The purpose of an environmental insurance policy is to fill the insurance
coverage gaps created by pollution exclusions in liability and property
insurance policies. Because pollution exclusions vary a great deal in property
and liability insurance policies, environmental insurance policies vary a great
deal as well. Virtually any legal business activity can be insured for a
fortuitous pollution loss event under an environmental insurance policy.
Environmental impairment liability (EIL) insurance was first introduced in
1978 and has been in constant evolution since. AIG insurance company introduced
its private label version of environmental impairment liability insurance under
their brand name "Pollution Legal Liability" in 1980. Contractors
environmental liability was first introduced by AIG under the brand name
"Contractors Pollution Liability" in 1986.
There are well over 100 different genuine environmental insurance policy
forms available in 2015. Market capacity exceeds $200 million in limits of
liability for a single risk.
There are no industry standards for the coverages offered in an
environmental insurance policy. As a result, the coverages offered between
different environmental insurance policies vary a great deal, even within the
same coverage line.
There is very little regulatory oversight of the coverage line because
almost all of the environmental insurance policies are written in the excess
and surplus lines insurance marketplace. Therefore, when evaluating different
CEL options, for example, it is necessary to perform a coverage review of the
actual policy forms and endorsements. Environmental insurance policies should
not be evaluated on premium, deductible and limits alone. It is possible to
purchase an environmental insurance policy that will not insure 90 percent of
an insurance buyer’s loss exposure if a poor match of policy form to the
particular customer’s insurance needs is made.
Essential Coverage Elements in a Genuine Environmental Insurance
Policy
Genuine environmental insurance needs to have an insuring agreement that
provides specific coverage for losses arising from the release or escape of
pollutants. At a minimum, insurance coverage will apply to losses arising
from:
- Bodily injury (mirrors and sometimes enhances the definition used in the
general liability (GL) policy)
- Property damage (mirrors and sometimes enhances the definition used in
the GL policy)
- Cleanup expenses (usually as required by environmental laws with
available enhancements by class of business)
- Defenses costs (usually included within the limit of liability)
Common optional coverages include:
- Non-owned waste disposal sites
- Transportation of pollutants as cargo
- Business interruption
- Loss of rents
- Extra expense
- Reputational damage
- Midnight dumping on insured locations
- Coverage for fungi/bacteria as defined pollutants
- Amended definitions of cleanup costs for contaminates that are not
regulated as hazardous materials (fungi/bacteria)
- Reputational damages
Basic Environmental Liability Insurance Policy Forms
There are three basic environmental liability insurance policy forms.
-
Environmental Impairment Liability (sold under various
product names)
Coverage only applies to listed locations.
This policy form can provide coverage for first-party cleanup costs,
business interruption, loss of rents and extra expenses coverage. These
coverage extensions are especially important on commercial buildings and
habitational risks, such as apartment complexes and hotels.
Regarding the insurance application process, underwriters basically need
to know about the preexisting pollution conditions at the insured locations
(if any), the raw materials or inventories at the insured locations and the
size and use of the insured property.
-
Contractors Environmental Liability
Coverage applies for pollution events arising from the operations of the
insured as described in the insurance application. In some cases, the
insurance application specifically becomes part of the part of the
insurance policy.
The insurance application process; Underwriters basically need to have a
description of the insured operations and a measurement of relative size of
the operations to be insured which is usually measured by dollars of gross
revenue.
-
Professional Liability
In most cases professional liability for pollution related losses is
provided under a professional liability policy that does not have a
pollution exclusion.
The insurance application process mirrors traditional professional
liability underwriting with an emphasis on the professional qualifications
of the insured.
Common Coverage Mistakes Made in Environmental Insurance
There are many mistakes made when placing or buying environmental insurance.
Following are some:
- Selling a policy form that is not fit for the purpose for which it is
intended. Selling an insurance policy designed for an industrial site to a
hotel is a common example in EIL policy placements. In another common
example, the package general liability/contractors pollution liability
insurance policies needed to insure a fire and water damage restoration
contractor were originally designed to insure nuclear weapons manufacturing
plant cleanup contractors. The original package insurance policy design for a
nuclear cleanup contractor is not well suited to a contractor working in a
private residence kitchen. Most environmental insurance policies need to be
amended to address the specific coverage needs of the insured parties.
- Failure to address completed operations loss exposures in contractors
environmental liability (especially on project-specific insurance
placements).
- Not addressing the full effects of the pollution exclusions in standard
property and liability insurance policies within the design of the
environmental insurance placement.
- Selling environmental insurance policies with fundamentally flawed
coverage for fungi/bacteria.
- Not addressing preexisting pollution conditions on the environmental
insurance policies sold to farms.
- General sloppiness on additional insured endorsements and certificates of
insurance.
- Underestimating the full effects of pollution exclusions in standard
policy forms.
