In 2007, pollution legal liability (PLL) insurance coverage continued to constitute approximately $1.7 billion in generated premium—about 60 percent of the entire environmental insurance marketplace. There are approximately 15 insurers offering various forms of PLL coverage. 1
There has been no change in the number of insurers offering PLL during 2007 with AIG Environmental, XL Environmental, Zurich Environmental, Chubb Environmental Solutions, and ACE Environmental Risk constituting the majority of the marketplace. Other PLL markets include the following.
- Liberty International Underwriters
- Markel Underwriting Managers/Evanston Insurance Company
- Freberg Environmental/Hudson Insurance Company
- American Safety Insurance Company
- Everest Indemnity Insurance Company/National Environmental Coverage Corp. (NECC)
Great American launched an environmental division during the second quarter 2008 with a suite of environmental products including PLL. CV Starr also has plans to expand into the environmental marketplace during 2008.
During 2007, the capacity available for PLL continued to exceed $300 million, with the maximum limit any one insurer can offer remaining at $50 million. The major insurers continue to have access to the reinsurance marketplace for facultative capacity above $50 million.
PLL coverage has expanded to the point where nearly every industry is looking at some form of coverage to address a variety of environmental liabilities. Whether it is to comply with state underground storage tanks (UST) regulations; address Natural Resource Damage (NRD) claims or Securities and Exchange Commission (SEC) issues, mold issues, property transactions; or protect assets from day-to-day environmental risk, many organizations are looking to PLL to serve as a financing mechanism for environmental loss.
Minimum retentions continue to run around $10,000. Coverage can be written with either deductibles or self-insured retentions, depending on the market and the financial strength of the insured. Typical retentions for PLL coverage start at $25,000 and can reach $1 million or more depending on the size and complexity of the risk. Typical premiums for low hazard risks (i.e., vacant land, or single-location new commercial real estate) for a 1-year term are between $7,500 and $10,000 for a $1 million per incident/$1 million aggregate limit of liability.
Pollution Legal Liability Highlights
Market Trends: Buying Motivators
The buying motivators for PLL insurance over the past year continued to fall into four categories including: regulatory, contractual, lender requirements, and risk management. PLL insurance continues to be the vehicle of choice for companies that must satisfy federal and state regulatory responsibility requirements. These companies include landfills, hazardous materials treatment, storage and disposal facilities, and manufacturing facilities with waste units within its footprint. Depending on the type of location, financial assurance requirements range from $1 million per incident/$1 million aggregate for underground storage tanks to $4 million per incident/$ 8 million aggregate for treatment, storage, and disposal facilities (actually $1 million per incident/$2 million aggregate for sudden/accidental pollution and $3 million per incident/$6 million aggregate for gradual pollution). Financial responsibility requirements ensure that companies have the ability to fund the cleanup of pollution conditions at their location(s).
The December 2005 Interpretation 47 (FIN 47) of the Financial Accounting Standards Board (FASB), which required accounting for Conditional Asset Retirement Obligations (CAROs), started to take effect at the end of 2006 and into 2007. Public companies have been scrambling to account for tens of millions in CAROs on their year-end financial statements. Broad inconsistencies remain in the application of FIN 47. It is still too early to assess the ultimate impact of FIN 47 on corporate income statements and balance sheets; however, more and more companies are accounting for their CAROs.
More purchase and sale agreements (PSAs) provide environmental indemnification language which releases the buyer from any "pre-closing" environmental liabilities. Companies continue to purchase PLL insurance to either back an environmental indemnity or to be used in lieu of an indemnity provision when they are purchasing facilities in an "as-is" environmental condition.
As companies and owners of commercial and habitational real estate restructure their portfolios and seek lending and other funding mechanisms, the number of lenders and other financial institutions requiring PLL insurance was on the rise during 2007. This trend has resulted in increased inquiries from insurance brokers handling real estate business, and has been confirmed per discussions with the major environmental insurers. Lender requirements include adding the lending institution as an additional insured and dictating limits of liability and coverage enhancements, such as mold.
During 2007, PLL coverage continued to grow as a risk financing technique for many companies, especially those involved in real estate transactions and merger and acquisition (M&A). Chief financial officers, risk managers, and outside environmental counsel continue to use PLL policies as a tool to facilitate these deals. Policies have been crafted to include the seller, buyer, and the investment partners providing financing for the transaction. PLL is especially popular when the acquisition involves real estate with historical contamination at the site. The policy may be crafted to provide coverage for both third-party claims and cleanup for known and unknown preexisting conditions at the subject site depending on the regulatory status of the property.
Transactional versus Prospective Coverage
The trend in 2007 continued to favor the purchase of PLL coverage to facilitate real estate transactions. Based on conversations with several major markets, M&As continued as the single largest driver for growth, accounting for approximately 60 percent of all of the PLL coverage purchased.
Eighty percent of the insureds involved on either side of the transaction were first-time buyers. The remaining 40 percent of PLL insurance was purchased by real estate entities and manufacturing classes interested in protecting their assets against environmental losses resulting from operational exposures and third-party claims from tenants.
Policy Terms
Policy terms remained consistent over the past several years. For transactional purchases, terms varied between 5 and 10 years. On coverage for prospective purchases, the average term remained approximately 2 1/2 to 3 years.
Types of PLL Purchases
Several of the major markets have the ability to provide PLL coverage up to a 10-year term, typically covering unknown preexisting (legacy) conditions only, while the remainder of the marketplace continued to write shorter-term policies between 1 and 3 years. Coverage for new conditions is typically available up to 5 years, depending on the risk.
