The US Environmental Liability Insurance Market—Reaching New Frontiers

Historical Perspective

A handful of insurance markets offered environmental coverage in the early 1980s, but were able to provide only limited coverage because reinsurers were reluctant to accept these emerging exposures. At the time, federal and state regulations were relatively new, and there was a great deal of uncertainty surrounding the outcome of toxic tort claims stemming from various contaminants. As a result, the market was extremely conservative in its approach to providing coverage. Nonetheless, businesses in certain industries were often motivated to purchase such insurance to satisfy contractual or regulatory obligations.

Strict underwriting guidelines, restricted coverage, and significant premiums of the early market caused most companies to self-insure their environmental exposures. Although many companies would have preferred to insure such exposure, they felt the coverage provided limited protection at excessive costs.

The situation began to change however, as underwriting results proved favorable. In the 1980s and 1990s, environmental insurance markets experienced a profitable book of environmental insurance business. Since environmental claims traditionally have been catastrophic in nature and not subject to great frequency, most long-term market participants have been able to establish more than adequate reserves. The maturing of the market also has produced more comprehensive loss data, allowing insurers and reinsurers to gain a better understanding of the financial risks involved. As a result, the amounts and types of coverages the marketplace offers have grown dramatically.

Significant Events/Trends

A number of significant developments have affected the environmental insurance market in recent years, including the following.

• A proliferation of environmental regulatory "cleanup" programs, such as federal, state, and local "Voluntary Cleanup" and "Brownfield" initiatives
• Enforcement of environmental liabilities "disclosure" requirements for US companies under SEC and FASB rules
• Increased public awareness of environmental issues and an active legal system
• A healthy economy that provides many corporations with the ability to address environmental issues on a proactive basis

In addition, a number of broader trends are fueling the rapid growth of the environmental insurance industry.

• Mergers and Acquisitions. Investors and other parties to a business combination have become more familiar with environmental risk transfer programs, which have been used to help resolve issues between buyers and sellers related to a company's environmental liabilities. Underwriters and brokers offer expertise in the evaluation of complex purchase agreements, indemnification, and other contractual documents, and coverage can be structured to address a company's contractual obligations.
• Utility Deregulation. In the United States, the deregulation of utilities has generated mergers, divestitures, and acquisitions as companies restructure to compete in a rapidly changing environment. Many companies are evaluating and addressing environmental liabilities to satisfy concerns of buyers and make more cost-efficient use of their assets, which often include large real estate holdings. Despite existing pollution, real estate may have the potential to generate revenue after it is cleaned up and redeveloped. Environmental risk management programs have been used to cap the cost of cleanups at these sites, insure those performing cleanups, and protect real estate buyers from unknown environmental liabilities.
• Reuse of Military Bases. As the Department of Defense (DOD) and the Department of Energy (DOE) scale down and consolidate their operations, many government properties are being transferred to the private sector for redevelopment—particularly as part of the DOD Base Realignment and Closure Act (BRAC). Environmental insurance is being used to address a variety of exposures that are potential obstacles to redevelopment, including liability for hazardous waste cleanup costs. Recent legislative changes make it possible for redevelopment authorities to take title to a site before a cleanup is completed. Mitigation of environmental issues is a critical component to the overall success of such projects.
• Commercial Real Estate Transfers/Brownfield Redevelopment. In addition to addressing the concerns of the buyer, seller, and developer of commercial real estate, environmental insurance products may also protect financial institutions associated with the transaction. In certain situations, bank lenders could potentially be held liable for pollution conditions at properties to which they are tied via a loan or other financial agreement. As a result, lenders have become more careful with transactions that involve potentially contaminated property. Lenders generally require environmental studies and formal assurance that they will not be assuming liability for future cleanup. In the absence of legislature and judicial relief from such liability, lenders have turned to, and are increasingly comfortable with, environmental insurance. The use of insurance has paved the way for property transactions to proceed unimpeded. In addition, insurance is now also available for secured creditors, providing coverage to pay either the outstanding loan balance or the cost of cleaning up the property.

While industries of all types face myriad exposures resulting from environmental issues, the size and type of environmental risk sometimes varies by industry. Operational risks that affect many different industries and may nonetheless be covered by environmental insurance programs include the following.

• All sudden and gradual pollution releases (including legacy liabilities)
• First- and third-party property damage and bodily injury claims
• First-party business interruption (loss of income)
• Historical and prospective unknown remediation (cleanup) costs
• Legal and defense expenses
• Liabilities resulting from the transportation and disposal of contaminants
• Historical remediation (cleanup) costs that exceed original estimates for a single site or portfolio of sites
• All general contractors' and environmental contractors' operational exposures
• Lender liability and protection of outstanding loan balances associated with the lending activities of various financial institutions

US Environmental Insurance Market Snapshot

The number and types of environmental insurance markets have expanded significantly in recent years. Companies now have the ability to insure both known and unknown liabilities associated with historical and future operations and contractual obligations.

In addition, environmental products are quickly becoming a meaningful component of most types of business transactions.

Significant capacity, broader policy terms and conditions, aggressive pricing, multiyear policy terms, and knowledgeable underwriters characterize the market. The changes have affected how and why US industries and companies purchase environmental products, as well as how underwriters package them. At present, a handful of the major insurers provide the majority share of the approximately $1.2 billion of premium in today's market. The premium volume is expected to increase at an annual rate of 20 to 25 percent. In spite of the projected growth in gross written premiums, insurance companies will continue to compete aggressively for market share, in terms of price, rate, and breadth of coverage.

Market capacity offered by any one insurer for a single transaction has continued to increase, with most of the major markets offering $100 million per loss, and some offering $200 million or more in the aggregate. With the introduction of major international reinsurance markets into the primary market, total market capacity is in excess of $1 billion. The market also has introduced a number of niche specialty insurers for various lines of insurance.

