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Environmental Risk Resources Association
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David J. Dybdahl, CPCU, ARM, MBA
Contemporary environmental insurance can be an important and powerful coverage within an organization’s insurance program. In contrast to the general perception that environmental insurance coverage is restrictive and expensive, the reality is, there is a wide range of coverage available at sometimes surprisingly affordable prices.
Environmental insurance is vastly underutilized as a risk management tool. In 1999, the annual revenue of the environmental remediation industry in the United States was about twenty billion dollars. In comparison, the total amount of environmental insurance premiums written that would pay for these services was about four hundred million dollars. Although there is not a direct cause-and-effect relationship between these two figures, they do support a theory that less than ten percent of environmental losses (hiring a remedial-action contractor is probably a loss to the person paying the bill) are insured through environmental insurance. It is also important to note that remediation is only one coverage component of environmental insurance. The environmental remediation industry revenue would not include the costs of bodily injury claims or legal expenses. In combination, the macro data on environmental loss costs compared to environmental insurance premiums would seem to support the conclusion that considerably less than ten percent of environmental losses are insured.
One of the contributing factors to the underutilization of environmental insurance is general confusion on what coverage is available, and how it can be used. This problem is exacerbated by the environmental insurance underwriters’ rapid introduction of new policy forms on one hand and new exceptions to pollution exclusions being added to the standard commercial policies on the other. To make the confusion even worse, there is a tendency for insurance practitioners to refer to exceptions within pollution exclusions in standard policy forms as "environmental insurance". This is arguably wrong, yet is prevalent in a great deal of printed material on the subject.
Considering the breadth of coverage available and the price, it is difficult to explain why environmental insurance does not enjoy widespread acceptance in the risk management community. One reason might be the complexity of the environmental insurance products that are available. With over one hundred real environmental insurance products available in the marketplace it is sometimes difficult to compare the coverage provided in different policy forms. This article will present the basic building blocks of environmental insurance coverage. Utilizing reverse engineering virtually any environmental insurance policy can be broken down into its component parts for accurate coverage analysis among policies and vendors.
By combining the basic building blocks of environmental insurance, insurance underwriters are able to create insurance packages capable of insuring environmental damage claims from virtually any legal operation, activity, or service. These packages are marketed under a number of catchy brand names that may or may not indicate what risk the package is intended to cover. Of course, these packages just add to customer confusion by marketing essentially the same coverage combination under different names.
Environmental insurance has been available in the US market place for over twenty years. Over forty insurance companies currently write real environmental insurance. The premiums written in the environmental insurance market exceed one billion dollars annually. There are over 100 different real environmental insurance policy forms available in the market place and the market capacity for environmental impairment liability insurance on a single risk is over $400,000,000.
I make the distinction between real and pseudo environmental insurance because, in my opinion, the common practice of labeling any insurance policy that might provide some coverage for an environmental claim as environmental insurance is misleading.
For the purposes of this paper, real environmental insurance will be defined as an insurance policy that has a coverage grant for environmental damages, cleanup, or restoration within the insuring agreements. An insurance policy that only addresses environmental issues within the exclusion section of the policy is not true environmental insurance. Just as if he were buying a counterfeit Rolex for twenty dollars, the buyer of pseudo environmental insurance is certain to realize the differences between real environmental insurance and the pseudo versions sometime in the future.
The analogy between the fake Rolex and the value of pseudo environmental insurance is much more accurate than most people might realize. To determine the fair market value of pseudo environmental insurance it is enlightening to ask the underwriter providing a limited exception to a pollution exclusion by how much would the premium decrease if the insured was willing to accept a full pollution exclusion in its place. The answer is almost always there is no premium credit due because the underwriter did not anticipate paying any environmental losses through the limited exception to the pollution exclusion in the first place. Just like the Rolex, you get what you pay for. Unfortunately, in my opinion, fundamental confusion as to the differences between real environmental insurance and the pseudo versions sold by underwriters that do not charge a premium for the coverage, will continue to fund a healthy policyholders’ legal cottage industry for years.
It is unfortunate that the insurance industry does not delineate between genuine and pseudo versions of environmental coverage. The failure to do so leads to disappointed insurance buyers with uncovered claims, and delays the acceptance of real environmental insurance as a useful tool in a broad range of businesses. I will only address the genuine environmental policies. Sudden and accidental, time element, named pollutants, above ground pollution, hostile fire, and various other once-in-a-blue moon, if it is reported on time environmental coverage extensions within a pollution exclusion will be kept out of the discussion.
