The need for environmental insurance on a broad spectrum of commercial
insurance buyers has never been greater than it is today. The insurance
distribution channels are not keeping up with the expanding needs of their
customer base for environmental insurance. The result is needlessly uninsured
losses.
In abundant and continuous supply since 1975, the market penetration of the
environmental insurance product line is currently less than 10 percent. The
poor market penetration of the environmental insurance product line cannot be
attributed to limited product availability or to excessive price. Historically,
many environmental insurance policies were being sold at a fraction of their
inherent loss costs. The minimum premiums today are at an all-time historical
low, making environmental insurance affordable for virtually any commercial
insurance buyer.
Although the number of environmental insurance policies sold every year is
growing, the capabilities of the insurance distribution system in the coverage
line are not growing as fast as the rapidly expanding need for environmental
insurance coverage in new classes of business. The main reasons for the poor
market penetration of environmental insurance are as follows.
- Insurance brokers are not technically proficient in the unique aspects of
environmental risks.
- The effects of pollution exclusions in property and liability insurance
policies and the need for environmental insurances are not well understood by
insurance practitioners.
- The plethora of complex, nonstandardized environmental insurance policies
makes it difficult to match environmental insurance policies to the needs of
insurance buyers.
Today, the majority of insurance buyers remain needlessly and ignorantly
uninsured on both property and liability insurance policies for losses arising
from a broad spectrum of potential contaminated losses. Insurance agent and
broker professional errors and omissions loss exposures for failing to advise
their clients on the need for environmental insurance are expanding at an
unprecedented rate due to the widespread availability of affordable
environmental insurance coverages. The professional liability loss exposure for
agents and brokers for uncovered contamination claims extends beyond current
customers—failure to advise loss exposures may arise from customers who, 15
years ago, were not presented with the documented opportunity to purchase
inexpensive environmental insurance for known and unknown pollution liabilities
dating back to the beginning of time.
The good news for the agents and brokers is decades-old gaps in insurance
coverage can effectively be erased through the current offering of
environmental insurance written on a claims-made coverage basis that either
does not have a retroactive date at all or has a retro date far into the past.
However, it will require proactive measures by insurance brokerage managers to
eliminate historical insurance coverage gaps and the resulting legacy
professional liability loss exposures for the brokerage firms.
Environmental Risks Are Expanding
Environmental risks for commercial insurance buyers are expanding in the US
economy at rates reminiscent of the late 1970s, when a series of major
environmental protection laws were passed. Now, decades-old water quality and
solid waste disposal laws are successfully being driven by citizen legal
actions into the agriculture sector of the economy. Large scale agricultural
operations start looking a lot like industrial-sized "polluters" to
the general public. A new concept in the agricultural community is that state
"right-to-farm" laws are not "right-to-pollute" laws.
In another example of expanding environmental risks, in 2015, the Obama
Administration expanded the reach of the Clean Water Act to nonpoint source
pollution. Today, a farm field with water running off into a waterway needs to
be concerned about the Clean Water Act. So do a wide range of other
organizations responsible for nonpoint source water contamination.
Coverage for Contamination Is Being Eliminated in Traditional Policies
In the face of expanding sources of "contamination-related"
losses, insurance companies have successfully been stripping down the amount of
coverage provided for these kinds of losses in standard property and liability
insurance policies for decades. Examples of this over just the past 15 years
include specific exclusions for fungus and bacteria, lead-based paint, silica,
and exterior insulation and finishing systems.
Emerging Environmental Insurance Markets
Restrictions in coverage in standard insurance policies increase the need
for environmental insurances. Based on the number of potential buyers of the
product, the need for environmental insurance is at an all-time high and is
expected to grow.
Exclusions for losses associated with fungus and bacteria turned many common
water intrusion events in buildings into technically excluded
"contamination" claims. Today, there are tens of millions of
commercial buildings that are needlessly uninsured for losses associated with
contamination of some sort. This is especially true for losses associated in
any sequence to the presence of any amount or type of mold or bacteria on or
within a building.
