Environmental Pollution Insurance: A Fluid and Ever-changing Market

By Stephanie K. Jones | July 23, 2001

Environmental pollution policies – they’re not just for oil industry giants and radioactive waste depositories anymore.

Even the most seemingly benign businesses may carry the risk of producing, storing or emitting hazardous waste materials. Airports, apartment complexes, pig farms, prisons, dry cleaners, printed wiring board manufacturers and amusement parks are just a fraction of the types of businesses for which the companies that provide environmental coverage write policies on a regular basis.

In the mid-1980s, standard commercial general liability policies eliminated coverage for pollution liability claims. As a result, coverage for potential and existing hazards must be purchased separately. Commonly used environmental insurance policies include those for pollution legal liability, property transfer, cleanup cost cap/stop loss, Brownfields restoration and development, secured creditor, professional and contractor environmental liability, transporter insurance, storage tank pollution liability, closure and post-closure.

With some exceptions, most environmental policies are written on a “claims-made and reported” basis. Unlike occurrence forms, claims made forms require that the environmental claim must be received by the policyholder and reported to the company within the policy period or within an extended reporting period. To be continuously covered, the policyholder must continue to renew the coverage at the end of each term. Certain contractor policies may be written on either a claims-made or occurrence basis. Usually, the entire premium for environmental policies is due before coverage is initiated.

According to Dan Persha, founder and director of Environmental Services Group (ESG), a division of Insurance Concepts, “the market for environmental insurance is fluid and ever-changing.” He added that the market is complicated in that “there are no standard forms – companies have their own forms. And there’s no standard coverage, so it’s difficult to compare coverage from one company to the next.”

Persha said the main underwriters he uses are American International Group (AIG), ECS, Zurich Environmental – and he uses them every day. Other underwriters, which Persha uses on a case-by-case basis, include Kemper, Gulf Travelers, Seneca and Chubb.

Shawn Tate, regional underwriting manager for Zurich Environmental’s South/Central region, agreed that the market is fluctuating, especially premiums. “In some areas, the market is
firming, in other areas its not – there’s not a lot of consistency in environmental right now,” Tate said. “We can’t even guess on our competitor’s renewal prices for environmental lines because of fluctuations.”

During the past year Tate’s division wrote about $10.5 million in premiums. That figure was up about 20 percent over the previous year and the numbers represent a wide variety of policy types. The bulk of the policies were written in Texas and Louisiana. The division “is expecting upward growth and increasing volumes. At least we’re targeting that,” said Tate.

Misunderstood Coverage
“Transaction insurance is one of the most misunderstood coverages,” ESG’s Persha said. “But it’s a huge, emerging market because of growing environmental awareness and hazards – buyers, sellers, and financial institutions are requiring it.”

Transaction insurance, environmental policies that provide coverage where property is changing hands, usually consists of pollution legal liability and cost cap coverage, Persha said. It is often used for transactions involving strip centers, due to the risk of dry cleaning solvent spills and damage from underground storage tanks (USTs). In fact, Persha said, although he sometimes writes policies for heavy commercial and Brownfields properties, 80 percent of the policies getting written are for strip centers with dry cleaners and USTs.

“Real estate transactions are driving the market – no one will buy a property unless it has had a Phase One or Phase Two inspection,” Persha said. “And because of heavy inspections, they tend to find problems.”

According to Persha, term lengths for transaction insurance are almost always more one year; with three, five, seven and 10-year policies being common for a “clean” site – one in which there’s been no known problems. Although normally premiums run between $3,500 and $7,500 per year, some run less than that. And for a site with a known problem, or a buyer or seller that needs pollution legal liability and cost cap insurance – the premiums can start around $50,000, Persha said.

Persha said it is often difficult to find environmental insurance because of the risks. He is “working on a case right now in Arizona where a client is buying a Nabisco distribution center – a warehouse that is six months old and has never had any spills – it’s a clean site.” Within a mile of the facility, there is a Superfund site that has the potential to impact the warehouse in the future, so the client is buying a policy to cover any future problems, such as diminution of value, loss of rent, and business interruption. “That’s how cautious the market is – I contacted four companies for coverage – two declined, two will quote,” Persha said.

An Opportunity
Steve Morton, an attorney with the Austin-based firm of Jenkens & Gilchrist, represents clients in negotiations with insurance companies over terms and conditions of insurance policies and contracts in real estate transactions. He has handled policies for clients ranging from ranch owners to large corporations – and has seen premiums running from $35,000 for a three-year contract to $500,000 for a 10-year policy. Coverage levels range from $1 million to $50 million. Often, Morton said, a corporation that owns a portfolio of properties, such as shopping centers, may purchase pollution liability insurance to cover spills on the properties. Typically, Morton said, all the properties in the ownership portfolio are covered by one policy, and the more properties, the lower the premium costs.

