Environmental Pollution Insurance: A Fluid and Ever-changing Market

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 it’ s 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 than 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 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, 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 policies “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 USTs 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 several 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.”

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.

Topics Agencies Underwriting Property Contractors Pollution