Source: http://www.ibamag.com, March 30, 2014
By: Caitlin Bronson
As events have led to increased public awareness of environmental liabilities, the demand for coverage – as well as environmental insurance’s profile – has risen dramatically
The standard refrain on environmental insurance is that companies only purchase it when it’s required or when their liabilities are so obvious, it would be nigh suicidal to pass up coverage. As a result, several producers write off the insurance offering as a niche product without a lot of personal payoff.
Thanks to an escalating public focus on environmental risk, however, the attraction of corresponding coverage is turning formerly hesitant window-shoppers into actual policyholders.
The producers with enough know-how to place these products in front of the right clients are guaranteed to profit, industry leaders say.
As president of the environmental wholesale insurance broker Beacon Hill, Bill Pritchard has followed environmental trends for the past 23 years. During that time he’s seen plenty of change, but the increase in environmental awareness in recent years has surprised even his veteran eyes.
“I think the visibility [of environmental insurance] has just exploded. The general public has become much more aware of their liabilities in the past five years, much less in the past 10,” Pritchard said. “We’ve had such a heightened demand for this coverage as businesses become more aware of their exposures – you can’t turn on a television without seeing a crystal clear example of why.”
Pritchard said that at the beginning of his tenure with Charlottesville, Va.-based Beacon Hill, this wasn’t the case. He struggled to get clients to appreciate the importance of environmental insurance, but now the product’s profile is “significantly higher.”
“And it has nowhere to go but up,” Pritchard said. The heightened visibility means Beacon Hill’s client base has diversified. Where once it mainly saw broker partners representing conventional environmental clients like landfills or water treatment plants, Pritchard is now servicing brokers with books of business that include shopping centers, dry cleaners and contractors.
Stacy Brown, president and managing partner of Freberg Environmental Insurance in Denver, characterized his own shift in client base as market entry by nontraditional businesses and contractors.
“I think there’s always been a traditional base of facilities that look for environmental insurance – those with very obvious environmental exposures,” Brown said. “But I think in the past few years, there’s been a slight shift where other types of facilities are now considering environmental insurance.”
Recognizing environmental exposure is not enough for an employer to source risk with a specialized policy, however. Many misconceptions about environmental insurance still exist – particularly where liability coverage is concerned.
Despite the frequency and visibility of litigation surrounding the notorious pollution exclusion, many employers continue to believe their commercial general liability policy offers protection in the event of an environmental incident.
Brown attributed much of this confusion to the fact that some GL policies do offer pollution coverage, provided the incident is “sudden and accidental.”
The verbiage lures insureds into a false sense of security regarding their potential liabilities, while in truth, that level of coverage won’t cut it in many situations.
“That’s different from the coverage we provide, and from what most other environmental insurance specialists provide,” he said. “We provide coverage for gradual pollution events, so there’s not a time element trigger that would limit coverage in the event of a release and a discovery some time at a much later date.”
“In my view, any kind of facility that handles materials that could be harmful should have a policy that provides gradual pollution coverage as well as sudden and accidental,” he added.
But what does all that coverage cost? That’s another misconception many businesses have about environmental insurance.
“I think a lot of people believe that environmental insurance is very, very expensive,” Brown said. “I would say that coverage is commensurate with the amount of risk a facility has. Coverage can be quite inexpensive and particular. A million dollars of coverage can be very, very affordable and provide a significant amount of protection.”
Even independent agents suffer from some false notions in this arena. Pritchard pointed out that brokers are often hesitant to get into the space, believing environmental insurance to be dense, technical and complicated. That’s very far from the truth, he said.
“I don’t think it’s that complicated – no more complicated than any other coverage they have to deal with,” Pritchard said. “Personally, I think cyber insurance looks confusing, but that’s because I’ve been doing [environmental] for 23 years.”
Getting clients, as well as themselves, over these humps is vital if producers want to start a conversation about environmental liabilities. Only then can they move corresponding coverage off the backburner – where it so often sits – to a real tool in a company’s risk management strategy.
THE LIABILITIES OF A FIXED FACILITY
Already, independent agent Bill Howard has begun pushing environmental insurance as part of a regular set of recommendations he provides clients.
“Five or 10 years ago, that maybe wasn’t the case, but now it’s something we make sure to cover,” said Howard, who works as vice president of Alexandria, Va.-based Clarke & Sampson. “Environmental is now in a category that includes employment practices, D&O and cyber – important risks that aren’t covered under general liability.”
Nearly every commercial client carries some level of environmental risk, so knowing which clients to push and which to merely educate is an important skill.
Brown believes some employers are more ripe for the picking than others, and thus worth pursuing more doggedly. Firms with fixed facilities, for example, would benefit greatly from an environmental impairment liability (EIL) policy.
“Any kind of fixed facility, especially those in a growth mode, are actively managing more and more materials that may give rise to a pollution claim,” he said. “A number of years ago we had an incident where there was a spill of molasses. You wouldn’t think that molasses would be an environmental pollutant, but if it’s spilled in an uncontrolled way, it can create a pollution condition.”
EIL is designed to cover just such occurrences. Where once the policy was highly expensive and limited in its protection, the Society of Environmental Insurance Professionals notes that as risks have evolved, so has EIL.
Standard EIL coverage now addresses both on and off-site cleanup, bodily injury and property damage liability, legal defense costs, business interruption, diminution of value and contracted liability coverage. EIL is also more affordable, the group said.
Brown noted that given the number of fixed facilities in the U.S., “the premium universe is almost unlimited” for EIL sales.
