Risk Management Focus Sells EIL Policies

The largely unspoken reality is that should a client sustain an uninsured pollution loss for which, it is later disclosed, coverage was easily available with a minor premium increase, there is a good chance that the renewal signoff won't provide much of a defense.

Another challenge to middle-market agents that eliminates one problem by creating another is the growing trend of insureds being required by third parties to obtain environmental insurance. In these cases, the agent's worry about an uninsured client is replaced by the panic call from an insured who suddenly needs a pollution policy to win a bid, close a sale or secure financing.

Suddenly and without warning, the agent becomes responsible for the success or failure of the client's business transaction and is often completely unprepared to obtain the coverage with no time to research policies or carriers and is hindered by limited premium budgets.

The broad-based solution to these challenges requires the agent to transition from a reactive attitude toward environmental insurance to a consultative interaction with insureds.

The critical first step in this process is for agents to understand and believe that they are assisting the insureds in making an informed business decision as to whether environmental insurance is necessary for their enterprise. The emphasis is on informing and educating the client about environmental risk and exposure not on selling the policy.

The fact is that environmental insurance usually sells itself once the insured, with the help of the agent, has properly assessed pollution risk and potential third-party requirements for coverage. The key is for the agent to approach the issue from a risk management perspective, with insurance considered as part of the process rather than the primary focus.

This idea certainly sounds great. The fact is that environmental risk and insurance can be a very complex subject, and rational agents should question why or how they would approach their insured and offer to advise them on a topic they know nothing or little about.

The good news is that a relatively tiny number of people in the insurance business do know about environmental insurance, so the agent is far from alone in the "I don't know about this stuff" category.

The better news is that the agent pro-actively discussing pollution issues is typically considered a very positive experience by the client, especially when focused on a risk management approach.

The best first step for the agent is to start the dialogue by talking about what they do know about their client's pollution coverage. In the majority of cases, what is known is the insured's program excludes coverage for pollution losses. While most agents don't like to remind their clients about the coverage they don't have, the pollution exclusion can actually be used as a risk management tool.

Reviewing the wording with the insured and posing the simple question of whether any of the facilities or operations within their business could experience any of the conditions described in the exclusion is the foundation of an environmental risk management assessment.

What typically follows is a series of client "what if" questions that often reveal important misconceptions about what is or isn't considered pollution, often followed by the realization sometimes traumatic that what was thought to be covered by an existing program is in reality uninsured.

More often, the initial assessment ends with the insureds confirming their greater understanding of the coverage that is not provided, making them better positioned to make a properly informed decision as to whether risk transfer is a potential course of action.

An ancillary benefit has the insured in a better position to discuss the basis for their pollution insurance requirements with third parties, potentially resulting in avoiding or mitigating the extent and cost of the required coverage.

For example, contractors may be able to save premium dollars by negotiating with property owners and developers for lower pollution policy limits or scaled-back coverage based on a better understanding of their own environmental risk profile and how it can be accommodated by a modified environmental policy.

The agent may be asked to pursue additional information or, in some instances, preliminary terms and conditions of an environmental policy. Agents have several sources for this information depending on their particular preference. That includes specialized environmental wholesale brokers, program managers or dealing directly with the environmental carriers.

When selecting a resource for environmental coverage, the agent must be confident that the broker or underwriter spends the time to fully understand the insureds level of interest in environmental insurance to assure that the client's specific risk-transfer objectives are being pursued.

Agents must be wary of the "send me an application and I'll get back to you" approach, as the quote will likely miss either the coverage and or premium target.

Underwriters and specialist brokers should offer to meet or teleconference with the insured and the agent if there is a need and always present a team approach to the process.

Environmental insurance is readily available and affordable to a vast majority of middle-market businesses. It is the responsibility of agents and brokers and the marketplace to approach their insureds to help manage their pollution risk, above all making certain that there is a firm basis for informed decision-making.

Awareness surrounding environmental risk and insurance is growing, though the gap between those buying environmental insurance and those relying on pollution exclusions needs to be bridged.

Agents and brokers should encourage their clients to seriously consider environmental insurance as part of their normative policies, thus helping to ensure the safety and security of their business.

John Butler heads PBC Environmental, the wholesale environmental insurance specialty practice of Hub International Ltd. Mr. Butler can be reached at jbutler@programbrokerage.com.

Reproduced from National Underwriter Edition, April 8, 2005. Copyright 2005 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.