing for agents, it is not without risk. Insurance companies may offer lower-priced options to gain market share without providing the same scope of coverage offered by others. The responsibility to review and determine the adequacy of coverage options will still lie with the agent.

Where the opportunities will be in 2005

At present, the anecdotal evidence points to a gradual move away from a hard market in 2005. As this occurs, agents will face the typical challenges such a sea change brings. How to retain customers? How to attract new ones? How to grow revenue when premiums decrease? More than at any time in the past, environmental insurance is the answer to each of these questions.

Customer retention will be highest for those agents who provide the most effective coverage at the best possible terms. Environmental coverage will become more readily available for mold and, in at least some circumstances, for silica during 2005. Agents who are adept at recognizing their insured's environmental exposures, communicating them to their clients, and giving them reasonable solutions will be in the best position to retain business.

The complexity of environmental coverage also can work to an agent's advantage. The environmental component of an account is more difficult for another agent to replace than are the other coverages. So successfully arranging environmental insurance not only highlights an agency's competency but also makes the account more difficult for a competitor to win.

Carriers are planning to bring lower-cost environmental coverage to a wider range of insureds. Stand-alone contractors pollution and site pollution coverages designed for lower-risk accounts will be available for a fraction of the previous cost. Agents' ability to access these new products will be critical to their success.

A demonstrated ability to meet a client's environmental-insurance needs is as valuable to writing new business as it is to retaining existing clients. Agents who can dissect what their competitors have done for a business and who can access products that can plug an existing coverage gap will have a significant advantage in the marketplace.

Environmental insurance also can help an agent meet the challenge of growing an agency's revenue in a softening marketplace. As insureds see a leveling of their costs for standard insurance products, they will be more open to buying additional coverages like environmental insurance.

The biggest hurdle to taking advantage of opportunities in environmental insurance is lack of familiarity with the products and the exposures they cover. Agents must be able to assess their clients' environmental risks completely and then be able to explain the value of coverage. For agents interested in increasing their knowledge of environmental exposures and products, many resources are available from carriers and specialty brokers. Agents should access several of these sources to be sure they are getting comprehensive, unbiased information.

Armed with a clear understanding of the benefits of the product lines, agents will find it far easier to integrate environmental insurance products into their clients' coverage packages. As the insurance industry continues to evolve, this knowledge can contribute significantly to an agency's success.

Bill Pritchard is president of Beacon Hill Associates, a wholesale brokerage firm that specializes in environmental insurance. He holds an environmental risk management designation and teaches pollution insurance classes nationwide. He can be reached at bpritchard@b-h-a.com.