There were more changes in environmental risks and in the environmental
insurance market in 2016 than there have been in any year since 1997. This is
an exciting time to be in the environmental insurance business. Many of the
things set in motion in 2016 will be affecting the risk management business 30
years from now. I wish I was 30 years old again so that I could see these 2016
changes ultimately settling in. This reminds me of 1982 all over again.
The US public is much more aware of the human impact on the environment than
it has ever been. In North Dakota, 10,000 people camping in the winter to
protest a new oil pipeline is a testament to that relative new awareness and
concern. This environmental awareness also translates into less tolerance for
pollution and polluters. Less tolerance translates into more claims for
environmental damages in the courts.
Clean Water Act
Correspondingly, environmental risks are expanding to Main Street businesses
and farms at an unprecedented pace. In 2016, the Clean Water Act was expanded
to encompass nonpoint source pollution. A point source is a drain pipe. A
nonpoint source could be a farmer's field or a water drainage district. One
water drainage district can involve hundreds of farms, the board of directors
of the water drainage district, and everybody who sold fertilizer to the farms.
Combine that with public intolerance and industrialized agriculture, and the
environmental risks in farming are entering a new world that farms are
unprepared to deal with.
That one change in the Clean Water Act, a decades' old environmental
protection law, sets federal environmental protection laws on a collision
course with decades' old state "right to farm" laws. In the
simplest terms, right-to-farm laws are not right-to-pollute laws, and federal
law prevails. Nine-figure pollution damage claims in this area have already
been made. Most of the parties involved in the farming sector do not have a
speck of useful insurance coverage in place for environmental damages to soil
and water today.
Environmental Insurance Capacity
There was a glut of environmental insurance capacity in 2016, and that will
be here in 2017 as well. The supply of environmental insurance products
exceeding demand has been the case since at least 1988, so that is not a new
situation.
The constraint in the marketplace that leads to poor market penetration in
the environmental insurance product line has always been in the product
distribution channel where insurance producers are not educationally equipped
to help their customer base manage environmental risks. The reactivation of the
Society of Environmental Insurance Professionals in 2016, a not-for-profit
educational organization dedicated to the advancement of knowledge on
environmental insurance, and webcasts from multiple providers on environmental
insurance and risks hold promise in creating the venues for insurance producers
to become more proficient in the coverage line.
The smaller end of the environmental insurance marketplace is less than 3
percent market penetrated. For example, there are 2 million farms without
adequate insurance for fertilizer-caused contamination to ground and surface
waters. There are over 2 million condo and apartment buildings that do not have
adequate coverage for mold or Category 3 water damage today. There are
significant sales opportunities for insurance producers in both of these
sectors.
2016 Environmental Milestones
The following are some of the environmental risk milestones from 2016.
- The city of Des Moines, Iowa, needs a new water treatment because farm
fertilizer spread on fields—in some cases, decades ago—has made its water
supply too unsafe to drink. The city would like the nonpoint polluters
upstream to pay $175 million for the new plant. Those "polluters,"
which include county board members in three counties upstream from Des Moines
on the Racoon River, are finding out firsthand why the Supreme Court justice
from Wisconsin said in 2014 that the liability insurance policies sold to
farms for pollution losses were "useless."
- A city in Alabama that draws in drinking water from a river is suing a
long list of manufacturers in Georgia for contaminating the river with
chemicals. Included in the list of damages the city seeks compensation for is
lost revenue due to its inability to sell its drinking water to its
residents. The damages claims being made by the city are for economic damages
due to reduced revenues from the sale of water.
- AIG, the company that basically invented commercially viable
environmental insurance in 1980, exited its pollution legal liability
coverage line in February 2016. AIG will no longer renew those policies.
Although there was no official reason provided for exiting the site pollution
insurance product line that I am aware of, the general consensus in the
marketplace is the exit was driven by poor loss ratios in the coverage line.
As these nonrenewed AIG policies are being replaced at sometimes 40 percent
price decreases, not enough attention (apparently, none) is being given to
formerly reported claims under the AIG pollution legal liability (PLL)
policies. Environmental impairment liability (EIL) claims sometimes take 20
years to fully develop from the date they were first reported. There is a
little quirk built into an AIG PLL policy (and others) that requires
perpetual renewal of the coverage with AIG for incurred by but not reported
claims to be covered. It is hard to renew a policy if the insurer will not
sell it. Hence, the incurred but not reported losses might not be covered at
all unless specific attention is paid to this loss exposure within the
replacement coverage.
- At least four new managing general agents entered the marketplace to sell
environmental insurance in 2016, adding to an already oversupply of
environmental insurance products and distribution points. Oversupply is
leading to lower premiums, which, in some sectors, were already likely too
low to begin with.
- The glut of environmental insurance products has made matching the
environmental insurance product to the needs of the customer even more
difficult for the insurance brokers. In some industry sectors, such as fire
and water restoration contractors, the fundamental coverage defect rate
between the general liability and environmental insurance is still above 80
percent in the policies sold to this class of business.