Another emerging market for environmental insurance is farming; hundreds of
thousands of farms now need to be concerned about environmental risks that,
heretofore, were outside of the environmental protection laws originally
targeting industrial operations. For the past 60 years, the biggest general
liability insurance loss exposure in farming was tractor and automobile
collisions. More changed in the environmental risk management picture of farms
in the past 18 months than over the past 20 years combined. The reason for this
is that now farms have the potential to be held responsible for cleaning up
groundwater contamination caused by common farming practices. Groundwater
cleanups can cost hundreds of millions of dollars. Environmental risks driven
by "make the polluter pay" environmental cleanup laws have
fundamentally changed the risk management picture and, by effect, the insurance
needs of the agricultural community. There are more than 2 million farms in the
US, and most of them are uninsured for pollution losses.
How To Improve Market Acceptance of Environmental Insurance
For the past 30 years, adding more insurance policy form choices and cutting
price well below loss costs have not been effective at improving the market
penetration of environmental insurance. Working on the customer experience with
environmental insurance products is the only way to get beyond the
less-than-10-percent market penetration of the product line and to close the
door on potential insurance brokerage malpractice loss exposures that are
created by the status quo.
A good first step toward improving the market penetration of the
environmental insurance product line is for insurance brokers and their
customers to avoid unintentionally uninsured contamination losses. To do this,
all it takes is the ability for the insurance broker to explain the
environmental loss exposures to a customer as a trusted adviser, not an
insurance salesperson. The adviser needs to explain the effects of the various
pollution exclusions on property and liability insurance policies relative to
the loss exposures of the client and then recommend the purchase of the
appropriate environmental insurance products to fill the identified insurance
coverage gaps.
The main constraint in performing all of those steps is the training of the
insurance agents and brokers. Historically, there were very few training venues
available. And when classes are offered on these topics, they tend to be
ignored by insurance agents and brokers who presumably do not see the need for
them. The Society of Environmental Insurance Professionals (SEIP) is poised as
a not-for-profit educational organization to tackle this long-term constraint
in the broader acceptance of environmental insurance products.
To the defense of the insurance agents and brokers, they are not going to
devote their training efforts into an insurance product line that their clients
do not want to purchase. But this is a Catch-22 situation—there is weak demand
because stakeholders do not know what environmental insurance is for. The
insurance product distribution system (insurance agents and brokers) do not
devote time to learning about environmental risk and insurance because there is
weak demand for the product line in their customer base. This situation has
been perpetuated for decades, and it would likely continue indefinitely, except
for the specter of multi-million-dollar professional malpractice claims
potentially being made against insurance brokers for leaving a customer
ignorantly uninsured for contamination losses in the face of an over-supply of
cheap environmental insurance. Expanding the working knowledge of environmental
risks and insurance in stakeholder groups would go a long way in correcting the
Catch 22.
Avoiding unintentionally uninsured contamination losses can only be
accomplished through educating the insurance salesforce and the public on
environmental risks and insurance. Education of stakeholders on these topics is
the primary goal of the SEIP.
Environmental Insurance Products Need To Be Simpler
Making environmental insurance easier to work with would go a long way
toward improving the market penetration of environmental insurance. The
environmental insurance application process is historically intimidating and
drives away potential buyers. Underwriters need to avoid "recreational
underwriting," where questions are asked of the applicant that require
many man-hours to answer but have no statistical bearing in the probability of
loss under the policy. Requiring lengthy insurance applications works
essentially as a tax that is over and above the premium, implicitly costing
more than the premium in some cases.
With over 150 different environmental insurance policy forms to choose from,
the product line is much more complex than it needs to be. Overwhelming choice,
without any standards for policy form construction, actually hurts the market
acceptance of the environmental insurance product line. To correct for this
impediment, there needs to be an industry consensus standard for the coverage
provided under a basic site pollution or a contractor's environmental
insurance policy.
The absence of industry standardization in the basic coverage parts of an
environmental insurance policy form drives away the sales force and potential
buyers from the product line. Standardized terminology used to describe the
basic coverages would help. For example, "cleanup cost" should have a
standard definition since the coverage intent between virtually all
underwriters is the same on this coverage part. The same could easily be done
for the definitions of bodily injury, property damage, and defense costs.
(Perhaps the SEIP could provide a venue for the development of consensus
language for core coverage terms.)