Although having environmental insurance coverage is better than no coverage at all, my personal opinion is all pseudo versions of environmental coverage are open invitations to coverage litigation in the event of an actual loss. All of the event- specific coverage extensions through exceptions to the pollution exclusion create a situation in which the insurance practitioner will find it impossible to predict the outcome of the insurers’ coverage determination until the facts of the loss are known.
Today, the underwriting climate for environmental insurance is very competitive. Underwriters are willing to take on high amounts of risk, sometimes for very long periods, at premiums that are comparable to other lines of commercial insurance coverage. In today’s marketplace, virtually any legal activity can obtain environmental insurance. To illustrate underwriters’ appetite for risk, the US-based environmental underwriters were recently asked to provide environmental insurance coverage for the cleanup of the nuclear disaster at Chernobyl. The marketplace responded quickly, with favorable terms that enabled the cleanup activities to begin. Any organization that assumes that environmental insurance is unavailable may want to compare their loss exposures to those at Chernobyl, then ask what they have that is worse. Unfortunately, there is much misinformation in the marketplace as to the availability and cost of environmental insurance. Often, incorrect information leads potential users of environmental insurance to the erroneous conclusion that environmental insurance is too costly and/or restrictive.
In the past twenty years the environmental insurance market has grown dramatically. The potential market for environmental insurance grew dramatically with the introduction of new generation insurance products that are being used to reach financial closure on environmental legacy costs, including Superfund. These new and powerful insurance products have thus far captured less than ten percent of their market potential.
Underwriters, aware of this rather dismal market penetration, have attempted to attract a larger number of buyers by introducing a broader range of environmental insurance products. The result is a mind-numbing number of choices that requires a degree of subject matter expertise just to match the appropriate environmental coverage to the loss exposure.
Unlike the traditional insurance marketplace, where insurance companies routinely cooperate to produce standard policy forms for general liability and property insurance, there are no accepted industry standards for environmental insurance. Often, different underwriters commonly create custom names for essentially the same type of environmental coverage. For example, environmental impairment liability insurance and pollution legal liability insurance are different names referring to the same coverage. Underwriters have also compounded the complexity of the environmental insurance marketplace by combining various forms of environmental coverage into package policies, then labeling it to appeal to certain target buyers. While these package policies make powerful tools for practitioners when designing an insurance program, they also add to market complexity, which is very intimidating to the average insurance practitioner, and is largely responsible for the small number of insurance practitioners working in the environmental insurance arena.
Environmental insurance can be broken down into five basic coverage forms. To create a new policy form, these basic coverage components are mixed, matched, and assembled, then relabeled for the market place.
Reverse engineering is a useful tool when making coverage comparisons between different policies or when crafting a customized environmental insurance policy. The majority of all environmental insurance policies in the marketplace will consist of one or more basic building blocks, that will be discussed in the sections that follow.
Site specific environmental impairment liability insurance evolved directly from the early gradual pollution EIL policies written in the 1980s. Modern EIL policy forms cover claims arising from sudden, as well as, gradual releases of pollutants from insured locations. In fact, the words sudden and gradual do not appear in the policy which responds to claims that arise from the release of irritants and contaminants. Coverage enhancements allow policyholders to purchase protection against the costs of onsite cleanup, nonowned disposal sites (Superfund), and to insure against claims arising from pre-existing pollution at insured sites.
EIL policies respond to loss arising from pollution conditions, which, in general, requires an active release of pollutants to trigger coverage under the policy. The definition of pollution conditions closely follows the definition of pollutants in the ISO pollution exclusions found in general liability, auto liability, and other liability insurance policies. Accordingly, EIL policies are often viewed as filling the coverage gap created by the pollution exclusion in the CGL policy.
The definition of pollution conditions, like that of pollutants in the CGL and other policies, does not include the words hazardous waste or hazardous material. The definition of pollution in all insurance policies is much broader than hazardous waste, which is an important point to remember when analyzing potential coverage gaps between EIL policies and the other liability policies. Milk in a stream might lead to a pollution-related loss.
Environmental impairment liability insurance is used to cover fixed site exposures. Standard off-the-shelf versions of this policy will typically exclude onsite cleanup and claims from nonowned disposal sites (Superfund), although these coverage extensions are readily available. These policies are usually annually renewable.