Below is a summary of the current major providers of environmental insurance and their capacity available for any one transaction.

Selected Environmental Liability Markets

Capacity as of May 2000

Additionally, it should be noted that global reinsurance capacity is in excess of $800 million for any one placement.

The number and types of insurance products have increased continuously in recent years. The following provides a brief summary of the major insurance products being offered in today's market.

• Asbestos Abatement Liability—Designed to cover bodily injury and property damage that results from asbestos abatement operations conducted by the remedial contractor. The asbestos coverage consists of a series of endorsements added to the general liability policy. The limits are shared between the two coverages, usually written on a blanket basis. The policy is written on an occurrence basis.
• Asbestos Containment—Designed to cover building owners if a release of asbestos occurs. The operations and maintenance (O&M) program is a must for managing on-site asbestos containing building materials (ACBM). Sudden/accidental release of asbestos, which results in BI/PD, is covered on an occurrence basis. Loss must take place during the policy term. Coverage is only provided for asbestos actually revealed by a building survey. The policy form is offered on an occurrence basis.
• Cleanup Cost Cap—Indemnifies the owner and/or buyer and/or lender as an insured for financial losses that arise when the anticipated remediation costs are exceeded. The policy form is offered on a claims-made basis.
• Contractor Operations and Professional Services—Covers field operations and professional services, shares one set of limits, and specifically schedules all activities. It is a combination of the professional and contractor's pollution insurance forms. The professional services coverage policy form is offered on a claims-made basis. The contractors pollution liability coverage is issued on either an occurrence or claims-made basis.
• Contractors Pollution Liability (CPL)—Covers third-party bodily injury and property damage liability caused by a remedial contractor arising from pollution conditions on customer work sites, and covers pollution events and cleanup costs on a work site. Activities must be specifically named as covered operations. The policy form is offered on a claims-made basis.
• Environmental and General Liability Exposures—The policy provides a combined general and pollution legal liability coverage form with one set of limits. It can be issued for a specific site or a portfolio of sites. The general liability includes either a claims-made or occurrence insuring agreement and the pollution legal liability is issued on a claims-made basis.
• Environmental Protection Program Closure/Post Closure—Intended to satisfy the financial responsibility requirements for closure/post-closure and liability protection required by individual, state, and RCRA regulations. Closure/post-closure programs do not typically cover third-party bodily injury, property damage, or defense expenses.
• Errors and Omissions (E&O)—Coverage addresses errors and omissions resulting from professional services/opinions, including pollution of engineers and consultants in the environmental services industry. The pollution exclusion is deleted from the policies offered by these insurers, or modified by endorsement to offer coverage for named activities. The policy form is offered on a claims-made basis.
• General Contractors (GC) Pollution Liability—Designed to provide pollution coverage for general contractors resulting from contingent liability created by acts of subcontractors whose insurance can be insufficient for the GC's protection; and incidental liability, for situations where the contractor is unaware of contaminants at a site and the process of performing the construction project causes a release of pollutants. The policy form is offered on a claims-made basis.
• Lead Abatement Contractors Liability (remedial contractor)—Designed to cover bodily injury and property damage arising from lead abatement activities of a remedial contractor. The policy may be written with or without general liability coverage. The policy form is offered on an occurrence basis.
• Owner Controlled Environmental Insurance Program (OCEIP)—Asbestos Abatement Project, Environmental Remediation/Consulting Projects—The program is a master policy designed to fit the needs of the owner/contractor resulting from a remediation or asbestos/lead abatement project. Any of the policies can be put into wrap-up form on behalf of the owner or contractors.
• Owner's Protective Professional and Environmental Liability—Policy covers the owner for environmental impairment as a result of the professional services of the architect/engineering firm(s), construction services of the construction contractor or the A/E firms, and completed operations of the contractor or A/E firm. In addition, it covers the owner for negligence in performance of professional services performed by the A/E firm. The policy form is offered on a claims-made basis.
• Owner's Spill Liability—Policy provides coverage for bodily injury, property damage, and cleanup costs resulting from an incident during transportation by a carrier of the named insured's product or waste.
• Pollution Legal Liability (PLL or EIL)—PLL covers pollution conditions emanating from the designated locations. Off-site third-party, BI/PD, cleanup, and defense costs are included in the limit. As a general rule, the markets will endorse the policy to add on-site coverage. Coverage may be available for a specific site or a portfolio of sites. The policy can also be amended to provide coverage for the transportation and disposal of waste, first- and third-party diminution of property value, and first-party business interruption. The policy form is available on a claims-made basis.
• Secured Creditor/Creditor Reimbursement for Environmental Damages—This policy is designed to protect companies (banks) offering credit secured by real property from losses (outstanding loan balance) based on environmental claims. The policy pays for covered loans upon default when pollution conditions exist. The policy form is offered on a claims-made basis.
• Storage Tank Pollution Insurance—Policy is designed to meet federal financial responsibility requirements. Covers bodily injury, property damage and corrective action resulting from release from aboveground and underground storage tanks. On-site/off-site coverage is available. Tanks must be in regulatory compliance. The policy form is offered on a claims-made basis.
• Supplemental Environmental Auto Liability (SEAL)—Coverage applies to bodily injury, property damage, and cleanup costs that are a result of pollution release from transported cargo carried by a covered auto. Standard auto policy excludes this unless it is amended to provide the environmental coverage.

Coming Up

This report sets the stage for this column with an overview of the environmental insurance market. Future articles will report on the details of specific policies, the associated underwriting processes, and the application of these policies in transactions associated with issues such as acquisition and divestitures, property transfers, and Brownfield redevelopment.