Environmental Liability Sales Expand As Carriers Grow Less Wary Of Risk

Yet, new impetuses for coverage arise daily. "You are now starting to see banks require it, if they are giving loans to companies that have the potential to pollute," he said.

Secured creditor coverage can protect against environmental risks that can arise from banking and real estate transactions, according to a report by Chicago-based Aon's environmental unit. Coverage is triggered by a default on a loan that is accompanied by a pollution condition. Once triggered, the policy pays for either the remediation costs or the outstanding loan balance, whichever is less.

With more insureds purchasing environmental policies, and more carriers selling them, pricing has come down, market participants say. And so far, the policies have not produced many loss horror stories.

Mr. Pritchard said that while environmental coverages have seen some of the price swings that are common for the commercial sector, trends within the environmental sector itself have led to a noticeable price decline over the past decade. "I really can't think of one [environmental] line in which pricing has shown a general upward trend," he said.

Turning to profitability, "I am not exactly in the loss loop," Mr. Pritchard said. "But I have always been told by carriers that the line is very profitable, at least for the purely environmental portions."

For example, while Beacon Hill may write numerous underground storage tank policies, many of the claims can come from "people falling in the hole–you know, typical GL claims," he said.

And the fact that the strictly regulated environmental contractors in general are very well run also makes them better risks, Mr. Pritchard said, referring to contractors' pollution liability policies.

Such profitability could explain why the number of environmental writers has gone from a handful to nearly 20, with "more on the horizon," he added.

David Bennink, who heads up Aon's environmental unit, said remediation cost cap policies have been a significant source of large losses over the past few years.

Remediation cost cap coverage protects owners from potential cost overruns associated with cleanup projects. "It is an area the underwriters are struggling to underwrite effectively," he said.

With about seven years of experience in the line, underwriters have now "tweaked" their models to price it a little more conservatively and set the attachment points a little higher. And they are being a little more diligent in their underwriting reviews, Mr. Bennink said.

Much like the situation with cyber insurance, where coverage applicants are no longer required to undergo costly risk assessments (as was the case during the coverage incubation period), Mr. Pritchard said environmental carriers have gotten a better handle on how to assess risk, which has made the coverage more accessible to new classes of business.

Today, for example, risk managers have come to realize–thanks in part to the diligence of their agents and brokers–that they have environmental liabilities, even if they are covering a group of office buildings, he said. And mold ranks at the top of any list of environmental exposure.

Eli Morawiec, executive vice president for New York-based wholesaler Trinity Managers International, said mold remains one of the main concerns of underwriters and risk managers today.

"Insurance companies still don't have a handle on what their exposures can be" in this area, he said. "It is difficult to underwrite."

Mold claims can arise under pollution legal liability policies, as well as contractors pollution liability policies. (See related infographic, "Policy Types" for coverage descriptions.) "We recommend all contractors have CPL coverage because it can be amended to provide an affirmative coverage for mold," Mr. Morawiec said.

Cost depends on what kinds of safeguards an insured may have in place to protect against water damage, as well as strict procedures for quick cleanup if damage should occur, he said.

Mr. Bennink said that "while mold presents an opportunity to sell site pollution and contractors' policies, at the same time clients have to have an active and effective mold management plan in place to really help manage that exposure."

Obtaining mold coverage still remains a challenge for habitational facilities and residential contractors, he said. "They may have to accept lower limits or deal with coverage restrictions, such as no coverage for cleanup"–in other words, "only third-party bodily injury coverage," he said.

Unlike homeowners–or even commercial general liability lines–where mold coverage may have happened almost haphazardly, "in our world, the underwriters very specifically design their coverage for mold or any other pollutant," Mr. Bennink said.

Mr. Bennink said classes such as hazardous waste disposal sites and chemical manufacturing companies can obtain environmental coverage, but only after undergoing a rigorous underwriting process.