- For unknown reasons, claims adjusters seem to be denying losses that have
been paid for years under exceptions to pollution exclusions. This emerging
trend is especially noticeable in the oil and gas insurance sectors. For
decades, insurance companies in this sector have sold general liability (GL)
policies showing "pollution" coverage on the declarations page. The
"pollution coverage" on these GL policies is actually a series of
exclusions related to pollution. Under certain circumstances associated with
the pollution event, exclusions to the pollution exclusion can lead to a
covered loss, or an uncovered loss, depending on which claims adjuster's
view is taken. In 2016, there seemed to be an unusual number of claims denied
for pollution based on the perspective of the claims adjuster, sometimes in
midlevel layers of excess placements, even when the insurers below and above
the contested coverage layer had paid for pollution damages. In my
experience, depending on exclusions to exclusions is not the best way to
insure for pollution damage losses. It is better to have the pollution
coverage within an insuring agreement. Pollution exclusions are hard enough
to understand without adding into the mix pollution exclusion exclusions. It
is no wonder there is emerging coverage litigation in the arena.
- For unknown reasons, the insurance companies that sold GL insurance
between 1980 to 1986, and have been paying for pollution claims over the past
few decades under those old GL policies, have started to investigate what
kind of primary environmental insurance was available to cover
pollution-related losses after 1986. The legacy GL insurers would like to
debunk the myth that GL insurance buyers could not buy meaningful pollution
coverage after 1986. If the legacy GL insurers can show the primary
environmental insurance was available but not purchased after the
"absolute" pollution exclusions were added to GL policies, those
insurance companies could free up billions in incurred but not paid pollution
claims. Of course, that means that the responsible parties would have to pay
the environmental legacy claims out of pocket if they have not purchased
primary pollution insurance.
- The biggest change I experienced in 2016 was a tenfold increase in expert
witness work on environmental insurance-related topics. More requests for
expert witness support work were presented to me in 1 year than in the past
10 years combined. The litigated pollution insurance damages in the cases I
did work on exceeded a billion dollars. Our research/report production team
produced 90,000 words in expert reports with well over 15,000 pages of
supporting documents, all detailing the availability of environmental
insurance after 1986 and the workings of environmental insurance in custom
and practice.
The takeaway for the insurance producers reading this last point is: Why was
their insurance coverage litigation on a billion dollars of pollution claims in
the first place? There has been a glut of environmental insurance capacity
since 1988. There are not a lot of good reasons to have uninsured pollution
losses any time after 1997 for anything less risky than the containment
operations for the Chernobyl nuclear disaster in the Ukraine.
Professional Liability Effects
Expanding environmental protection laws, combined with a historical surplus
of underpriced environmental insurance, is setting up hundreds of insurance
brokers for professional liability claims arising from leaving their clients
needlessly uninsured for pollution-related losses. In some cases, insurance
brokers have their feet being held to the fire for their activities, or lack
thereof, 20 years ago, which left their customers uninsured for environmental
losses today.
A very much underappreciated design-advantage of claims-made insurance
coverage is 40 years of neglect on pollution loss exposures, and the effects of
pollution exclusions can be erased by simply purchasing full prior acts EIL
coverage today. For insurance brokers, simply recommending insurance of this
type should alleviate allegations of neglect in the long-term customer base for
uninsured losses.
The departure of AIG in 2016 from the site pollution insurance product line
has created the biggest shift in the environmental insurance marketplace since
1987. A former product line manager at AIG tweeted that he estimated there was
300 percent loss ratio on the site pollution product line from placements made
more than 10 years ago.
This 20/20 hindsight is showing that environmental insurance has been
unrealistically cheap for decades based on these kinds of loss ratios. The
reason that the site pollution liability loss ratio affects everyone today, not
just the customers of AIG, is that, if the site pollution product line product
line really has a loss ratio that bad, it is not reasonable to say
environmental insurance is or was too expensive as a justification for not
buying the insurance.
History will show it was the insured losses under EIL policies that were
expensive, not the premiums charged. From at least 1997 to 2007, environmental
insurance for expected and unexpected loss costs, arising from known and
unknown pollution conditions at an insured site, was available dirt cheap. Some
of the policy terms were 30 years long!
As the pre-1986 GL insurers start to produce solid evidence that there was
over a billion dollars of retroactive primary environmental insurance capacity
available for purchase, the insurance brokers who did not recommend EIL
coverage 25 years ago, or any time thereafter, will be looked at under the
microscope for potential errors and omissions by the clients with uninsured
losses.
What To Expect in 2017
The public demand for a clean environment will continue to expand, even in
the face of a Donald Trump administration. A lack of government enforcement of
environmental protection laws would be expected to lead to more private
lawsuits.
The environmental insurance product line in the United States will continue
to expand at a 10 percent organic growth rate. Most of the growth will come
from small accounts where the market is less than 3 percent penetrated.
I foresee increasing pollution losses on Main Street businesses and
agricultural risks. Most of these losses will be uninsured. The errors and
omissions loss exposure to insurance agents will be light in this sector
because the uninsured clients, after the uninsured loss, will not have the
money necessary to pursue a professional liability lawsuit against the
agent.
With billions of dollars at stake, I expect the legacy GL insurers to
continue to perfect the "primary environmental insurance was
available" argument to deny losses for post-1986 pollution claims under
pre-1986 policies. Unlike the small account market, uninsured pollution claims
that could have been insured for 20–30 years under an insurance product line
with 300 percent loss ratio will put the larger brokers under the microscope
for professional liability losses. This new loss exposure for the brokers will
be on long-term customers who depended on the broker's advice on what to
insure in cases where the brokers did not go on record recommending pollution
insurance in the 1997-to-2007 time period.
Not paying for pollution claims under the exceptions to pollution exclusions
in GL policies has been expanding for the past 3 years, and I expect that trend
to continue. Those risks will migrate toward true environmental insurance
policy forms.
Conclusion
All of this spells more demand for environmental insurance from both the
large and small account market. It is a great time to be a specialist in
environmental insurance.