The U.S. Environmental Liability Insurance Market-Reaching New Frontiers
May 2000
The number and types of environmental insurance
markets and products offered has increased dramatically in recent years. This
article looks at the trends and events surrounding the market and provides a
snapshot of the current environmental insurance marketplace.
by John
A. Hannah
Marsh,
Inc.
The U.S. environmental liability insurance market has continued to experience
significant growth since its development in the early 1980s. The market was
originally created to provide mechanisms to satisfy the financial responsibility
requirements of hazardous waste facilities and environmental service companies
under local, state, and federal regulations. In the past 2 decades, insurers
have introduced an array of environmental coverage and provided the capacity
needed to respond to myriad known and unknown liabilities and exposures now
confronting businesses and public entities across the United States.
Historical Perspective
A handful of insurance markets offered environmental coverage in the early
1980s, but were able to provide only limited coverage because reinsurers were
reluctant to accept these emerging exposures. At the time, federal and state
regulations were relatively new, and there was a great deal of uncertainty surrounding
the outcome of toxic tort claims stemming from various contaminants. As a result,
the market was extremely conservative in its approach to providing coverage.
Nonetheless, businesses in certain industries were often motivated to purchase
such insurance to satisfy contractual or regulatory obligations.
Strict underwriting guidelines, restricted coverage, and significant premiums
of the early market caused most companies to self-insure their environmental
exposures. Although many companies would have preferred to insure such exposure,
they felt the coverage provided limited protection at excessive costs.
The situation began to change however, as underwriting results proved favorable.
In the 1980s and 1990s, environmental insurance markets experienced a profitable
book of environmental insurance business. Since environmental claims traditionally
have been catastrophic in nature and not subject to great frequency, most long-term
market participants have been able to establish more than adequate reserves.
The maturing of the market also has produced more comprehensive loss data, allowing
insurers and reinsurers to gain a better understanding of the financial risks
involved. As a result, the amounts and types of coverages the marketplace offers
have grown dramatically.
Significant Events/Trends
A number of significant developments have affected the environmental insurance
market in recent years, including the following.
- A proliferation of environmental regulatory "cleanup" programs, such
as federal, state, and local "Voluntary Cleanup" and "Brownfield" initiatives
- Enforcement of environmental liabilities "disclosure" requirements for
U.S. companies under SEC and FASB rules
- Increased public awareness of environmental issues and an active legal
system
- A healthy economy that provides many corporations with the ability to
address environmental issues on a proactive basis
In addition, a number of broader trends are fueling the rapid growth of the
environmental insurance industry.
- Mergers and Acquisitions. Investors and
other parties to a business combination have become more familiar with environmental
risk transfer programs, which have been used to help resolve issues between
buyers and sellers related to a company’s environmental liabilities. Underwriters
and brokers offer expertise in the evaluation of complex purchase agreements,
indemnification, and other contractual documents, and coverage can be structured
to address a company’s contractual obligations.
- Utility Deregulation. In the United States,
the deregulation of utilities has generated mergers, divestitures, and acquisitions
as companies restructure to compete in a rapidly changing environment. Many
companies are evaluating and addressing environmental liabilities to satisfy
concerns of buyers and make more cost-efficient use of their assets, which
often include large real estate holdings. Despite existing pollution, real
estate may have the potential to generate revenue after it is cleaned up
and redeveloped. Environmental risk management programs have been used to
cap the cost of cleanups at these sites, insure those performing cleanups,
and protect real estate buyers from unknown environmental liabilities.
- Reuse of Military Bases. As the Department
of Defense (DOD) and the Department of Energy (DOE) scale down and consolidate
their operations, many government properties are being transferred to the
private sector for redevelopment—particularly as part of the DOD Base Realignment
and Closure Act (BRAC). Environmental insurance is being used to address
a variety of exposures that are potential obstacles to redevelopment, including
liability for hazardous waste cleanup costs. Recent legislative changes
make it possible for redevelopment authorities to take title to a site before
a cleanup is completed. Mitigation of environmental issues is a critical
component to the overall success of such projects.
- Commercial Real Estate Transfers/Brownfield Redevelopment. In addition to addressing the concerns of the buyer, seller, and developer
of commercial real estate, environmental insurance products may also protect
financial institutions associated with the transaction. In certain situations,
bank lenders could potentially be held liable for pollution conditions at
properties to which they are tied via a loan or other financial agreement.