In another example of undue complexity, insurance policies with multiple
insurance agreements in a menu approach make the environmental insurance
product line unnecessarily difficult. One widely marketed combined general
liability and environmental liability insurance policy has seven different
insuring agreements in the base policy form. Multiple insurance agreements are
not a "feature" to the customer, and they are not a benefit to
mainstream insurance brokers either. It takes a knowledgeable insurance broker
8 hours per policy to compare two quotes from different insurers utilizing this
type of insurance policy form construction. The highest hurdle to overcome is
when duplicate coverage is described in different terms in separates parts of
the insurance policy. It takes a qualified practitioner a long time to figure
it all out. Novices rarely can. This means that insurance brokers avoid
environmental insurance altogether, preferring to sell lines they are
comfortable with, such as workers compensation and property insurance.
A preferable way to build environmental insurance coverage is to follow the
"all in" approach used in commercial general liability (CGL)
insurance. Under this approach, insurance buyers would be insured for all of
their environmental loss exposures in their operations on a turnkey basis.
Exceptions to the blanket coverage approach (e.g., known pollution conditions)
would be provided by endorsements. This type of an "all-in" approach
to policy design is much easier for stakeholders to work with and would improve
the market acceptance of the environmental insurance product line.
Insurance Buyers Are Currently Underserved
As the need for environmental coverages expands into new sectors due to
expanding regulations or exclusions, there simply are not enough trained
insurance agents and brokers who can describe in a credible fashion the need
for environmental insurance to their customer base. Educational efforts made by
the SEIP; the Independent Insurance Agents and Brokers of America, Inc.
(IIABA); International Risk Management Institute, Inc. (IRMI); and the Society
of Chartered Property and Casualty Underwriters (CPCU Society) to bring
knowledge on environmental risk and insurance to the salesforce are largely
ignored by insurance agents and brokers who find the subject matter difficult
to master and discuss with customers.
The poor market acceptance of environmental insurance is not a result of
constraints in the cost or availability of environmental insurance. A long-term
market leader in the sale of environmental insurance recently withdrew its site
pollution liability insurance product line from the marketplace in the face of
what could be a 300 percent loss ratio after decades of selling these policies.
It cannot be said that an insurance product is too expensive if the market
leader underwriter was selling insurance policies at one-quarter of the premium
needed to make an underwriting profit. In this situation, it was the insured
losses that were expensive—the premiums being charged were commensurate with
those found on the final clearance rack in a bargain basement retail clothing
store. This site pollution liability coverage was dirt cheap in relative terms
for over 20 years.
The minimum premiums charged for environmental insurance today is not a
constraint for most commercial insurance buyers. A contractor can purchase a
contractor's environmental liability insurance policy for a minimum premium
of $570, which will buy a $1 million limit of liability. Fixed sites, like
schools and hotels, have access to $3,500 minimum premiums to insure their
buildings for a $1 million limit of liability. Apartments can be insured under
a high quality environmental impairment liability (EIL) policy for $18 per unit
once the minimum premium threshold is attained. Environmental premiums are now
affordable for the majority of commercial insurance buyers.
Underserved insurance buyers on environmental risks is not a new situation.
Environmental insurance market capacity reached its peak between 1998 and 2005,
with slightly over a billion dollars in single site capacity. Those
environmental insurance products would insure the cleanup costs of a Superfund
site and were being sold by a handful of top-rated insurance companies. The
premiums for one of these package policies would be determined by discounting
the estimated cleanup costs of a contaminated site back to their present value,
which would form the base insurance premium to complete a remedial action plan,
then additional premiums would be charged for potential cost overruns in the
remediation process and any claims arising from unknown pollution conditions.
These insurance packages could have policy terms as long as 30 years. Over the
course of the policy term, cleanup costs charged by the remediation contractors
were paid as covered "claims" under the insurance policy. In this
aspect, the environmental insurance packages sold to insure contaminated sites
operated like a large workers compensation insurance program with a stop-loss
provision. All of the premiums paid were tax deductible as an insurance expense
by the purchaser. The sellers of these products found it difficult to get
insurance brokers to present the product to potential buyers of the
coverage.