Rates during 2007 eroded slightly over previous years, with annual PLL renewals decreasing approximately 5 percent. During the first half of 2007, 3- and 5-year policy renewals incurred slightly lower rate increases, ranging from 5 to 15 percent depending on the term and the type of exposure covered. Rates began to flatten and even erode slightly for multi-year policy renewals during the latter part of 2007. The 2008 rate outlook anticipates continued downward pressure. With the soft casualty market and stalled economy, we expect a 0 to 5 percent decrease for annual terms, and a flat to a slight decrease for multiyear terms.
Coverage Considerations
In addition to the basic coverage form for PLL, there are many coverage considerations that can be added via endorsement to the PLL form. Several are of importance in protecting owners of single sites or large real estate portfolios. The most requested PLL coverage enhancements over the past year include the following.
Mold or Fungus
Many environmental insurers offer mold coverage, providing modifications depending on the type of risk, i.e., habitational versus commercial properties. Commercial properties are typically offered broader coverage and higher limits. Mold can be offered up to a $20 million limit, typically for commercial real estate risks including Class A office space. Several insurers will offer mold coverage with up to a $1 million sublimit covering third-party claims for bodily injury and property damage. Other markets will offer coverage for third-party claims as well as coverage for onsite cleanup. The maximum policy term offered for mold remains 5 years. During 2007, many of the major insurers—including AIG environmental, ACE Environmental, and Chubb Environmental Solutions—readily offered mold coverage for habitational risks for up to 5 years including onsite cleanup. All of the markets charge an additional premium for mold coverage which can range from 30 up to 125 percent of the policy premium, depending on the type of risk. Additional underwriting information is required, including a supplemental mold application for each location and a Mold Operations and Maintenance Plan.
Lead-Based Paint and Asbestos
The majority of the environmental markets either include coverage for third-party claims for lead-based paint and asbestos in their forms or have the ability to provide the coverage via endorsement. Typically, coverage is available with sublimits up to $5 million; however, several of the major insurers have the ability to offer coverage up to $50 million. If lead-based paint and asbestos are confirmed to be present, several markets will require review of both lead and asbestos Operations and Maintenance Plans prior to providing coverage.
Non-Owned Disposal Sites (NODS)
Owners of facilities which generate and dispose of waste may be liable for the cleanup of the nonowned disposal site. NODS endorsements provide coverage for the insured's legal liability arising out of pollution conditions at the designated nonowned disposal site. NODS, or sites which accept waste from generators, can be added, via endorsement, by the majority of the environmental insurers. Coverage can be offered at these locations, subject to the policy limit; however, several markets will sublimit this exposure from $2 million per incident/$2 million aggregate to $5 million per incident/$5 million aggregate. A majority of the insurers require the name, address, and Environmental Protection Agency (EPA) Identification number to add an NODS. Only one or two markets are willing to offer blanket coverage for NODS as long as they are in compliance with regulation. The markets will assess an additional premium for NODS coverage, typically ranging from $1,000 to $2,500 per NOD location.
Business Interruption
Available from most insurers, business interruption coverage is purchased on less than 20 percent of the PLL policies; however, the number purchasing this coverage continues to grow each year. Larger real estate portfolios and manufacturing risks are the most frequent buyers of the coverage. Business interruption is triggered in the PLL when a location must close or relocate as a result of a pollution condition. Coverage can also be provided to real estate owners for loss of rental income. Coverage typically contains sublimits, and the deductible periods continue to range as few as 5 to 35 days, depending on the insured exposure. The additional premium for business interruption coverage ranges from 10 to 25 percent of the total premium. Insurers require business interruption worksheets and rent rolls prior to adding coverage.
Natural Resource Damage (NRD)
This is injury to, destruction of, or loss of natural resources. Natural resources are broadly defined by the EPA as "land, fish, wildlife, biota, air, water, groundwater, drinking water supplies, and other such resources which belong to, are controlled/managed by the United States, any State, an Indian tribe, or local or foreign government." NRD claims can be asserted in addition to typical cleanup liability. NRDs continue to be an emerging legal issue with significance in many states, which levy penalties in addition to the cost of an environmental cleanup. Several insurers will offer the coverage via endorsement, while many include NRDs in the definition of "property damage." NRD coverage is typically "included" within the PLL premium; however, an additional premium or higher deductibles may apply for this coverage, depending on the location of the site.
PLL derivative coverages continued to be offered by the environmental insurance marketplace during 2007 with no changes anticipated for 2008. These coverages include storage tank liability; secured creditor or mortgage impairment liability (for financial institutions); closure/post closure (financial assurance for clean-up of regulated facilities); cleanup cost cap or remediation cost cap coverage (coverage for cost overruns of remediation projects); and environmental liability transfer insurance (utilized on cleanup projects with valued greater than $5 million where the insured pays an insurer the estimated cleanup cost at a discounted rate to complete the remediation potentially allowing a footnote on, or removal of, environmental liabilities from their balance sheet).
Remainder of 2008 Expectations
During 2007, PLL appetites remained constant; however, by year-end, rates eroded not only for annual policies, but for multiyear terms as well. This was attributed not only to increased competition in the marketplace, but due to an economic slowdown triggered by the subprime mortgage quagmire and recession fears. These economic issues may linger well into 2008. However, transactions and M&A activity, although slower, are predicted to be once again the driver of new PLL premium, with the continued availability of policy terms up to 10 years. Mold coverage, including coverage for onsite cleanup, will continue to be readily available with up to 5-year policy terms. PLL requirements by lenders are expected to continue to grow over the next year. Market capacity will remain robust at over $300 million while insurer single capacity will remain the same at up to $50 million. Several markets have reintroduced "new" versions of their PLL forms during 2007, while several more are expected to release updated versions of their forms during 2008. With Great American and CV Starr launching their Environmental Units in 2008, the expectation is that PLL and their derivative coverages will be readily available in the marketplace, with coverage terms and premiums remaining very competitive.
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