What would a $500,000 uninsured loss do to one of your small commercial clients? How about a $5-million one?
In environmental insurance, those staggering loss costs are often par for the course—and they can hit a business as innocuous as a Hallmark card shop.
“The industry is attractive because it is profitable, but profits are shrinking from what they used to be because claims are trending,” explains Chris Bunbury, president & CEO of Environmental Risk Managers, Inc. “It’s not like work comp where you have claims coming on a regular basis, but when you have an environmental loss, it goes pretty deep and pretty wide.”
“This is something that isn’t a frequency-driven issue, but is a potential severity incident,” agrees Matt O’Malley, president of North America environmental insurance services at XL Catlin. “I think of it as akin to an umbrella policy where you may never need the coverage, but when you have an incident that requires significant limits, you’re sure glad that you bought it.”
So when your prospect or client says, “We’ve been in business 25 years and never had a claim,” that’s beside the point. If they have no coverage for a one-time environmental incident, “they would find themselves trying to pay out of pocket”—which, depending upon the size of the entity, “could have a very significant impact on their ability to continue operating,” O’Malley cautions.
That’s why Bunbury advises agents not to “waste any of your time going after environmental engineers, cleanup contractors, waste haulers—that’s all yesterday’s business. Today, your everyday standard commercial insureds are the ones that are buying the pollution products. Once you educate them, they realize it’s part of best practices.”
In this way, environmental insurance is similar to cyber: Every commercial client needs it, no matter the nature of their business. And in some ways, environmental exposures are even more troubling—where cyber liability is still based on negligence, environmental is subject to legislated liability, says David Dybdahl, president of ARMR.net.
“Here’s where the agents are fundamentally screwed up—they think environmental liability has something to do with actions,” Dybdahl explains. “Environmental liabilities can arise from actions, like letting a water damage loss turn into mold damage, but there’s something else out there called legislated liability for cleanup costs, and that has to do with status—who you are, not what you did or didn’t do. So if you own the property and it’s contaminated, you’re responsible for cleaning up the property. It has nothing to do with being a bad person, it has nothing to do with following the law—it’s just strict liability for cleanup costs.”
Usually, when Bunbury sits down with a business and their insurance agent to discuss environmental insurance options, “the first response out of the business’s mouth is, ‘Well, we don’t have any environmental exposure,’” he says. “So what I tell agents is to just say, ‘OK, let’s not get into an argument here, but who are your neighbors? What if your neighbors have an environmental loss, and that loss happens to come on to your property?”
It’s an eye-opener for many commercial clients who may not be aware that under federal law, as the owner of a property, they are ultimately responsible for the condition of that property—“regardless of who caused the contamination,” Bunbury says. “So maybe you don’t have an exposure, but who are your neighbors? And what happens if they have a loss and they don’t have the financial wherewithal to make you whole?”
Consider the aforementioned Hallmark card shop. Maybe it sits on a former Mercury recycling plant, which “people have since forgotten because that was 20 or 30 years ago, but some contamination was left behind,” points out Mary Ann Susavidge, chief underwriting officer of environmental insurance at XL Catlin. “Something may look really innocuous on the surface, but you could have a contractor working at a shopping center who has a generator running out back, and all the people in the Hallmark store could be affected by the fumes.”
Or perhaps it’s as simple as the dry cleaner next door releasing harmful chemicals into the air or soil. “That could require the general retailer to have to provide a cleanup because maybe there are vapor issues that exist from an adjoining property,” O’Malley explains. “If that adjoining property doesn’t have the proper cover, many times that individual retailer or the owner of the strip mall themselves will be left with the requirement to conduct a cleanup.”
Dybdahl spent half a year working as an expert witness in a $50-million pollution loss involving a bank store parking lot that was built over a former dry cleaner from the 1980s. “At issue in the legal matter was the availability of environmental insurance that would have covered 100% of the loss on the date it was first reported,” Dybdahl explains. “Of course, there was no environmental insurance in place. Nobody in the bank’s insurance department predicted a bank parking lot could produce a $50-million pollution loss.”
And remember: The biggest downside of not talking to your prospects and clients about environmental insurance is that when your client experiences an environmental loss, “your E&O insurance may be the only coverage they have,” Bunbury warns. “We’ve heard of cases where attorneys will call up and sue agents over environmental losses because the agent didn’t consult with their client on environmental exposures.”
“Where people become most dissatisfied is when they have a gap and they didn’t realize there was something that could fill it,” Susavidge agrees. “It really comes down to understanding the need of your clients specifically. This isn’t a generic form meant for everybody. It’s a form that can be tailored to each individual risk.”
What if your prospects or clients argue that they’re protected by their general liability policies? For a few proven environmental sales strategies, keep an eye on IAmagazine.com and upcoming editions of the Markets Pulse e-newsletter.
Jacquelyn Connelly is IA senior editor.