Morton noted that “agents might want to consider pollution liability as an opportunity, and one particular area they might want to look at is lending institutions-banks. Banks that lend money on commercial properties don’t want to be caught if pollution is found on a property they lend on,” said Morton, “so they may require buyers to provide environmental insurance that names the bank as one of the insureds.”

A Hot Ticket
According to Sheila Hailey, dry cleaners pollution polices “are a hot ticket right now.” Although she also writes pollution coverage for USTs, Hailey said she “gets an average of five calls per week for dry cleaning insurance and writes policies for 95 percent of those calls.” Hailey added that the business is a “flip-flop” from previous years, in which she mostly wrote coverage for USTs.

Hailey suggested that one reason for the increase in dry cleaners policies, is that in general, owners of strip malls in which dry cleaners are located are requiring cleaners to have pollution liability insurance. She said the average bill for cleaning a spill from a dry cleaners is $50,000 while the average cleanup from a gasoline station UST is $10,000.

Limits for policies she writes generally start at $1 million per occurrence and $1 million per release, Hailey said. The average deductible for dry cleaners is $10,000 and average deductible for UST’s is $5,000. For dry cleaners the average premium is $1,750. For new gas stations, premiums run from $300 to $500 per tank, and for some stations or owners with more than one station and multiple tanks, premiums can run up to the $20,000 range.

Contractors, Consultants
Becky Thompson, an associate vice president for property and casualty with Austin Surplus Lines, restricts the environmental policies she writes to those for consulting and engineering groups and contractors, such as remediation contractors that may be removing dirt from a site or working with lead and asbestos abatement programs. In order to ensure that there are “no gaps, no in-fighting between carriers over whose responsibilities lie where,” Thompson tries to combine pollution-related coverage with a contractor or consultant general liability policy.

Thompson said that combining coverage is important not only to provide the client with the best and most complete coverage, it is also important from an E&O standpoint for the underwriter or agent. “I have had agents say all they need is a general liability contract, but my feeling as a broker is – that’s leaving too many gaps,” said Thompson.

Mark Sowle, an MGA with EnStar Underwriters Inc. in Columbus, Ohio, agreed that it is often effective to write general liability, professional liability and pollution liability policies with the same carrier in order to “prevent squabbling over coverage.” However, Sowle said, “the downside to combining the policies is that all the coverage would be tied to the same limits.”

Sowle, who writes contractor/consultant policies in Texas and other states, said his company generally insures small to mid-sized companies with revenues of about $5 million to $10 million annually. The minimum premium for general liability policies with pollution coverage he provides is $1,500 for a $1 million limit. Premiums and limits go up from there.

“It really depends on what the client needs,” Sowle said, “sometimes they need more insurance to get on a job site. A larger company may need higher limits – they’ll be buying contractor insurance with $10 million to $20 million limits.”

Jo Ann Taylor, with US Risk in Dallas, writes policies for consultants that have very little exposure, like rangeland consultants and archeologists that may never go out to a site, as well as for higher risk contractors who may be directly involved in cleanup and abatement projects. Taylor
said many of her clients are companies with a mid-size risk, and the policies they require carry a $1 million limit. Deductibles and premiums run about $2,500, each. Taylor added that sometimes specific contracts or governmental agencies require a contractor to have in place a policy with higher limits.

Taylor, Sowle and Thompson agreed that the “devil is in the details” when it comes to writing environmental policies that protect the client, the agent and the underwriter. “The information included on an application is paramount,” Sowle said. “My duty as an MGA is to protect the company’s assets,” he said, adding that he must know exactly what the policy he’s offering covers, as well as what the client’s risks are. In addition, Sowle said he “feels a responsibility to the producer that brings in the business, especially if they have never written environmental insurance.”

Environmental Risks
Not only is Texas one of the largest states in terms of land mass (the largest, if you don’t count Alaska’s ice, as Texans like to say) it also ranks highest in the nation for on- and off-site releases of toxic materials—at least for releases by what the Texas Natural Resource Conservation Commission (TNRCC) calls “original industries.” These include traditionally heavily-polluting industries like oil and gas, and chemical refineries.

However, plenty of non-environmental facilities and businesses have the need for pollution liability insurance that has increasingly become a necessity in today’s environmentally conscious and litigious world. These businesses represent an opportunity and a challenge to agents and underwriters entering the niche market of environmental insurance.

Types of Policies

The largest players in the billion-dollar environmental insurance industry are AIG, ECS/XL, Kemper and Zurich. Other companies, such as United Coastal, Gulf Travelers, Seneca and Chubb, also offer pollution legal liability and related insurance. Sowle writes policies using Century Insurance Group, EnStar’s parent company.

