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Why Experience Is Crucial in Environmental Liability Insurance

Demand for environmental liability insurance is on the rise, but lack of experience poses a challenge in a complex market. 
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“I sound like a broken record sometimes, but the reality is that every single account that comes across our desk has an environmental exposure,” says Gina Jones, vice president, director, Environmental Programs, Burns & Wilcox. “Every. Single. One.”

The flourishing construction industry is one of the main factors driving demand for environmental liability insurance. Approximately $1.4 trillion is spent on U.S. construction every year, according to Global Data, which makes the industry one of the world's largest. It is also a sector that contributes more than 4% to annual U.S. GDP and provides jobs for more than 5% of the country's workforce.

“Depending on where there is the most construction, we’re seeing a lot of contractors pollution liability wrap policies and owner-controlled policies,” Jones says. “In Arizona, Colorado and Texas for instance, where construction is really booming and there’s a lot of construction of hotels, apartment buildings and things like that, we’re doing a lot of policies that follow the length of the project, including the statute of repose.”

Another example of growth in demand for environmental liability insurance includes commercial landowners and property owners who require their tenants to demonstrate coverage, such as dental offices, as well as vacant land exposures, explains Jones.

“But trying to get insureds to understand their exposures is difficult,” she says. “They already have to buy general liability, property and auto insurance, so unless they’re forced to buy environmental liability, they typically don’t.”

As the environmental insurance industry grows, “the difficulty and inability for the market to get experienced underwriters poses a challenge,” says Chris Bunbury, president, environmental strategist, Environmental Risk Managers, Inc. (ERMI) in Moline, Michigan.

For example, ERMI, a wholesale operation, lost an account to a retailer they had been working with when the retailer decided to go direct to the carrier. Bunbury knew the retail policy was different from the carrier’s wholesale policy and asked for a copy of the new policy once it had been bound.

“They beat us by a few thousand dollars, but the reason was that the agent didn’t pick up on the fact that we had the client on an occurrence form policy and the new underwriter put them on a claims-made policy, which is cheaper versus the occurrence form we offered.  They also lost site pollution coverage for most of their owned locations,” Bunbury says. “I don’t know if they did it just to get the business or if they just weren’t experienced enough, but getting knowledgeable, experienced underwriters is causing a problem.  It’s an E&O exposure for retail insurance agents that work directly with carriers if they are not working daily in the environmental insurance space.”

Another area where experience in the environmental insurance market is absent surrounds “a lack of understanding of what a pollutant really is,” explains Bunbury, who has seen claims denied due to cheese, beer, fruit juice, milk and even freshwater being classified as a pollutant.

In response to how an insurance policy defines a pollutant, Bunbury came up with his own definition that “is much easier for the masses to understand,” he says. “Very simply, a pollutant is a material, substance or product, that gets introduced to an environment for something other than it’s intended use or purpose. In other words, something that gets introduced somewhere it doesn’t belong.”

Additionally, when Bunbury talks to clients about environmental liability, he asks a series of questions, which the answer to each is normally “yes.” Do you have a contract with your vendors? Do you have a contract with your business clients? Do they include environmental indemnifications?  What financial assurance mechanism has been put into place to backstop the environmental indemnification?

“Part of best practices is making sure that there’s a financial assurance mechanism in place to meet the environmental indemnification that attorneys put into contracts,” Bunbury says. “That’s something that I’m seeing more and more out there and it’s really driving the marketplace.”

“You’d be amazed how many times we get a contract asking for the wrong type of pollution coverage,” he continues. “When people who don’t work with environmental insurance products on a daily basis get into these things, they often don’t know what they’re getting into.”

Above all, “you do not sell environmental insurance. You educate your clients on their environmental exposure,” Bunbury says. “And then, you allow the insured who is now well-informed to make a decision about whether investing in pollution insurance will add value to their business.”

“That’s where we step in,” agrees Jones. “We’re equipped with the expertise and knowledge. We have a deep understanding of environmental insurance. We can go through that with clients. We’re the industry experts and we can get the carriers to help get that done.”

Will Jones is IA senior editor.

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Tuesday, June 2, 2020
Environmental Liability