A property transfer policy is a specially adapted EIL policy designed to be used when property is bought and sold. It is basically an EIL policy with a long policy period (eight to ten years) and coverage for the cleanup of the insured premises. These policies can be used in place of the seller’s indemnity for clean up costs and third party claims for bodily injury and property damage when a property is being bought or sold. There is usually a one-time premium for the entire policy period. The buyer, seller, and lender can all be named insureds under the policy.
Secured creditors environmental insurance was developed to meet a market demand for very inexpensive environmental insurance to back the collateral interest of the lender on loans. These policies have their roots in traditional EIL property transfer coverage forms, then restrict the coverage in the following ways. First is that there is only one named insured, the lender. These policies provide no value to the borrower although, interestingly, the borrower pays the premium as part of the loan transaction. Another restriction is the coverage trigger. The policy will pay if the borrower defaults on the loan and there is an environmental condition at the insured location. There are two basic coverage variations in the marketplace for the secured creditor policy. One variation of the policy will pay the lender for the cost of remediation, and one will pay for the cost of remediation or pay off the outstanding loan balance, whichever is less.
The Resource Conservation and Recovery Act (RCRA) was modified in 1986 to provide regulations that apply to the owners and operators of underground storage tanks. When such tanks are used for storage of fuels or hazardous materials, the RCRA regulations require the owners or operators to demonstrate their ability to pay (financial responsibility) claims resulting from the release of materials from the tank.
One method by which financial responsibility can be demonstrated is the purchase of insurance. The specific coverage extensions required in the federal and state environmental regulations have resulted in the development of a special form of pollution insurance, called underground storage tank (UST) insurance or simply tank insurance. These policies cover third-party liability claims for bodily injury, property damage, off-site as well as on-site cleanup costs, and defense costs. UST policies have an additional policy limit for defense, which are over and above the limit of liability in the basic EIL. Some of the UST policies written by environmental insurers are not full EIL policies (as described earlier). Although the policy is site-specific, it does not insure all releases of contaminants from the insured site. Some tank policies only respond to a corrective action as that term is defined in RCRA, and not to other environmental damage claims. This distinction is important for any insured that may face environmental liability claims on grounds other than RCRA, or could have an environmental loss from something other than a storage tank.
This policy form was first developed to address the environmental insurance needs of contractors performing environmental remediation services on contaminated sites. Today, this policy form is commonly used to insure the environmental loss exposures of traditional contractors as well.
Many of the policy terms and conditions in the contractors EIL policy form are similar to those found in the site-specific EIL policy. The major differential between the contractors EIL policy and the traditional site-specific EIL insurance is that the contractors form is designed to cover a contractor’s operations and activities at a number of job sites. The contractor’s policy form also covers environmental losses from the completed operations of the contractor. Unlike site-specific EIL policies, contractors policies provide coverage for loss arising from the described operations of the named insured, thereby covering a number of job sites on a blanket basis. This coverage is available on a claims-made or occurrence-coverage trigger.
The exposure of an asbestos or lead abatement contractor may be more economically addressed under an asbestos or a lead abatement liability insurance policy, which will be discussed later in this article.
Today, environmental professional errors and omissions insurance policies resemble traditional professional errors and omissions insurance for architects and engineers, with two important exceptions. First, the policies written specifically for environmental professionals should contain a coverage grant in the insuring agreement or the definition of loss for environmental damages and clean up. The second policy modification from the traditional architects and engineers policy should be the elimination or modification of the pollution exclusion.
Unlike contractors EIL insurance, which was introduced and gained market acceptance as a monoline, gap-filling coverage for the pollution exclusion in the contractor’s CGL policy, an environmental E&O policy that responded only to pollution claims was quickly eclipsed by a blanket E&O policy covering all the traditional E&O exposures of the engineer or consultant, including claims for environmental damages.
Essentially, the asbestos abatement contractors general liability insurance policy is a general liability policy with an exception to the pollution exclusion for asbestos materials and lead. Stated another way, asbestos and lead are not considered a pollutant under the policy. Early policy forms were written on a claims-made basis and were very restrictive in terms of the coverage provided. By 1990, the market for this coverage had switched to occurrence-based policy forms, used almost universally for asbestos-abatement liability insurance today. The policies are written for one-year terms, or longer periods if required by the project owner.
As concern over lead paint has grown, many asbestos-abatement insurance markets have expanded their policy forms to include lead paint exposures as well. Coverage terms and conditions for lead-abatement contractors are virtually identical to those found in the asbestos-abatement forms.