Through the purchase of this type of insurance and variations of it,
commercial insurance buyers were able to ring fence their legacy environmental
loss exposures back to the beginning of time for known and unknown pollution
conditions at specified sites, at bargain basement prices, at very high limits
of liability, and for very long policy terms. Insurance buyers who chose to
self-insure their environmental loss exposures missed a window of opportunity
between 1998 and 2007. These types of comprehensive environmental insurance
packages are not available today.
Missing this window could spell trouble for the incumbent insurance brokers
at the time the opportunities were missed. However, the standard of care for
insurance brokers professional liability is pretty low. Generally, it is a
buyer-beware situation in the insurance marketplace. That changes somewhat if
an insurance buyer can establish that he or she had a "special
relationship" with an insurance brokerage firm and, therefore, relied on
the broker's advice on what insurance to purchase.
One significant reason for the poor market penetration of the environmental
insurance product line today is management decisions made 15 years ago within
the largest insurance brokerage firms. Few managers, if any at the time,
recognized the complexity and gravity of getting meaningful environmental
insurance coverages into the hands of their customer base or what the
consequences could be if they did not do so.
Today there are fewer environmental specialists on staff in the
environmental practice groups of the major insurance brokers than there were in
2002 when significant reductions in environmental resource personnel were
undertaken by most of the major insurance brokers in corporate restructurings.
In contrast, the number of insurance buyers in need of assistance has increased
ten-fold if indoor air quality and agricultural risks are taken into account.
To make matters worse, it is common practice in insurance brokerage firms to
limit their employees access to specialized expertise in the wholesale
insurance brokerage space due to preferred provider arrangements with
wholesalers who may not have the needed levels of expertise in environmental
insurance. Enabling the service teams within an insurance brokerage firm to
access specialized knowledge resources where they can find them would go a long
way to getting customers insured the right way for contamination losses.
Another common practice that leads to the poor market acceptance of the
environmental insurance product line is stakeholders relying on limited
exceptions to pollution exclusions in property and liability insurance
policies. Doing so forces insurance buyers into a game of insurance roulette.
For example, it is common for the pollution exclusion in a general liability
insurance policy to have an exception for some losses caused by a hostile fire.
But what if the pollution release was caused by wind?
In Wisconsin, the limited exception to the pollution exclusion on the
package insurance policy commonly sold to a dairy farm was considered
"useless insurance" by a Supreme Court Justice in a pollution-related
insurance coverage litigation case.1 In that case,
the court was asked to determine if a bacterial contamination in groundwater
loss as a resulting of spreading manure on a field was covered under the farm
package policy. The court decided the bacteria contamination of groundwater was
excluded by the standard pollution exclusion in the farm package policy. One
justice was amazed that insurance agents would leave farmers uninsured for such
an obvious loss exposure arising from their daily and unavoidable activities in
dairy farming. That comment was a warning shot to the insurance agents in
Wisconsin to not leave their clients ignorantly uninsured for environmental
risks. Other states are likely to follow Wisconsin's lead on this
topic.
Improve the Customer Experience and Stay Out of Court
Underwriters should not provide "useless insurance" by only
partially covering contamination losses arising from the core business
operation of an insured. If only partial coverage is being offered as a limited
exception to the pollution exclusion, the insurance buyer should be given the
option to purchase environmental insurance from another source.
Insurance companies, agents, and brokers should not represent limited
exceptions to pollution exclusions as "pollution insurance." Doing so
really confuses insurance buyers and judges if a claim goes into insurance
coverage litigation. If an insurance policy does not have an insurance
agreement that extends coverage specifically for pollution losses, it should
not be referred to as "pollution insurance." A more accurate
description of an exception to the pollution exclusion in a general liability
insurance policy would be "General liability insurance with limited
exceptions to the pollution exclusion."
Consider the example of a publicly traded company that states in its annual
report to shareholders that the firm had purchased "pollution
coverage" within its general liability insurance policy. In fact, what it
purchased was general liability insurance with a pollution exclusion—an
exclusion to the exclusion for certain defined pollution release or escape loss
scenarios and a third pollution exclusion that overrode parts of the first two
exclusions. An insurance policy that only speaks to covering pollution losses
within the context of exclusions is not really "pollution insurance"
as the term would be commonly understood. Being more up-front with the
descriptions of coverage would go a long way toward improving the customer
experience with environmental risks and staying out of court over insurance
coverage disputes on contamination losses. This would also help develop demand
for true environmental insurance coverage to the benefit of all parties
concerned.