"You have to demonstrate to the underwriters that this is a firm that obviously knows what they are doing and that they live and breathe and walk and talk safety and prevention," he said.

The critical issue in the environmental insurance world remains "how to sell the risk to the underwriter," Mr. Pritchard said.

Product pollution coverages present some knotty issues to underwriters. "Say you have a manufacturer of valves, and those valves fail on an oil pipeline. You could have a tremendous pollution liability," Mr. Morawiec said.

Mr. Pritchard recalled one difficult insured to place coverage for was a window manufacturer who wanted product coverage for mold. If the window ends up in a water intrusion incident, that manufacturer, along with all the handlers up to the builder, can become named parties in a lawsuit with the resulting legal defense costs.

"So, it is incredibly difficult to find coverage for that, because in many instances it is not the failure of the product but how it is installed," Mr. Pritchard said.

Brokers and wholesalers play a crucial role in extracting the best terms and conditions, which are becoming more favorable to the insured in what Mr. Morawiec terms an "aggressive" environmental market.

"If the underwriters have the authority to amend the policies in favor of the client, they will do it," he said.

Such discretion exists in environmental lines more than others, Mr. Morawiec said, because many of the policies are in the nonadmitted market. "The regulatory issues of changing the wording are not really there," he said.

That also means insureds and brokers need to be wary of wording changes. Some carriers may claim that a new policy form provides new coverages, "but what they fail to tell you is what the new form is taking away."

"Talk is cheap. You just have to look at the form to know what is going on," Mr. Morawiec said.

He also advised that pollution coverages need to be coordinated with other policies. Some pollution coverages may exist in general liability programs, but exclusions make it important for the insured to sort out exactly what is covered and what is not. "Pollution coverages cannot be offered in a vacuum," Mr. Moraweic said.

For more than 17 years, since the Exxon Valdez oil spill, companies have faced a new potential environmental exposure should their pollutants contaminate those areas such as wetlands and nature reserves held in the public trust.

Natural resource damage claims can run into significant amounts, particularly for those insureds in states where the issue is taken seriously. Such coverage is usually included as part of site pollution policies at no extra cost. "But if you have a significant exposure to that–if you are surrounded by wetlands–then hopefully an underwriter who knows what he or she is doing is going to recognize that." Mr. Bennink said.

This new exposure has arisen as states, particularly New Jersey, have sought to recover cleanup costs for greater surrounding areas.

Mr. Camfield said some states have even sought retroactive coverage for past damages. Still, the exposure remains just one more factor that goes into underwriting site pollution liability and has not resulted in any new endorsements or added features.

As one of the least penetrated areas of coverage, Mr. Bennink estimated the growth rate for environmental insurance policies at about 20 percent a year. "I would say environmental insurance clearly has the most upside potential," he said. While environmental insurance has been around for 25 years, "it really didn't hit a stage of exponential growth until about five years ago," he said.

As a 13-year veteran of the business, Mr. Camfield recalls that time as one when exposures like mold migrated from commercial general liability lines to environmental units, where there was the expertise to underwrite them more accurately.

As potential insureds become more aware of the risks, carriers are designing more products specifically tailored and reasonably priced to meet these concerns, Mr. Bennink said.

Retail chains in their quest for the perfect location may sometimes find that one of those locations was once a gas station, which in the past could have raised alarm bells in the risk management department. But now environmental insurance products can quell those fears, so retailers can move their focus to potential customer traffic, Mr. Camfield said.

In addition, environmental policies are becoming critical components in mergers and acquisitions negotiations, as no acquirer wants to be saddled with surprise environmental liabilities, Mr. Camfield said.

Stricter accounting rules concerning the reporting of environmental liabilities have led to a new market for environmental insurance, Mr. Bennink said. (See related article, page 26.)

While in the past policyholders may have had their own informal "don't ask, don't tell policies," their accountants need the numbers now about such liabilities, which in turn forces companies to think seriously about covering them.

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