Expert Commentary

Navigating the U.S. Environmental Liability Market (Part 2)

In this two-part article, Alan Bressler examines the current state of the environmental insurance market, including the players, capacity, mold, and bio-terrorism.

March 2002

In Part 1 of this article, we examined the current state of the environmental insurance marketplace, how it developed, its current role, and the markets and capacity that are currently being seen. This article will address the two areas of concern most likely to affect the market: the repercussions from the September 11 disaster and emerging environmental concerns, specifically mold and bio-terrorism.

State of the Market Post-September 11

The events of September 11 had a direct and severe impact across worldwide primary and excess insurance markets. Published sources have put forth loss estimates in the range of $30-$50 billion, exclusive of life- and health-related claims. Coverage lines hit hardest were property and business interruption, aviation hull and liability, and workers compensation. The resulting losses will spread across hundreds of insurers and reinsurers in the United States, Europe, and Bermuda. While the environmental insurance market does not appear to be directly affected by the catastrophe in the short term, some indirect effects might be expected.

Most environmental insurance programs are non-layered, meaning that one insurer or market typically provides the full limit of liability under the policy. This unique quality of environmental coverage is possible because many major environmental markets historically have written in excess of $100mm capacity. To the extent that most insurers will find it more difficult to obtain support above $100mm on a treaty basis, and even find it difficult to secure treaty support up to $100mm for evolving exposures like mold, programs with limits above $100m will increasingly be placed on a layered basis or via the use of facultative reinsurance.

Insureds will foot the bill for increased reinsurance costs, net exposures, and the cost of having several primary insurers layer their programs; these increases, however, will be moderate in most cases, especially when compared with more traditional lines of coverage. Total market capacity for environmental coverage is not expected to be severely hampered in the context of the vast majority of programs placed.

Many environmental markets use the same, select few reinsurers for a large portion of their facultative and treaty reinsurance. As a result of the reinsurance markets' significant exposure to the World Trade Center and other catastrophic events in 2001, facultative markets may be less supportive of environmental risks for off-treaty considerations. This could result in dampened enthusiasm from primary insurers for new or expanded coverages outside their current treaty reinsurance agreements.

However, since environmental coverages have not experienced the high loss ratios of other reinsurance lines, there is an expectation that environmental capacity will not be severely affected by the September 11 tragedy. The presence and health of reinsurers in the environmental marketplace is undoubtedly important, but buyers have access to significant capacity in the primary environmental insurance market even if reinsurers begin to abandon coverage, which is not expected.

Environmental premiums are expected to rise an additional 5-10 percent in 2002 due to the events of September 11 and continued uncertainty in the financial markets. However, the need for, and increased complexity of, environmental transactions should overshadow the premium increases. When viewed in the context of, for example, a $10 billion merger or acquisition, the increases will not have a material impact on the financial structure of the transaction.

Further interest rate reductions are likely to cause increases in the rates and premiums of short-term environmental finite risk programs. Longer-term programs will be less affected as normalcy returns to the financial markets.

Addressing New Environmental Concerns

New environmental concerns are creating coverage questions for both traditional P&C insurers and specialty environmental markets. In 2002 two new environmental concerns will continue to challenge underwriters, brokers and insureds: mold and bio-terrorism. These are creating coverage issues where none previously existed, and careful policy language review and negotiation is often required to manage these problems.

Mold: The New Asbestos?

Prior to 1990, mold claims were virtually nonexistent. Yet, in recent years, mold has become a significant issue that has spawned a new breed of specialists on the subject, including attorneys, contractors, industrial hygienists, consultants, doctors, and other professionals.

Insurance coverages that might address mold claims include homeowners, commercial property and commercial general liability (CGL) insurance policies. Finding coverage under CGL policies has proven difficult for many insureds, based on the "absolute" pollution exclusion attached to these policies.

While several jurisdictions have held that coverage for mold is not eliminated by this exclusion, the question of whether or not mold fits the ISO CGL pollution exclusion definition of a "pollutant" is yet a matter for courts to decide. The ISO CGL pollution exclusion will not, however, be the only policy language issue that determines each case. The owned property exclusion, for example, precludes coverage for property damage to owned, rented, or occupied real or personal property.

Coverage for mold-related claims may be found in these traditional coverages on a case-by-case basis, depending on how mold claims are brought, the jurisdiction in which the claim is made, and the specific policy language. Indeed, the battle over mold coverage in insurance policies has only begun. Who will ultimately win the war remains to be seen.