As a result, lenders have become more careful with transactions that involve
potentially contaminated property. Lenders generally require environmental
studies and formal assurance that they will not be assuming liability for
future cleanup. In the absence of legislature and judicial relief from such
liability, lenders have turned to, and are increasingly comfortable with,
environmental insurance. The use of insurance has paved the way for property
transactions to proceed unimpeded. In addition, insurance is now also available
for secured creditors, providing coverage to pay either the outstanding
loan balance or the cost of cleaning up the property.
While industries of all types face myriad exposures resulting from environmental
issues, the size and type of environmental risk sometimes varies by industry.
Operational risks that affect many different industries and may nonetheless
be covered by environmental insurance programs include the following.
- All sudden and gradual pollution releases (including legacy liabilities)
- First- and third-party property damage and bodily injury claims
- First-party business interruption (loss of income)
- Historical and prospective unknown remediation (cleanup) costs
- Legal and defense expenses
- Liabilities resulting from the transportation and disposal of contaminants
- Historical remediation (cleanup) costs that exceed original estimates
for a single site or portfolio of sites
- All general contractors’ and environmental contractors’ operational
exposures
- Lender liability and protection of outstanding loan balances associated
with the lending activities of various financial institutions
U.S. Environmental Insurance Market Snapshot
The number and types of environmental insurance markets have expanded significantly
in recent years. Companies now have the ability to insure both known and unknown
liabilities associated with historical and future operations and contractual
obligations.
In addition, environmental products are quickly becoming a meaningful component
of most types of business transactions.
Significant capacity, broader policy terms and conditions, aggressive pricing,
multiyear policy terms, and knowledgeable underwriters characterize the market.
The changes have affected how and why U.S. industries and companies purchase
environmental products, as well as how underwriters package them. At present,
a handful of the major insurers provide the majority share of the approximately
$1.2 billion of premium in today’s market. The premium volume is expected to
increase at an annual rate of 20 to 25 percent. In spite of the projected growth
in gross written premiums, insurance companies will continue to compete aggressively
for market share, in terms of price, rate, and breadth of coverage.
Market capacity offered by any one insurer for a single transaction has continued
to increase, with most of the major markets offering $100 million per loss,
and some offering $200 million or more in the aggregate. With the introduction
of major international reinsurance markets into the primary market, total market
capacity is in excess of $1 billion. The market also has introduced a number
of niche specialty insurers for various lines of insurance.
Below is a summary of the current major providers of environmental insurance
and their capacity available for any one transaction.
Selected Environmental Liability Markets
Capacity as of May 2000
| AIG Environmental |
200 |
| Environmental Compliance Services,
Inc. (XL Insurance Company) |
150 |
| Kemper Environmental |
200 |
| Zurich-American |
150 |
| United Capital |
15 |
| Liberty |
30 |
| Chubb |
10 |
| Various other specialty environmental
insurers (cumulative capacity) |
250 |
| Total |
1,005 |
Additionally, it should be noted that global reinsurance capacity is in excess
of $800 million for any one placement.
The number and types of insurance products have increased continuously in
recent years. The following provides a brief summary of the major insurance
products being offered in today’s market.
- Asbestos Abatement Liability—Designed
to cover bodily injury and property damage that results from asbestos abatement
operations conducted by the remedial contractor. The asbestos coverage consists
of a series of endorsements added to the general liability policy. The limits
are shared between the two coverages, usually written on a blanket basis.
The policy is written on an occurrence basis.
- Asbestos Containment—Designed to cover
building owners if a release of asbestos occurs. The operations and maintenance
(O&M) program is a must for managing on-site asbestos containing building
materials (ACBM). Sudden/accidental release of asbestos, which results in
BI/PD, is covered on an occurrence basis. Loss must take place during the
policy term. Coverage is only provided for asbestos actually revealed by
a building survey. The policy form is offered on an occurrence basis.
- Cleanup Cost Cap—Indemnifies the owner
and/or buyer and/or lender as an insured for financial losses that arise
when the anticipated remediation costs are exceeded. The policy form is
offered on a claims-made basis.
- Contractor Operations and Professional Services—Covers
field operations and professional services, shares one set of limits, and
specifically schedules all activities. It is a combination of the professional
and contractor’s pollution insurance forms. The professional services coverage
policy form is offered on a claims-made basis. The contractors pollution
liability coverage is issued on either an occurrence or claims-made basis.
