Just a few years ago, a contractor probably wouldn’t be able to get their hands on a standalone environmental liability policy for less than $2,500.
Today, quality coverage is available for less than half that amount.
Because environmental liability claims tend to be low frequency, high severity, “some of these products have performed very profitably,” says Tim Clegg, president of UCPM Environmental Insurance. “At this point, the cost has now gotten pretty close to the cost of the risk you’re transferring. There’s very little fat on a contractors pollution liability policy today.”
At just over a grand, “it makes a lot of sense for a contractor to consider buying the policy,” Clegg adds.
So why aren’t more agents selling it? Clegg calls it an issue of economics. “We see a lot of agencies who just put a sticker on the GL policy that says, ‘You don’t have pollution coverage—let us know if you want it,’” he says. “We think that’s because historically, it hasn’t been quick, easy or lucrative to offer these coverages.”
Clegg believes experience has taught most agents that getting a pollution liability quote for a contractor will eat up hours, days, even weeks of their time—and all for nothing. “The agent is thinking, ‘I’m going to offer this, the contractor’s going to say they have no exposure, and I’m not going to be prepared to enlighten him otherwise in terms of the specific environmental risks an HVAC contractor faces,’” he says. “That becomes an unprofitable sales opportunity for your typical agent who’s getting paid a commission and can make more money offering hundreds of other products.”
The solution is “finding a way to provide the client with a detailed coverage analysis so you can look like an expert when you’re presenting it,” Clegg says. “Agents don’t want to go out and offer a policy or present a quote for a coverage they don’t understand well.”
Establishing coverage gaps first, then presenting a premium estimate before even starting the application process, leads to new business closing ratios of 80%, says Dave Dybdahl, president of ARMR.Net, LLC, a specialized wholesale brokerage firm available through Big “I” Markets.
Consider a simple fire and water damage restoration contractor, for example. “The failure rate for insurance placements that meet specifications in common procurement contracts is a little more than 90%,” Dybdahl says, based on over 500 in-force policy reviews in this class of business. “Most agents are unwittingly selling policies that fundamentally don’t work due to a fundamental misunderstanding of mold and bacteria exclusions.”
When they wrote their mold exclusions, insurance companies knew there would be two sources of loss: the owners of the moldy buildings, and the contractors hired to clean them up. “To get rid of the risk of contractors doing mold remediations, many carriers ended up excluding the jobsite the contractor was working on from the general liability coverage,” Dybdahl explains. “That means they have no liability insurance at those jobsites—not even for dropping a ladder on a kid’s head.”
Where to start learning about such specific hidden coverage gaps? Dybdahl encourages agents to take advantage of continuing education opportunities that focus specifically on the far reach of the pollution exclusion, as well as resources like the Big “I” Virtual University, ARMR.Net and the Society of Environmental Insurance Professionals. Clegg, meanwhile, points agents to UCPM’s online contractors pollution liability portal, where they can get not only five bindable quotes from different carriers, but also a detailed coverage analysis and customized list of exposures for each contractor class—all in a few minutes.
“Without explaining the need for environmental insurance based on actual coverage gaps, the closing ratio on new business is dismal,” Dybdahl says. “The sales presentation for environmental insurance essentially boils down to, ‘Hey, I got you some pollution insurance quotes—I’m not sure what this insurance is for, and it’s not exactly cheap. You don’t want to buy it, do you?’ Such an ineffective description of the need for environmental insurance leaves many customers unaware of their insurance coverage gaps and needlessly uninsured for an increasingly common cause of loss.”
Usually, Clegg says, a stable soft market is not good news. “That’s typically true when you’re talking about a static market of prospects who already buy coverages—falling prices hurt the agent,” he says. “It’s a negative thing when it comes to property coverage and GL coverage, because there are no new buyers—everybody already buys GL, so falling and rising prices take the agents’ income in the same direction.”
But in environmental insurance, “prices have fallen so much that for those agents who go back around and offer pollution liability, they may find a much wider market of willing buyers now,” Clegg explains. “Many of these prospects probably haven’t seen a quote on environmental for three years, five years—maybe never. Just according to demand curve, you’ll have more buyers at that new lower price than you would have had the last time they got an offer.”
That means total revenue on environmental can still be positive, despite consistently low premiums, says Clegg, who notes that UCPM’s hit ratio has steadily improved in recent years even when quoting a significantly higher number of accounts: “You’re going to make less per policy, but the potential’s there to sell a lot more policies.”
And that’s especially true of a line that’s notoriously undersold. According to Dybdahl, less than 5% of the commercial buildings that need environmental liability coverage for pollutants like mold actually have it—and “that’s conservative,” he adds. “I’d guess it’s actually less than 1%. From an errors & omissions standpoint, that’s nothing but trouble.”
Jacquelyn Connelly is IA senior editor.