A contractors EIL policy can be used to address asbestos and lead exposures by deleting the exclusions for these particular pollutants that are common in contractors EIL policy forms. However, because contractors environmental impairment liability policies were traditionally available only on a claims-made basis, the majority of asbestos and lead paint abatement contractors purchased the occurrence-based policy form. In today’s insurance market, occurrence-based contractors environmental insurance is available. As a result, it is now viable to purchase separate general liability and pollution/asbestos coverage and have them both on an occurrence basis.
As with other forms of environmental insurance, the market for asbestos-abatement contractors insurance is changing rapidly, and underwriters compete with each other through the use of manuscript coverage forms as well as on price. There are no standard forms in the market except for the ISO CGL policy, which is the basic building block for the policy. Care must be taken in evaluating the coverage provided by these policies because the asbestos modifications to the policy can delete standard CGL provisions in the process.
Remediation stop-loss (also known as cost cap coverage) was designed to insure remediation costs that exceed the projected or anticipated costs in the execution of a remedial action plan at a specific location. Remediation stop-loss policies provide only first-party coverage and do not cover third-party claims. Third-party EIL coverage is often provided as part of an overall insurance package on a project by adding another policy form to the insurance coverage portfolio.
Remediation stop-loss policies typically agree to pay on behalf of the named insured the expenses (in excess of the deductible) that the insured incurs in completing an approved remedial action work plan at a specified location.
A claim under the policy is defined as "written notice to the insured that the remediation costs incurred at the project have exceeded the costs contained within the scope of work." The description of the "insured scope of work," which is different in each policy, is usually contained in an endorsement to the policy.
The coverage is useful in facilitating the sale of contaminated property, or as a tool
to reach financial certainty on an estimated cost of cleanup.
As the variety of environmental insurance policies grew, it became apparent that many potential insurance buyers would benefit from having a single policy that combined multiple environmental coverages. The demand for combined forms began with environmental consulting firms that were also involved in on-site remediation of contamination. Because these firms had both a professional liability exposure and a contracting exposure, they found it necessary to purchase both a contractors EIL policy and a professional E&O liability policy to adequately cover their environmental liability exposures. Once the pattern of combining coverage forms was established, underwriters developed other combinations of coverage to meet the specific needs of various segments of the market. Now, combined forms are an important part of the environmental insurance market.
Using combined forms for environmental insurance has several advantages. The first is that it provides the coverage needed by the insured to adequately protect it against pollution claims. As was mentioned earlier in reference to environmental consultants who also do on-site work, the combination of contractor’s insurance with professional E&O insurance provides the pollution insurance needed by the insured in a single policy that takes the place of two forms. A combined policy is typically less expensive than if the two coverage forms were purchased separately. The combined policy has a lower price because it typically provides a single limit of liability for both the contracting and the professional liability exposures.
Another advantage of combined forms is that they can eliminate coverage disputes that might otherwise exist if the separate coverages were provided by two different insurers. For example, when a release occurs during the remediation of a contaminated site, it may be difficult to determine immediately whether the loss is a result of contracting operations or of an error related to the professional activities of the engineer. If a contractor that is excavating soil to remove heavy metals unexpectedly strikes an underground storage tank, releasing diesel fuel into an area of clean soil, the fault may be that of the contractor that directly caused the release, or the engineer who failed to identify the presence of the tank. If the firm that had done the site assessment is also doing the on-site remediation, it may experience a third-party claim that falls in a gray area between the contracting and professional aspects of its work. Having both exposures insured by the same insurer eliminates the possibility of two separate insurers denying coverage for the gray area claim.
Besides providing protection against either a contracting or a professional liability exposure, the combined insurance form also provides a uniform defense for such claims that assures the environmental consultant of efficient handling of the problem with the client. There is no dispute over which insurer is responsible and no need for subrogation, which might otherwise be necessary to establish the rights of the parties and/or the insurers when the coverages are provided in separate policies (typically with different insurers). Because the claim is handled without a dispute, it is less likely to result in a problem in the relationship between the environmental consultant and the firm that hired it to do the site characterization and remediation.
The combined contractors EIL/engineers professional liability insurance policy is typically less expensive than would be the case if these coverages were purchased separately; this is primarily due to the use of a single policy aggregate limit that applies to both coverage parts. Although this makes the policy less costly, it does have the drawback of offering only one limit, whereby the purchase of separate policies would provide two limits. If a claim involves both contracting liability and a professional error, the lesser limit may be a factor. However, only one deductible applies in the combined form, whereas the use of separate policies would result in the application of two deductibles.