Generally, environmental policies offered by these companies fall into the following categories:

Pollution Legal Liability: Insured are claims from unknown pollution conditions at covered locations specified in the policy. Generally, these policies cover both on- and off-site pollution conditions, and include claims for bodily injury, property damage and cleanup costs. Often, business interruption and transportation claims will be covered, but costs of an ongoing cleanup or existing, known contamination are not. Pollution legal liability policies are modifiable to fit individual circumstances and many terms and coverages are negotiable.

Property Transfer: Similar to pollution legal liability policies, property transfer policies cover claims generating from a covered location for preexisting, unknown contamination and known contamination below reportable levels. In some cases it covers known contamination that may be at levels above regulatory limits but permitted by a governmental body and with a cap in place. Like pollution legal liability insurance, these policies cover bodily injury, property damage and cleanup costs. Limits, deductibles and exclusions are also similar to those found in pollution liability policies.

Cleanup Cost Cap or Stop Loss: Very specific policies that protect against cost overruns for remediation of individual projects. Covered overruns may result from the discovery of additional amounts or newly discovered contaminants, or from changes in regulatory requirements at a site. Coverage is limited to cleanup costs, and claims for bodily injury; property damage or other liabilities are not covered. Also commonly excluded are the costs of legal defense and governmental negotiations. Other exclusions may include: radioactive matter, asbestos, contractual liability, unknown conditions not disclosed to the insurance company, and regulatory fines and penalties.

Brownfields Restoration and Development: Cover properties with known contamination where remediation of pollution will take place as part of a development or restoration plan. They combine pollution legal liability and cost cap insurance and generally cover bodily injury, property damage, cleanup costs for unknown pollutants, and cost cap coverage for cleanup.

Secured Creditor: Coverage is for the lesser of either 1.) the loan balance due with respect to property found to be contaminated or 2.) the cost to clean up the property. Coverage may be included for default on loans and third-party claims for bodily injury and property damage. However, unless specifically negotiated, the coverage will not apply to known contamination or in situations where the loan goes into default beyond the policy period.

Professional and Contractor Environmental Liability: Covers environmental consultants and contractors, who may be exposed to third-party claims, as well as liability to the client in the event an error causes cleanup costs to exceed the estimate. Professional and contractor insurance programs often include contractor pollution legal liability and E&O insurance. Bodily injury and property damage claims are usually covered. Key exclusions include off-site waste liability, express warranties and guarantees, known claims or circumstances that existed before the coverage began, the cost to repair faulty workmanship and claims for the return of fees. Contractors are usually advised to keep these policies in place for a period of time after the work is completed.

Transporter Insurance: Cover a transporter for off-site spills and liability for disposal of waste at a non-owned location. Coverage is included for oil, asphalt, sand and gravel, construction material, chemicals, and other toxic materials. Bodily injury, property damage and cleanup costs are covered, but known conditions, completed operations, and deliberate acts are commonly excluded.

Storage Tank Pollution Liability: Covers releases from scheduled storage tank systems for corrective action on-site and off-site. Bodily injury and property damages are covered, and these policies can be used to meet Environmental Protection Agency and state financial responsibility requirements.

Closure and Post Closure: Designed for regulated facilities with financial assurance obligations, these policies are an alternative to bonds, letters of credit, and trust funds. No liability or associated defense coverage is included. They are useful for solid waste landfills, hazardous waste treatment, storage and disposal facilities, and some manufacturing and materials processing sites.

Finite Risk: Not traditional insurance coverage, this type of self-insurance policy is funded by the insured and administered by an insurance company.

2001
2000
Company
Through
6/1/01
Company
2000 Totals
American Int’l Specialty Lines $9,648,852.20 American Int’l Specialty Lines $18,823,407.19
Indian Harbor Insurance 1,508,564.40 Kemper Indemnity 2,658,525.00
Steadfast Insurance 1,066,449.39 Steadfast Insurance 2,086,894.00
West of England Ship Owner Mutual 767,160.77 Indian Harbor Insurance 1,436,917.00
Reliance Ins. Co. of Ill. 409,937.00 Lexington Insurance 456,185.00
Gulf Underwriters Ins. 357,858.00 Gulf Underwriters Ins. 256,871.00
Evanston Insurance 301,311.00 Underwriters at Lloyds’ London 231,689.25
Underwriters at Lloyds’ London 249,578.00 Colony Insurance 199,295.00
Kemper Indemnity 213,578.00 Clarendon America Ins. 186,463.00
Royal Surplus Lines 140,629.00 United National Insurance 156,338.00

Original Industries *
New Industries **
Total
Rank
Pounds
Rank
Pounds
Rank
Pounds
National Rank for Total On-and Off-site Releases
1
259,157,905
21
53,081,641
5
312,239,546
National Rank for Total On-site Releases
1
244,299,677
22
43,745,514
5
288,045,191
National Rank for Total Releases Within State
1
261,852,284
21
52,706,649
5
314,558,933
National Rank for Production-related Waste Managed
1
3,998,272,653
9
166,351,356
1
4,164,624,009

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