Producers can start tapping into that vast potential by going through their existing books of business and identifying clients who might benefit from EIL coverage. Agencies can also make use of the Environmental Protection Agency (EPA)’s website, which lists all facilities within a certain zip code that have taken out environmental permits, whether hazardous waste permits, air permits, or Clean Water Act permits.
“From that, you can determine whether or not those facilities are actively managing or are under one of the major environmental regulations,” Brown said. “Those facilities are clearly candidates for environmental coverage.”
COVERING A CONTRACTOR
Another market especially untapped in terms of environmental coverage is the nation’s growing contractor workforce. The number of U.S. construction jobs hit a three-year high last summer, and the value of new private construction projects reached $659.4 billion, according to the Associated General Contractors of America.
The surge has increased demand for traditional contractor policies such as builders risk insurance, but an opportunity to push environmental policies also exists.
“Over the last year or so, there has been a sharp uptick in our business with non-environmental contractors. These are folks like roofers, siding contractors, excavators – they represent the fastest growing sector of our business right now,” said Pritchard.
“They have all sorts of exposures for contaminants they may bring to a job site, which seem innocuous but could be in the wrong place and in the wrong quantity. They may also exacerbate existing conditions at the site by doing something like nicking a heating pipe, which could release thousands of gallons of heating oil.”
The answer to those risks is a contractors pollution liability (CPL) policy. CPLs cover most damages inflicted on a job site, and can be written as an annual or project-specific policy with coverage limits typically reaching $1 million per project.
Even smaller contracting firms have environmental exposures, and can benefit from some form of coverage. A renovator working in a home or office setting, for example, has the potential to disturb lead-based paint – something that may come into play if the EPA expands its current Lead Paint Renovation and Repair and Painting rule to regulate both public and commercial buildings.
Such contractors can procure a policy with $250,000 to $500,000 limits, which more accurately reflect risk of this magnitude.
PROTECTING REAL ESTATE DEALS
In addition to halting construction activity, the 2008 financial crisis also dampened the market for real estate transactions.
Activity is slowly returning to the industry, however. Deloitte has forecast “solid returns” for real estate investments in 2014, with sales of major properties rising 24% on a year-over-year basis last year. Sales of other, less valuable properties also experienced double-digit growth, resulting in a transaction total of $145 billion for the first half of 2013.
Against the background of a recovering but still subdued real estate market, banks and financial institutions are putting ever greater insurance demands on property owners, developers, etc. – which is all great news for the producer’s business.
Terms of most real estate transactions now carry provisions requiring the property owner to either conduct a phase-one environmental assessment or take out a lender environmental liability insurance policy.
Bill Howard has these real estate transaction provisions to thank for a large portion of his environmental sales.
“Lenders seem to be more concerned with [environmental liability] than they have in the past – they want to know the history behind the property,” Howard said. “They don’t want to pick up a property only to find out there is an environmental issue and that the value has greatly diminished.”
Lender environmental liability policies pay for any of that lost value, as well as costs associated with cleanup. It’s that latter provision that makes paying for an insurance policy preferable to arranging an environmental assessment.
“In many circumstances, insurance is a better vehicle because if there is an environmental incident at the property, the company will step in and clean up that contamination,” advised Brown. “If someone had done an environmental assessment and missed a key contaminant, the only way to clean that up would be to go after the consultant and go through a lengthy legal process to have the consultant pay for those damages.”
SOURCING RISK AND BUILDING A LONGLASTING CLIENT BASE
Given environmental’s success in recent years, a number of new entrants to the market have made the carrier selection process critical. Fortunately, there are a few simple ways to separate the sheep from the goats.
Longevity, marketplace reputation, a breadth of product offerings and a solid AM Best rating are good places to start, as they eliminate many contenders. In-house claims management is another vital quality in a good carrier, says Pritchard, who currently works with 18 carriers in 48 states.
“My claims experience with a carrier is one of the most compelling things I advise producers on,” he said. “These companies deal with hundreds and hundreds of policies, and to never have a claims problem – that’s what you want at the end of the day.”
Working with a wholesale broker or MGA who specializes in the environmental space is also a good way to ensure the best results for a valued client.
“We have a very specific broker that we go to,” said Howard. “As an agent, I know enough about pollution liability coverage that I could take it to someone like Zurich or Ace and come up with proposals, but what you really need is somebody who’s got their thumb on the pulse of the day-to-day business in order to do a proper job.”
“I think most main street agents need to go to somebody like that,” he said.
However, while sourcing risk and arranging forcoverage may go smoothly the first time around, arecent Marsh report suggests that renewing coverageis not so easy. Both renewals and limits for policies like pollution legal liability have experienced a five-yeardrop of more than 25%, the broker said, despite the increased demand for coverage.
It’s something Howard has experienced in his dealings with contractor and real estate clients. “Generally they say, ‘Yes, I understand [environmental insurance] and I think I need it, but I’m not too sure I want to pay for it right now,” he lamented.
To combat this trend, Brown says it is imperative that an agent sit down with a consumer and go over any changes in the amount of raw materials they are handling, any new safety procedures recently implemented, and any updated spill plans or permits.
“The agent should collect those bits of information and provide them to an underwriter,” he urged. “Then the underwriter can better assess their risk and potentially get better pricing for that account.”
Once a client has relied on environmental insurance to protect against an incident, Pritchard said, agents are sure to have policy renewals for the foreseeable future.
“All you have to do is have one claim, and you’re sold for life on the value of it,” he said, “and I think that will only continue to grow.”