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Environmental Coverage: Clear and Present Danger

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Agents with a keen eye for exposures will find plenty of opportunity – and capacity – in the environment

Less than 10 percent of environmental losses that businesses incur are insured. Yet by most accounts, the environmental marketplace is flush with capacity. So why the coverage gap?

The simple explanation is that most businesses prefer to roll the dice and operate without environmental insurance coverage, even when they know they have an exposure. Sometimes it’s shortsightedness, says Gina Jones, director of environmental programs at Burns & Wilcox, hearkening back to a situation in the wake of the Deepwater Horizon oil spill in the Gulf of Mexico, in which a hotel, fearing disruption to its business, sought coverage for business interruption. When the hotel’s risk managers learned they couldn’t get coverage for the current spill, only potential future events, they walked away from the table.

“Even though the business could clearly see it had real exposure to environmental risk, they decided to simply take a chance against future losses,” she says.

In other cases, the culprit is an “It can’t happen to me” mindset among buyers — and even among some brokers. “People equate environmental liability claims with Superfund sites, chemical manufacturers, [storage] tanks — things everyone recognizes as hazards. But the contractor who is painting a wall and doesn’t ventilate properly can have an environmental claim if someone breathes those fumes,” Jones says. “People don’t realize that even the most mundane applicants that come across their desk have environmental exposures.”

To illustrate her point, Jones rattles off a list of companies that have faced environmental claims:

  • A paving contractor that was assessed $150,000 in costs after rain washed cleaning chemicals into a stream.
  • A painting contractor that incurred $200,000 in losses for injuries caused by paint fumes from inadequate venting.
  • A utility contractor whose subcontractor hit an underground sewer, spilling raw sewage that required repair and cleanup costs.
  • A truck driver who was assessed $800,000 for the ecosystem damage and fish kill caused when his rig spilled milk into a local waterway after jackknifing.

“From the broker or agent’s standpoint, it’s also an E&O issue,” Jones says. “No agent wants a customer to have an environmental loss and then come back to them saying, ‘You never told me.’”

Pollution Solution

Certain industry segments appear to be getting the message about environmental liability.

“More and more, general trade contractors need contractors pollution liability (CPL) and often a contingent errors and omissions coverage,” says Mark G. Brown, senior vice president, environmental, at Crum & Forster in Freehold, NJ.

“Traditionally CPL was a voluntary market or a government-driven market for environmental cleanup contractors,” he explains. “Today the driving factors are contractual demands to provide evidence of CPL coverage for non-environmental trades and general contractors, as well as land and property owners who demand that leaseholders buy the coverage via contract.”

In the oil and gas sector, meanwhile, the understanding of environmental risk has become more acute, driven by concerns around the increasingly widespread extraction technique known as hydraulic fracturing, or fracking. The process involves vertical drilling and injecting fluids to release gas deposits. Although fracking has been around since the 1940s, concerns continue to center around the potential for environmental contamination, bodily injury, clean-up costs, natural resource damage, and transportation-related pollution. Even if liability is not established, policyholders will be looking for defense against third-party claims.

With a long history of successfully tackling the difficult risks associated with very real pollution exposures, the excess and surplus markets are well-versed in creative methods for structuring coverage for fracking. However, not all environmental markets are positioned to cover those operations.

“Crum & Forster Environmental is not an oil and gas or energy division, so we don’t offer coverage for fracking operations,” Brown acknowledges. “However, fringe opportunities exist in the site management and waste management areas. Coverage will be available for cleanup and restoration of the former drilling operations, as well as coverage for wastewater processing and disposal as a result of the operations.”

Other carriers appear more open to writing coverage for fracking operations. Liberty International Underwriters is a market for risks associated with the exploration and production of energy in many ways, including environmental, according to William McElroy, the company’s senior vice president of environmental.

“We do write risk involved in hydraulic fracturing of oil and gas wells,” he says. “We approach this risk with the same discipline and objective that we approach all aspects of our business, so we can be a stable, long term provider of coverage to our customers and producers,” McElroy says.

“Issues surrounding the development, transportation and use of energy resources are always vitally important in the world of environmental insurance,” he adds. “Recent developments in the industry have only sharpened the focus on this field.”

Flush With Capacity

In most environmental markets, capacity is strong, to the point where, in recent years, it has outpaced demand.

“There are more places to buy the coverage and more brokers selling it. In the past five years, there has been at least a doubling, maybe even a tripling, of environmental insurance markets to buy from. Anyway you look at it, the 15 markets of 2005 are closer to 40 markets now,” says Brown, adding that different markets do have different appetites and targets.

In an expanding market, it’s essential for brokers to choose a partner that knows the carriers and coverages available. Brokers need to understand the range of forms in the marketplace, including first party site pollution, third-party contractors pollution on a claims-made or occurrence basis, general liability and professional liability for environmental contractors and consultants, site pollution, contractors’ forms, environmental combined forms, as well as coverage in existing general liability, umbrella, and excess forms.

“Environmental risk and coverage is a technical specialty, with areas of risk and coverage constantly evolving,” says McElroy. “While many buyers and brokers come across environmental issues occasionally, it certainly helps to deal with subject matter experts when evaluating risk and acquiring coverage.”

Environmental policies are not one-size-fits-all. There are custom products for different exposures and different industries: health care, real estate, personal care products, agricultural products and more. Options such as coverage for increased restoration costs for green building upgrades either required or desired after environmental losses are also available, as are other add-on coverages, including transportation pollution liability, products pollution liability, employee benefits liability, mold, asbestos, lead, EIFS, silica, and natural resource damages. Coverage can also be extended to non-owned locations and additional insureds.

Finding Market Clarity

In this confusing climate, an experienced partner is essential to provide clarity. “We can assess a retail broker or agent’s book of business and individual accounts,” says Jones. “We can get them a quote for coverage with the company that is best for their client’s needs. If they have environmental policies in effect, we can do a coverage comparison to ensure they are covering their clients adequately and competitively.”

Burns & Wilcox also offers value-added services, such as continued education classes held across the country at its branch offices. For brokers and agents who are new to environmental liability insurance, or for those who work with it too infrequently to keep up-to-date on the latest developments, it is more important than ever to seek out the assistance of those with broad environmental expertise to ensure their clients’ exposures are properly assessed and addressed. The goal, says Jones, is to “take the frustration and confusion away from the broker or agent around environmental coverage.”

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