More Than Coverage: Environmental Insurance's Value Proposition

Acknowledgement to XL Environmental
By MaryAnn Susavidge, Executive Managing Underwriter, Environmental
As Deepwater Horizon was added to the list of names — Exxon Valdez, Bhopal, Love Canal — synonymous with environmental disasters, businesses received a stark reminder that their activities have the potential to incur environmental liabilities. While they may have made a mental note of their environmental liability risk, few made a mad dash to buy environmental insurance as some may have anticipated.
A weak economy still weighs heavy on most business’ insurance-buying decisions, and environmental insurance may be on the discretionary luxury list of insurance coverages. However, many experienced buyers see the value beyond the financial claims paying benefit of their pollution coverages. In fact, they are seeing the value of not only their environmental insurance, but the relationship that they have with their carrier, as a survival strategy, helping them take advantage of new business opportunities, get added guidance on their environmental, health and safety initiatives and protect their profitability in the current weak economy.
Consider the Deepwater Horizon situation as an example. While the spill devastated the Gulf fishing industry, for others, it presented an opportunity to maintain revenue while participating in the clean up efforts. According to BP, more than 150 private companies and government agencies, employing more than 20,000 people, were contracted for the cleanup. Some of the nation’s leading environmental remediation companies — undoubtedly longtime environmental insurance buyers — were involved and enlisted their environmental insurers to pinpoint and mitigate any risk specific to their activities because of the extent of this cleanup.
Many other contractors — eager for the opportunity but with limited experience — were also involved. While they were required to obtain specific liability cover-age, pollution and federally mandated workers’ compensation coverages, many took on the challenge of performing work out of the general scope of their expertise. For environmental insurers, the big concern about an inexperienced remediation contractor is that contractors could exacerbate the situation, costing more and exposing themselves to environmental liability. These contractors had to obtain pollution liability coverage — a portion of them likely purchased coverage from a new market that entered the environmental arena recently. In some cases this may have led to a potential increase in the contractor’s risk, as these contractors did not benefit from working with more seasoned environmental carriers who, along with insurance coverage, offer environmental risk management guidance to help contractors’ assure their livelihood and profitability.
For the most part, environmental incidents are fewer in frequency than other potential business insurance claims such as auto liability or workers’ compensation. However, as we are reminded by the Deepwater Horizon incident, the financial impact and environmental damage caused by an environmental incident can be costly and severe. Most businesses don’t expect the extent of a Deepwater Horizon disaster, which is estimated to cost BP upwards of $10 billion. A $1,000,000 to $10,000,000 cleanup is a real possibility for many business operations.
For contractors, the Deepwater Horizon cleanup was a silver lining in a horrible situation. It presented a source of income. But it also carried risks that if not handled properly could in turn strip out any rewards. It mirrored many business activities outside the Gulf. After all, in tough economic times, everyone is anxious to jump into new opportunities. It’s how businesses are taking on new opportunities that can make all the difference. These are the situations — especially for contractors, various environmental industries, real estate developers and more — where additional value can be gained from their environmental insurance policies. By tapping into seasoned environmental insurance carriers for risk management guidance, businesses can be assured that new ventures remain profitable and the value of their operations or assets is protected.
Just a few decades ago, the simple mention of environmental insurance might have met with a lot of skepticism. Rather, businesses across many industries choose to ignore their environmental exposures; thereby making the conscious decision to self-insure environmental liabilities. Today, environmental insurance is recognized as an important business tool — used to cover operational risks (including new ventures) or managing potential environmental liabilities of a transaction such as the closure of a facility, purchase of a new business or a property sale. In many instances, environmental coverages have offered enough reassurance that a transaction could be completed or a new business opportunity — say the development of a renewable energy project — could happen.
Like many insurance lines, environmental insurance is constantly changing, influenced by pressure from many angles, including market conditions, client needs, environmental regulations, and public perceptions of environmental risks. These influences often result in changes in the key market providers of this kind of specialty coverage, the availability of coverages, policy terms and underwriting standards. With more businesses seeking environmental protection, more insurers have begun offering pollution coverages.
Throughout its relatively short history, the environmental insurance industry has seen many providers enter the market and in many instances, make a quick exit. Since the environmental insurance market emerged in the early 1980s, three carriers — Chartis (formerly AIG), Zurich and XL Insurance — have consistently offered environmental coverage. Recently, however, there was a question of confidence in the market and many carriers saw an opportunity to grab some market share. Within the last three years, the number of insurance carriers has increased seven-fold, climbing to approximately 35 carriers today.
While this gives insurance buyers a wide range of market choices and competitive pricing, it does require buyers to do their homework to assure that they are buying from carriers who will remain committed to the market in the long-term and who have invested in appropriate claims and risk control services that will be needed should an incident occur. Like any business, insurers too have to take a hard look at the opportunities they take on and are confident that they have the necessary resources and expertise to assure new opportunities remain profitable ones. There is also the question of reinsurance. Reinsurers have to be confident that the insurer they are protecting has the expertise and wherewithal to manage the risk they are assuming.
The recent influx of new environmental insurance markets combined with the economic downturn has led to significant overcapacity, resulting in many carriers grappling for the same business. As business lessons have taught us before, this will only sustain itself for so long. As we have seen in the past, the environmental market will constrict to a smaller group of carriers specially equipped to address environmental risks.
Technical environmental expertise remains an important factor in an insurance carrier’s ability to successfully and profitably, underwrite environmental risks and, in turn, determines a providers’ longevity in the market. Environmental insurance is an engineered product. In other words, a substantial amount of upfront, hands-on work and evaluation goes into assessing a potential buyer’s environmental exposure before a policy is actually underwritten. Insurers with longevity in the environmental insurance market made a considerable investment in infrastructure and have built their underwriting, claims and risk control resources to manage clients’ environ-mental risks upfront with strategies and to mitigate losses with specialized claims handling.
An added advantage of working with an experienced, specialized environmental insurer is that the insured company gains access to environmental claims expertise. Should an environmental incident like a spill occur, the company has access to remediation help and legal expertise to help in an incident’s clean up or handle legal ramifications.
Despite weak economic conditions, forward thinking businesses realize that environmental protection is not a discretionary spend, but a “must have” to assure that their financial health is not jeopardized and they are well-equipped and supported for new opportunities. The value of environmental insurance protection has never been greater.

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