Navigating the U.S. Environmental Liability Market (Part 2)
March 2002
In this two-part article, Alan Bressler examines
the current state of the environmental insurance market, including the players,
capacity, mold, and bio-terrorism.
by Alan
Bressler
Marsh Environmental Group
In Part 1 of this article, we examined the
current state of the environmental insurance marketplace, how it developed,
its current role, and the markets and capacity that are currently being seen.
This article will address the two areas of concern most likely to affect the
market: the repercussions from the September 11 disaster and emerging environmental
concerns, specifically mold and bio-terrorism.
State of the Market Post-September 11
The events of September 11 had a direct and severe impact across worldwide
primary and excess insurance markets. Published sources have put forth loss
estimates in the range of $30–$50 billion, exclusive of life- and health-related
claims. Coverage lines hit hardest were property and business interruption,
aviation hull and liability, and workers compensation. The resulting losses
will spread across hundreds of insurers and reinsurers in the United States,
Europe, and Bermuda. While the environmental insurance market does not appear
to be directly affected by the catastrophe in the short term, some indirect
effects might be expected, as discussed below.
Most environmental insurance programs are non-layered, meaning that one insurer
or market typically provides the full limit of liability under the policy. This
unique quality of environmental coverage is possible because many major environmental
markets historically have written in excess of $100mm capacity. To the extent
that most insurers will find it more difficult to obtain support above $100mm
on a treaty basis, and even find it difficult to secure treaty support up to
$100mm for evolving exposures like mold, programs with limits above $100m will
increasingly be placed on a layered basis or via the use of facultative reinsurance.
Insureds will foot the bill for increased reinsurance costs, net exposures,
and the cost of having several primary insurers layer their programs; these
increases, however, will be moderate in most cases, especially when compared
with more traditional lines of coverage. Total market capacity for environmental
coverage is not expected to be severely hampered in the context of the vast
majority of programs placed.
Many environmental markets use the same, select few reinsurers for a large
portion of their facultative and treaty reinsurance. As a result of the reinsurance
markets' significant exposure to the World Trade Center and other catastrophic
events in 2001, facultative markets may be less supportive of environmental
risks for off-treaty considerations. This could result in dampened enthusiasm
from primary insurers for new or expanded coverages outside their current treaty
reinsurance agreements.
However, since environmental coverages have not experienced the high loss
ratios of other reinsurance lines, there is an expectation that environmental
capacity will not be severely affected by the September 11 tragedy. The presence
and health of reinsurers in the environmental marketplace is undoubtedly important,
but buyers have access to significant capacity in the primary environmental
insurance market even if reinsurers begin to abandon coverage, which is not
expected.
Environmental premiums are expected to rise an additional 5-10 percent in
2002 due to the events of September 11 and continued uncertainty in the financial
markets. However, the need for, and increased complexity of, environmental transactions
should overshadow the premium increases. When viewed in the context of, for
example, a $10 billion merger or acquisition, the increases will not have a
material impact on the financial structure of the transaction.
Further interest rate reductions are likely to cause increases in the rates
and premiums of short-term environmental finite risk programs. Longer-term programs
will be less affected as normalcy returns to the financial markets.
Addressing New Environmental Concerns
New environmental concerns are creating coverage questions for both traditional
P&C insurers and specialty environmental markets. In 2002 two new environmental
concerns will continue to challenge underwriters, brokers and insureds: mold
and bio-terrorism. These are creating coverage issues where none previously
existed, and careful policy language review and negotiation is often required
to manage these problems.
Mold: The New Asbestos?
Prior to 1990, mold claims were virtually nonexistent. Yet, in recent years,
mold has become a significant issue that has spawned a new breed of specialists
on the subject, including attorneys, contractors, industrial hygienists, consultants,
doctors, and other professionals.
Insurance coverages that might address mold claims include homeowners, commercial
property and commercial general liability (CGL) insurance policies. Finding
coverage under CGL policies has proven difficult for many insureds, based on
the "absolute" pollution exclusion attached to these policies.
While several jurisdictions have held that coverage for mold is not eliminated
by this exclusion, the question of whether or not mold fits the ISO CGL pollution
exclusion definition of a "pollutant" is yet a matter for courts to decide.
The ISO CGL pollution exclusion will not, however, be the only policy language
issue that determines each case. The owned property exclusion, for example,
precludes coverage for property damage to owned, rented, or occupied real or
personal property.
Coverage for mold-related claims may be found in these traditional coverages
on a case-by-case basis, depending on how mold claims are brought, the jurisdiction
in which the claim is made, and the specific policy language. Indeed, the battle
over mold coverage in insurance policies has only begun. Who will ultimately
win the war remains to be seen.