The Role of Insurance Agents and Brokers
There are two major motivators for insurance agents and brokers to become
proficient in the sale of environment insurance products. First, there is good
money to be made in the product line if it is efficiently produced. In 2015,
one of the 17 Elite Insurance Agencies in America, according to Insurance
Business America magazine, sold environmental insurance policies almost
exclusively. In another ranking in the same magazine a few months earlier, two
of the "Top-10 Producers" in America specialized almost exclusively
in the sale of environmental insurance products. This top-producer competition
was unrestricted by age, sex, or class of business. It could not be won by a
large but stagnant book of business or by writing a hole-in-one large account.
Both winners were only 26 years old. They happened to work in the award winning
Elite insurance agency. This shows there are exceptional new business
opportunities in the environmental product line.
The second motivator for developing proficiency in environmental risk
management and insurance is at the opposite end of the opportunity
spectrum—this is the risk of claims being made for insurance broker negligence
in the case of needlessly uninsured losses associated with contamination
events. This loss exposure to insurance brokerage firms is growing faster than
any time in the past 40 years.
Management actions or inaction in insurance brokerage firms can exacerbate
or mitigate the professional liability loss exposures to the firm. Implementing
a simple four-step process on every commercial insurance buyer can mitigate
insurance professional liability loss exposures for failure to advise and offer
environmental insurance coverage in the past.
- Advise customers on their loss exposures to contamination risks.
- Advise on the effects of pollution exclusions in their specific property
and liability coverages.
- Offer the needed genuine environmental insurance coverage to the customer
in a proposal.
- Recommend its purchase.
To implement this errors and omissions loss prevention process, a general
practitioner will likely need to access some subject matter expertise in
environmental loss exposures and insurance coverage. It is not sufficient to
simply put a quote for environmental insurance in front of the customer.
Without performing the first two steps in the loss control process, it is very
likely that environmental risks will be underappreciated by the customer and
that there will a mismatch made between the underlying property and liability
insurance coverages and the proposed environmental insurance in the quote.
Such mismatches are very common. In one example, based on a review of 100
commercial insurance packages, 60 percent of fire and water restoration
contractors today are sold insurance packages where the
pollution/fungus/mold/bacteria exclusions in the general liability policy
exclude more than the very broadest contractors environmental insurance policy
can cover. To dig a deeper hole on the insurance broker malpractice front, 9
out of 10 of the reviewed insurance programs materially misrepresented the
actual insurance in force on the reviewed certificates of insurance. Both
situations create professional errors and omissions loss exposures for the
insurance brokerage firms.
Understanding the environmental loss exposures of the customer and the
underlying insurance coverage gaps created by pollution exclusions would avoid
the sale of fundamentally flawed insurance program designs. Apathy on the topic
of environmental risks and insurance is by far the largest loss exposure to the
insurance brokerage firms, potentially setting the up for an eight-figure
professional liability claim when a client is surprised by an uncovered
contamination loss that could easily have been insured with widely available
and inexpensive environmental insurance.
Conclusion
The need for environmental insurance has never been greater than it is
today. Environmental risks are expanding into new sectors of the economy at a
pace the insurance distribution system is not educationally prepared for or
motivated to handle.
Affordable environmental insurance products are in abundant supply and have
been for decades. However, expertise in environmental risk and insurance at the
insurance product distribution level is the main constraining factor in the
acceptance of environmental insurance into the mainstream of commercial
insurance.
Some improvement on the usability of the policy forms through basic
standardization would improve the market acceptance of the environmental
insurance product line. Currently, some of the environmental insurance product
designs are too complex to attain broad market support.
The convergence of new business opportunity and self-preservation risk
management in the insurance brokerage ranks should lead to a greater market
acceptance of the environmental insurance product line over time.
David Dybdahl is the President of American Risk Management Resources
Network, LLC. A 35-year veteran in the environmental insurance product line, he
specializes in the design and sale of environmental insurance products and has
served as an expert witness and consultant in over one billion dollars of
litigated environmental damages claims. He can be reached at or 608 836 9567 (direct)