Expert Commentary

Environmental Insurance: Just the Facts

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
October 2015

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, discussed below.

  • 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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)
  5. 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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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