Environmental liability policies seem to be the most liberal when it comes
to finding coverage for mold-related exposures. Most environmental liability
underwriters have indicated that mold and other indoor air quality issues fall
within policy language of a covered pollutant. Even where the definition of
"pollution conditions" under environmental insurance is determined to be broad
enough to provide coverage, several other policy language issues make components
of a potential loss difficult to judge.
The clearest example is the issue of cleanup costs, usually a defined term
in environmental liability policies. The definition is typically tied to existing
and future environmental regulations. For example, in soil and groundwater contamination
incidents, coverage for cleanup costs is typically tied to contamination that
requires a remedial action under federal, state, or local environmental statutes
that provide guidance as to what constitutes an acceptable cleanup response.
At this writing, while many states and cities are debating specific cleanup
standards for mold, there are currently no such legal or regulatory standards.
Not only might this affect coverage for cleanup costs when the policy is
written on a "discovery" basis, it also raises questions about the extent of
cleanup. Assuming the environmental underwriter accepts coverage based on the
definition of pollution condition, the insured and the insurer may have different
perspectives on the most appropriate remedial methodology and resulting cost.
For example, the insured may seek to replace all affected material in the
building, often at enormous expense. The insurer, on the other hand, may deem
that it is only responsible for the cost of cleaning-rather than replacing-the
tainted material. Other issues, such as expenses for industrial hygienists to
monitor air quality during and after the selected remedy, could become matters
of contention.
Increasing claims frequency and severity are causing the environmental underwriting
community to carefully underwrite each risk. Depending on the insurer and the
risk, it is now more common than ever to find initial quotations for environmental
insurance have mold coverage restrictions. Generally, construction and fixed-site
facility-related environmental programs for habitational risks face the most
scrutiny.
At present, providing sublimits for this exposure and limiting coverage for
actual remediation expenses appear to be the predominant methods of underwriting
restrictions in the market. Nonetheless, underwriters need to be made aware
of appropriate mold loss prevention practices as part of routine operations
and maintenance (O&M) programs at commercial and habitational facilities. Combined
with aggressive negotiation with underwriters, most insureds are likely to find
adequate protection available from the market.
Bio-terrorism
Given recent world events, bio-terrorism concerns and, more specifically,
anthrax-related claims are among the highest risk concerns of many corporations.
The insurance industry has not yet taken a position on anthrax or other biological
terrorist agents as a pollutant or whether the resulting losses from anthrax
exposure would be covered under standard CGL policies.
The presence of a war or terrorism exclusion on any policy—general liability
or pollution-would presumably preclude a bio-terrorism claim against the policy.
However, in the absence of such exclusion, and depending on specific policy
wording, coverage for third-party bodily injury claims could be found under
traditional liability coverages. At this writing, the issue of whether or not
anthrax (or other biological agents) falls within the definition of "pollution"
in CGL policies, or of "pollution conditions" in environmental liability policies,
has not been decided in any jurisdiction.
Pollution coverages available in the environmental market may be a source
of coverage for bio-terrorist related claims, given the absence of a war and
terrorism exclusion. As always, specific policy language would need to be examined
to determine the extent of applicability of the policy to the claim.
In the absence of exclusionary language, insurers may be held to pay for
bioterrorism claims under most general liability and pollution liability coverages
until exclusionary policy language is developed and issued by underwriters.
Similar to the mold debate, even where coverage is deemed to apply to traditional
tort claims (mainly bodily injury), the issue of cleanup costs and how they
relate to (currently nonexistent) environmental regulations further complicates
a matter that is already in uncharted waters.
Conclusion
The environmental liability market is experiencing a hardening cycle just
as is the broader P&C marketplace. For the environmental market, this represents
the first "up-cycle" in the history of the line. Fortunately for insureds, this
segment of the market has not been as hard hit as other lines of P&C coverage.
Capacity, product flexibility, length of policy terms, and coverage provisions
have seen, for the most part, modest changes.
Insureds can expect to see increased underwriting scrutiny, higher retentions,
and minor increases in pricing. On the other hand, the environmental underwriting
community has worked hard over the last 15 years to gain acceptance of their
products. Insurers are well aware that imposing severe coverage restrictions
in the face of a tightening market would negate the goodwill their efforts has
created among sophisticated buyers.
Key players in the environmental market are here to stay. Increased historical
data, improved technical underwriting expertise, improved products, wider acceptance
as an important business transactional tool, and underwriting profitability
have given underwriters and their reinsurers staying power and confidence. No
one can look into a crystal ball and predict the future of this market niche,
but the market seems to be staying the course in spite of difficult conditions.
Follow this link to see Part 1 of this article.
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