If you make a poor match of policy form to a customer’s insurance needs, they could end up with an environmental insurance policy that will not insure 90% of their loss exposure. Here's what you need to know about essential environmental coverage elements.
Environmental impairment liability insurance was first introduced in 1978 and has been in constant evolution ever since.
AIG insurance company introduced its private-label version of environmental impairment liability insurance under the brand name "Pollution Legal Liability" in 1980 and contractors environmental liability under the brand name "Contractors Pollution Liability" in 1986.
Today, more than 100 different genuine environmental insurance policy forms are available in the marketplace, and market capacity exceeds $200 million in liability limits for a single risk. No industry standards apply to the environmental insurance policy coverages—and as a result, the coverages different provided by different environmental insurance policies vary a great deal, even within the same coverage line.
In addition, the market faces very little regulatory oversight because almost all environmental insurance policies are written in the excess and surplus lines insurance marketplace.
Therefore, when evaluating different options, agents and brokers must perform a coverage review of the actual policy forms and endorsements. Never evaluate environmental insurance policies on premium, deductible and limits alone. If you make a poor match of policy form to a particular customer’s insurance needs, it is possible to purchase an environmental insurance policy that will not insure 90% of an insurance buyer’s loss exposure.
Essential Coverage Elements
Genuine environmental insurance must have an insuring agreement that provides specific coverage for losses arising from the release or escape of pollutants. At a minimum, insurance coverage will apply to losses arising from:
- Bodily injury: mirrors and sometimes enhances the general liability policy definition
- Property damage: mirrors and sometimes enhances the GL policy definition
- Cleanup expenses: usually as required by environmental laws with available enhancements by class of business
- Defenses costs: usually included within the limit of liability
Common optional coverages include:
- Non-owned waste disposal sites
- Transportation of pollutants as cargo
- Business interruption
- Loss of rents
- Extra expense
- Reputational damage
- Midnight dumping on insured locations
- Coverage for fungi/bacteria as defined pollutants
- Amended definitions of cleanup costs for contaminants that are not regulated as hazardous materials, such as fungi/bacteria
- Reputational damages
Basic Policy Forms
Independent agents should be aware of three basic environmental liability insurance policy forms:
Environmental impairment liability (sold under various product names): coverage only applies to listed locations.
This policy form can provide coverage for first-party cleanup costs, business interruption, loss of rents and extra expenses coverage. These coverage extensions are especially important on commercial buildings and habitational risks, such as apartment complexes and hotels.
Regarding the insurance application process, underwriters basically need to know about the preexisting pollution conditions at the insured locations (if any), the raw materials or inventories at the insured locations, and the size and use of the insured property.
Contractors environmental liability: Coverage applies for pollution events arising from insured operations as described in the insurance application. In some cases, the insurance application specifically becomes part of the part of the insurance policy.
In the insurance application process, underwriters basically need a description of insured operations and a measurement of relative size of the operations to be insured, usually measured by dollars of gross revenue.
Professional liability: In most cases, professional liability coverage for pollution-related losses is provided under a professional liability policy that does not have a pollution exclusion. The insurance application process mirrors traditional professional liability underwriting, with an emphasis on the professional qualifications of the insured.
For the top 8 environmental insurance coverage mistakes and how to avoid them, keep an eye on IAmagazine.com and upcoming editions of the Markets Pulse e-newsletter.
David Dybdahl is president of American Risk Management Resources Network, LLC (ARMR.net)—a wholesale insurance brokerage firm and leading resource in microbial matter risk management and insurance that assists insurance agents and brokers in the design and placement of environmental insurance policies. This article is adapted from “Environmental Insurance: Just the Facts.”