Since the development of the earliest combined environmental insurance forms, underwriters have worked with brokers and clients to provide a variety of insurance products needed to protect against diverse pollution exposures. Consequently, insurers have developed numerous combined forms. Although the variety of combined policies is limited only by the imagination of the broker or the underwriter, certain forms have become popular. Some of the more popular combined forms will be described.
Organizations that have pollution exposures should purchase an EIL policy because of the limited pollution (pseudo) insurance provided by the less than absolute, absolute pollution exclusion in the commercial general liability coverage form. Even with the purchase of separate EIL insurance, a potential gap in coverage may still exist. The EIL policy may exclude products and completed operations that are supposed to be covered by the CGL policy. However, the coverage that remains in the CGL for products and completed operations provides insurance for bodily injury and property damage, but not for cleanup costs related to a release of hazardous materials from a product manufactured by the insured. An economical approach to this coverage quagmire would be a combined policy form.
Combined CGL/EIL policies may also be specifically endorsed to provide product coverage that includes protection against pollution claims related to a release caused by a failure of the insured’s product. The insured can also purchase coverage for pollution risks related to transportation of its products or waste materials when they are carried on vehicles owned by third parties.
The process of making application for environmental insurance has often been considered tedious because of the emphasis on details concerning the environmental risks in the applicants’ operations and activities. Over time, insurers have made the application process less complicated and less expensive for the applicant. In some cases, the applications have been reduced from more than twelve pages to as few as two. Some insurers even pay the cost of the environmental risk assessment.
Regardless of the process used to underwrite environmental insurance, the application will also include certain warranties that become part of the policy. The warranties include a statement that the applicant knows of no existing pollution conditions that are likely to lead to a claim against the organization. The warranties also verify the truthfulness of other information submitted to the underwriter. Additional warranties concern disclosure of past claims against the organization and knowledge of violations of environmental laws and regulations. The application is signed by an officer of the organization and attached to the policy when it is issued. Failure to provide honest or accurate information may result in a loss of coverage in the event of a loss.
One of the difficulties for risk managers in applying for environmental insurance has been that the information required is not common to other forms of insurance. Although gross receipts or some other simple accounting measures may be used as the rating base for the policy, much more detailed information on the specific environmental risks are usually required to underwrite the policy.
An insurance broker will commonly seek competitive proposals from two or more insurers in providing alternatives for the client to consider. Pricing has been competitive, and the policy forms are constantly being refined to add additional competition to the selection process. There are an increasing number of specialist insurance practitioners knowledgeable in this area who can provide valuable assistance in designing customized insurance packages, and evaluating the proposals of insurers and in assuring that the policies adequately address the identified environmental loss exposures.
Environmental Insurance is a vastly underutilized insurance product. A review of macro industry data among the insurance and remedial contracting industries would indicate that the majority of all remediations performed in the United States and, therefore, the majority of all environmental losses are uninsured.
The current environmental insurance market is very flexible and competitive. Environmental underwriters have shown the ability to take on significant loss exposures for significant periods of time. Virtually any legal operation, activity, or service can be insured for environmental damage claims anywhere in the world.
In light of this, it is difficult to understand why less than ten percent of the firms that need some form of environmental insurance have actually purchased it. There are two major contributors to the current state of affairs in the environmental insurance market. The first is general confusion within the insurance industry as to the intent of less than absolute pollution exclusions and various forms of coverage extensions for environmental damage claims. These coverage extensions amount to pseudo environmental insurance, and there are literally hundreds of different versions being sold today. Unfortunately, the existence of pseudo environmental coverage appears to lull insurance buyers into a false sense of security, even though the coverage provided by pseudo versions of environmental insurance is usually defective, and does not compare favorably to real environmental insurance.
The second factor that seems to be contributing to the poor acceptance of real environmental insurance is the complexity of the environmental insurance marketplace itself. There are over one hundred different environmental insurance policies on the market today. There are no industry standards for environmental insurance. However, there are only five basic types of environmental insurance. They are:
1. Site specific environmental impairment liability, including property transfer, secured creditor, storage tank, and combined GL/EIL policy forms
2. Contractors environmental impairment liability
3. Environmental professional errors and omissions
4. Asbestos/lead abatement contractors
5. Remediation stop loss
In utilizing these basic building blocks of environmental insurance, the underwriting community has created a broad range of environmental insurance products that can be powerful and valuable tools in an overall risk management program.
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