A discussion of the current market and reasons many delay insuring pollution exposures.
There is a broad array of risk management philosophies currently employed for pollution, ranging from the purchase of ultra-conservative limits, to passive self-insurance. Those at the extremes tend to stay with what has worked, but for most prospective environmental insurance buyers, there can be difficulty in evaluating environmental insurance as a sound risk financing mechanism. This dilemma causes many would be buyers to continue self-insuring environmental exposures.
Unfortunately, delaying the implementation of environmental insurance only increases the chance of having an uncovered loss. Lack of awareness, sophistication, budgeting, insurer claims history and a host of other reasons for delaying were perhaps valid reasons to put off serious consideration of environmental insurance in the mid-1990s, but today those reasons just don’t hold up.
Over the past few years, the popularity of cyber-risk and drone liability issues have completely overshadowed discussions around environmental risk, despite the fact that catastrophic environmental claims have easily overshadowed both. In fact, the complex pollution exclusion occupies more space on the ISO Commercial General Liability (CGL) policy than any other exclusion.
The available coverage for most exposures is broad, and premiums are at or near historical lows; yet there are many firms that either passively self-insure, or continue to rely on pollution coverage provided by their GL policy. Alarmingly, some in the industry estimate that only 1 in 100 environmental claims are adequately insured.
The General Liability Pollution Endorsement
Insurers have been successful in having courts uphold the modern pollution exclusions of the CGL policy in recent cases.
Earlier this year, an appellate court affirmed a lower court’s decision to preclude coverage for an explosion loss, citing the nature of the harm as directly related to the nature of the contaminant that was released and subsequently exploded (i.e., water mixed with petroleum constituents was flammable, volatile and explosive).1
This is one case of many where the modern CGL pollution exclusion has been upheld, but it directly contrasts with one of the primary reasons many companies opt not to purchase environmental insurance, citing that low-cost CGL pollution giveback is sufficient for limited exposures from their business operations.
In this particular case, the site owner could have been protected through its own environmental insurance policy, but instead relied upon its additional insured status on a service provider’s policy.
The Client Experience
Every insurer that offers pollution legal liability environmental insurance uses its own policy language. While the forms tend to convey many of the same core coverage concepts (e.g., remediation costs and third-party liabilities), there are vast differences and various combinations of coverage that introduce complexities prior to reviewing the insurance contract itself.
In addition to the variability of policy wordings, insurers have been entering and exiting the environmental insurance marketplace. With every insurer having a slightly different product, minimal coverage nuances can make the selection process challenging for buyers.
A skilled and experienced environmental broker should be able to adequately explain the nuances amongst the various insurer forms in plain language, so the burden does not fall solely on Insureds to read and understand all environmental policy forms in the marketplace. Appropriate coverage can be accomplished for most insureds’ needs, but putting it together correctly requires a thoughtful approach and some commitment from all parties involved.
Regardless of the insurance product purchased, some of the worst mistakes are made selecting environmental insurance based primarily on lowest cost, or delaying the procurement entirely.
“The bitterness of poor quality is remembered long after the sweetness of low price has faded from memory,”2 is a popular quote that captures this sentiment when selecting the “best” environmental coverage, or choosing to rely on low-cost CGL pollution coverage. Too often, insureds appreciate the limitations in their existing coverage while they are in the midst of a claim adjustment.
In contrast, if the purchase of full pre-existing and new conditions is too costly and/or cumbersome, Insureds could start with new conditions and strategically employ other risk financing mechanisms for pre-existing exposures, rather than delaying the purchase of any coverage. In time, retroactive dates established on the first policy will grow in value, and can be revisited along with the overall strategy when resources allow.
Regulatory Uncertainty
With every change in Presidential administration, there exists the potential for adjustments to the allocation of enforcement funding for the United States Environmental Protection Agency (EPA), as well as other Federal agencies. Politics aside, there will be periods of funding increases and decreases over time, and prospective buyers may wonder, “Is this the right time to buy environmental insurance?” Enforcement may have an impact on overall risk management concerns, but it should not be the only consideration regarding the purchase of environmental insurance, because there are constantly emerging risks.
It is also important to keep in mind that much of the environmental regulatory oversight and enforcement is carried out at the state level. Federal enforcement funding may be reduced, but states’ enforcement activities operate on their own respective budgets. In fact, recent years have seen a number of states implement new vapor-intrusion programs, with some re-evaluating prior cases based on evolving perceptions of the risk to human health and/or the environment.
Further, the Comprehensive Environmental Response, Compensation, and Liability Act established that pollution liability for hazardous substances in the United States is retroactive, strict, and joint and several.3 In other words, enforcement may slow at times, but the underlying exposure to enforcement action and pollution legal liability does not get commuted from a change in Administration or short-term funding.
Looking at the global stage, the current Administration just pulled the United States out of the 2015 Paris Climate Accord, which is set to take effect November 2020. Regardless of individual political or scientific positions on climate change or other global environmental issues; this development underscores the cultural differences in how environmental issues are perceived internationally, and that there is a continued theme of regulatory change that can make it increasingly risky to fully self-insure.
For many buyers, multi-year policies are readily available, allowing insureds to “lock-in” their coverage terms, and protect themselves from changing and emerging regulations.
Insurer Claims, the “PF-Word” and Class Warfare
In addition to existing regulatory uncertainty, it is inevitable that new contaminants of concern will emerge. There’s no way to predict which industry will be affected next; but currently, several insurers are citing an increase in mold/indoor air quality claims, PFOA/PFOS loss exposures, and are monitoring other contaminants of concern.
Generally, increased mold claims activity has been attributed to the hospitality and healthcare industries. While nearly every operation can have an exposure to loss from indoor air quality, some insurers are introducing class-based underwriting restrictions.
Perfluorooctanoic acid (PFOA) and perfluorooctanesulfonate (PFOS) are persistent organic chemicals linked to fiber, cookware and other manufactured products. These chemicals have been difficult to detect and manage. Until the phase-out in the early 2000s, many manufacturers had been discharging these chemicals – notably, while remaining in compliance with all applicable permits – only to now be exposed retroactively to pollution liability from PFOA/PFOS.
The EPA has been posting health advisories on its website for PFA/PFOS as recently as November 2016,3 and there are many existing policies that will be indemnifying or defending claims arising from PFOA/PFOS for years to come on an exposure that could not be evaluated just a few years ago.
AIG Environmental is generally considered the insurer that pioneered the environmental insurance industry, and was the largest environmental insurer and innovator until exiting the site-pollution business in 2016 as part of a revised business strategy.4 AIG would likely still be writing site-pollution business in the U.S. if not for the very real risk of unforeseeable pollution losses and emerging risks.
If nothing else, witnessing AIG’s business failure in the North American site-pollution market should motivate anyone trying to self-insure these risks to re-evaluate their delay in procuring their own environmental coverage.
Concluding Thoughts – The Need for Expert Advice
The environmental insurance marketplace and emerging risks continue to evolve. Starting out with only a handful of insurers, the market grew to over 20 retail insurers just a few years ago, and is now contracting with the combination of insurers due to acquisition activity. The trend of the last decade has been increasing claims and decreasing premiums, yet there is still excess capacity for most buyers’ needs. Given the change and uncertainty that surrounds pollution legal liability exposures, there is no better time than now to seriously consider environmental insurance.
1 Hiland vs National Union, Appeal from United States District Court for the District of North Dakota–Bismarck case No. 15-3936; Submitted: December 15, 2016; Filed: January 31, 2017
2 Common quote that is generally attributed to Aldo Gucci
3 EPA source
4 AIG source