- By far the most common coverage mistake made by insurance agents/brokers
is to leave their customers ignorantly uninsured for contamination related
losses. Usually this is caused by the self-guided belief that somehow
pollution exclusions only apply to hazardous waste. That turns out to be a
very dangerous assumption for insurance agents and brokers to make from a
professional errors and omissions standpoint.
How bad are the coverage mistakes with pollution exclusions and
environmental insurance in practice? The answer is amazingly bad. The #1
coverage flaw for contamination risks is unnecessarily uninsured loss
exposures. Second to that problem is the sale of environmental insurance
policies that contain fundamental coverage defects. This usually occurs when an
environmental insurance policy that was never designed to be used in the class
of business it is going to be used for is sold to an uninformed buyer by an
uniformed insurance agent or broker. As a result of these factors working in
concert, the vast majority of commercial insurance buyers are needlessly and
ignorantly uninsured for losses caused by a contamination event of some
sort.
Here are some common examples of unnecessary coverage flaws in practice:
- 99+ percent of apartment units currently are unnecessarily either
uninsured or underinsured for losses associated with
pollutants/mold/bacteria/lead /asbestos or category 3 water. Environmental
insurance on apartments has been available in the environmental insurance
marketplace at a cost of around $24 a door for over 4 years. The $10,000
minimum premium for this coverage has been the most significant price barrier
to the widespread sale of environmental insurance on apartment buildings. As
of this writing, minimum premiums are as low as $3,500 for that same
policy.
- Within the 1 percent of apartments that actually have environmental
insurance in place, it is common to find coverage only for legionella
bacteria as a defined “pollutant” in the environmental insurance policy.
Because of universal exclusions for fungi/bacteria, literally hundreds of
thousands of different forms of bacteria are fully excluded causes of loss
today in property and liability insurance policies. Of interest, an EIL
policy that covers all types of bacteria as a “pollutant” can cost less than
an environmental insurance policy that limits the bacteria coverage to only
legionella bacteria.
- Today, almost all commercial buildings are unnecessarily uninsured or
underinsured for a loss that is related to a speck of fungi or bacteria in
any sequence in the loss events.
- 95+ percent of condominium owner associations have sublimits for Category
3 water losses that cover only 10 percent of the average Category 3 water
loss in a high-rise condo building. ($25,000 versus $250,000)
- 90 percent of fire and water restoration contractors are sold
fundamentally defective general liability insurance programs for
fungi/mold/bacteria/Category 3 water remediation related job sites.
Yes, you read that right, technically all claims from these job sites become
excluded by the fungi/bacteria exclusion in the GL policy, not just claims
arising from actual exposure to these contaminates. Even the highest quality
CEL policy cannot fix this fundamental coverage flaw in the general liability
insurance policy. Customized GL/CEL insurance packages that close the GL
coverage flaw in this class of business are widely available but woefully
underutilized. Judging from the insurance coverage defect rate in this class
of business, insurance agents and brokers have no idea that fungi/bacteria
exclusions commonly found in GL policies apply to claims from the work site,
not actual exposure to fungus or bacteria.
And the list goes on and on…
How To Fix Common Coverage Glitches for Contamination Losses
The first step is for insurance agents and brokers to specifically
address—rather than ignore—the environmental risks in their customer base. See
A User's Guide to Pollution Exclusions, which contains a field guide
that serves as a tool in beginning that process. Commercial insurance buyers
need to be informed on the effects of pollution exclusions and offered
insurance coverage solutions if they are available. There is a lot more
environmental insurance product available at lower prices than most insurance
agents and brokers realize.
To avoid coverage mistakes in environmental insurance placements, most
insurance agents and brokers will need to seek out specialists in environmental
risk management and insurance. All the training in the world on traditional
property and casualty insurance does not prepare an insurance agent or broker
to work with environmental insurance. A working knowledge of the environmental
risks and insurance drivers in certain classes of business is relatively easy
to master with a good coach.
The inaccurate beliefs and myths about the effects of pollution exclusions
persist because there is a dearth in training venues on the subjects of
environmental risk management, pollution exclusions, and environmental
insurance. To make matters worse, much of what was taught about pollution
exclusions in the past was simply not technically accurate. A fledgling
not-for-profit organization is set to help correct that problem. The Society of
Environmental Insurance Professionals (SEIP) is a not-for-profit educational
organization dedicated to expanding the understanding of environmental risks
and environmental insurance. (www.seipro.org). Anyone wanting to keep current
on environmental risk and insurance should get on the SEIP mailing list.
Conclusion
Environmental insurance can be a profitable line of business for insurance
agents and brokers who take the time to become functional in the coverage line.
However, judging from the coverage defect rates in actual environmental
insurance placements, insurance producers need to seek out qualified help to
match the environmental coverage needs of their customer base with an
environmental insurance policy that is fit for the purpose for which it is
intended. With over 100 different environmental insurance policies to choose
from, certainly there is a good match of insurance coverage for any type of
insurance buyer.