A Big Picture on Environmental Insurance

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.

1. Advise customers on their loss exposures to contamination risks.
2. Advise on the effects of pollution exclusions in their specific property and liability coverages.
3. Offer the needed genuine environmental insurance coverage to the customer in a proposal.
4. 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)

¹See Wilson Mut. Ins. Co. v. Falk, 360 Wis. 2d 67, 857 N.W.2d 156 (2014); Preisler v. General Cas. Ins. Co., 360 Wis. 2d 129, 857 N.W.2d 136 (2014).