Environmental liability policies seem to be the most liberal when it comes to finding coverage for mold-related exposures. Most environmental liability underwriters have indicated that mold and other indoor air quality issues fall within policy language of a covered pollutant. Even where the definition of "pollution conditions" under environmental insurance is determined to be broad enough to provide coverage, several other policy language issues make components of a potential loss difficult to judge.

The clearest example is the issue of cleanup costs, usually a defined term in environmental liability policies. The definition is typically tied to existing and future environmental regulations. For example, in soil and groundwater contamination incidents, coverage for cleanup costs is typically tied to contamination that requires a remedial action under federal, state, or local environmental statutes that provide guidance as to what constitutes an acceptable cleanup response. At this writing, while many states and cities are debating specific cleanup standards for mold, there are currently no such legal or regulatory standards.

Not only might this affect coverage for cleanup costs when the policy is written on a "discovery" basis, it also raises questions about the extent of cleanup. Assuming the environmental underwriter accepts coverage based on the definition of pollution condition, the insured and the insurer may have different perspectives on the most appropriate remedial methodology and resulting cost.

For example, the insured may seek to replace all affected material in the building, often at enormous expense. The insurer, on the other hand, may deem that it is only responsible for the cost of cleaning-rather than replacing-the tainted material. Other issues, such as expenses for industrial hygienists to monitor air quality during and after the selected remedy, could become matters of contention.

Increasing claims frequency and severity are causing the environmental underwriting community to carefully underwrite each risk. Depending on the insurer and the risk, it is now more common than ever to find initial quotations for environmental insurance have mold coverage restrictions. Generally, construction and fixed-site facility-related environmental programs for habitational risks face the most scrutiny.

At present, providing sublimits for this exposure and limiting coverage for actual remediation expenses appear to be the predominant methods of underwriting restrictions in the market. Nonetheless, underwriters need to be made aware of appropriate mold loss prevention practices as part of routine operations and maintenance (O&M) programs at commercial and habitational facilities. Combined with aggressive negotiation with underwriters, most insureds are likely to find adequate protection available from the market.


Given recent world events, bio-terrorism concerns and, more specifically, anthrax-related claims are among the highest risk concerns of many corporations. The insurance industry has not yet taken a position on anthrax or other biological terrorist agents as a pollutant or whether the resulting losses from anthrax exposure would be covered under standard CGL policies.

The presence of a war or terrorism exclusion on any policy—general liability or pollution-would presumably preclude a bio-terrorism claim against the policy. However, in the absence of such exclusion, and depending on specific policy wording, coverage for third-party bodily injury claims could be found under traditional liability coverages. At this writing, the issue of whether or not anthrax (or other biological agents) falls within the definition of "pollution" in CGL policies, or of "pollution conditions" in environmental liability policies, has not been decided in any jurisdiction.

Pollution coverages available in the environmental market may be a source of coverage for bio-terrorist related claims, given the absence of a war and terrorism exclusion. As always, specific policy language would need to be examined to determine the extent of applicability of the policy to the claim.

In the absence of exclusionary language, insurers may be held to pay for bioterrorism claims under most general liability and pollution liability coverages until exclusionary policy language is developed and issued by underwriters. Similar to the mold debate, even where coverage is deemed to apply to traditional tort claims (mainly bodily injury), the issue of cleanup costs and how they relate to (currently nonexistent) environmental regulations further complicates a matter that is already in uncharted waters.


The environmental liability market is experiencing a hardening cycle just as is the broader P&C marketplace. For the environmental market, this represents the first "up-cycle" in the history of the line. Fortunately for insureds, this segment of the market has not been as hard hit as other lines of P&C coverage. Capacity, product flexibility, length of policy terms, and coverage provisions have seen, for the most part, modest changes.

Insureds can expect to see increased underwriting scrutiny, higher retentions, and minor increases in pricing. On the other hand, the environmental underwriting community has worked hard over the last 15 years to gain acceptance of their products. Insurers are well aware that imposing severe coverage restrictions in the face of a tightening market would negate the goodwill their efforts has created among sophisticated buyers.

Key players in the environmental market are here to stay. Increased historical data, improved technical underwriting expertise, improved products, wider acceptance as an important business transactional tool, and underwriting profitability have given underwriters and their reinsurers staying power and confidence. No one can look into a crystal ball and predict the future of this market niche, but the market seems to be staying the course in spite of difficult conditions.

Follow this link to see Part 1 of this article.

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