- Contractors Pollution Liability (CPL)—Covers
third-party bodily injury and property damage liability caused by a remedial
contractor arising from pollution conditions on customer work sites, and
covers pollution events and cleanup costs on a work site. Activities must
be specifically named as covered operations. The policy form is offered
on a claims-made basis.
- Environmental and General Liability Exposures—The
policy provides a combined general and pollution legal liability coverage
form with one set of limits. It can be issued for a specific site or a portfolio
of sites. The general liability includes either a claims-made or occurrence
insuring agreement and the pollution legal liability is issued on a claims-made
basis.
- Environmental Protection Program Closure/Post
Closure—Intended to satisfy the financial responsibility requirements
for closure/post-closure and liability protection required by individual,
state, and RCRA regulations. Closure/post-closure programs do not typically
cover third-party bodily injury, property damage, or defense expenses.
- Errors and Omissions (E&O)—Coverage addresses
errors and omissions resulting from professional services/opinions, including
pollution of engineers and consultants in the environmental services industry.
The pollution exclusion is deleted from the policies offered by these insurers,
or modified by endorsement to offer coverage for named activities. The policy
form is offered on a claims-made basis.
- General Contractors (GC) Pollution Liability—Designed
to provide pollution coverage for general contractors resulting from contingent
liability created by acts of subcontractors whose insurance can be insufficient
for the GC’s protection; and incidental liability, for situations where
the contractor is unaware of contaminants at a site and the process of performing
the construction project causes a release of pollutants. The policy form
is offered on a claims-made basis.
- Lead Abatement Contractors Liability (remedial
contractor)—Designed to cover bodily injury and property damage arising
from lead abatement activities of a remedial contractor. The policy may
be written with or without general liability coverage. The policy form is
offered on an occurrence basis.
- Owner Controlled Environmental Insurance Program
(OCEIP)—Asbestos Abatement Project, Environmental Remediation/Consulting
Projects—The program is a master policy designed to fit the needs of the
owner/contractor resulting from a remediation or asbestos/lead abatement
project. Any of the policies can be put into wrap-up form on behalf of the
owner or contractors.
- Owner’s Protective Professional and Environmental
Liability—Policy covers the owner for environmental impairment as
a result of the professional services of the architect/engineering firm(s),
construction services of the construction contractor or the A/E firms, and
completed operations of the contractor or A/E firm. In addition, it covers
the owner for negligence in performance of professional services performed
by the A/E firm. The policy form is offered on a claims-made basis.
- Owner’s Spill Liability—Policy provides
coverage for bodily injury, property damage, and cleanup costs resulting
from an incident during transportation by a carrier of the named insured’s
product or waste.
- Pollution Legal Liability (PLL or EIL)—PLL
covers pollution conditions emanating from the designated locations. Off-site
third-party, BI/PD, cleanup, and defense costs are included in the limit.
As a general rule, the markets will endorse the policy to add on-site coverage.
Coverage may be available for a specific site or a portfolio of sites. The
policy can also be amended to provide coverage for the transportation and
disposal of waste, first- and third-party diminution of property value,
and first-party business interruption. The policy form is available on a
claims-made basis.
- Secured Creditor/Creditor Reimbursement for Environmental
Damages—This policy is designed to protect companies (banks) offering
credit secured by real property from losses (outstanding loan balance) based
on environmental claims. The policy pays for covered loans upon default
when pollution conditions exist. The policy form is offered on a claims-made
basis.
- Storage Tank Pollution Insurance—Policy
is designed to meet federal financial responsibility requirements. Covers
bodily injury, property damage and corrective action resulting from release
from aboveground and underground storage tanks. On-site/off-site coverage
is available. Tanks must be in regulatory compliance. The policy form is
offered on a claims-made basis.
- Supplemental Environmental Auto Liability (SEAL)—Coverage
applies to bodily injury, property damage, and cleanup costs that are a
result of pollution release from transported cargo carried by a covered
auto. Standard auto policy excludes this unless it is amended to provide
the environmental coverage.
Coming Up
This report sets the stage for this column with an overview of the environmental
insurance market. Future articles will report on the details of specific policies,
the associated underwriting processes, and the application of these policies
in transactions associated with issues such as acquisition and divestitures,
property transfers, and Brownfield redevelopment.
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