Growing Demand for Environmental / Pollution Liability Coverage
No business today is immune to environmental risks or the benefits of pollution liability insurance. “The state of the commercial pollution and environmental insurance market is very strong,” says Clyde & Co. Partner Kevin Haas.
There are industries for which environmental and pollution liability exposures are obvious: Think petroleum refining, storage and transportation or chemical manufacturing and distribution.
“Pollution used to be a really niche coverage,” says Michael Padula, head of the U.S. environmental practice at Aspen Insurance Holdings. “But now we’re seeing more first-time buyers.”
Pair the emergence of new environmental risks with the increased frequency and severity of natural catastrophes due to climate change, and there really is no such thing as a commercial enterprise, large or small, that can afford to skimp on pollution liability insurance. Even a business that at first glance seems relatively insulated from environmental exposures could see its world turned upside down should a major storm trigger toxic floodwaters or an HVAC malfunction cause a mold or Legionella outbreak.
“It’s a rare occasion when people could look you straight in the face and say they don’t have any exposures,” says Mary Ann Susavidge, chief underwriting officer for the environmental practice at AXA XL.
However, increased awareness of climate change-related exposures along with pressure on companies to become savvier with regards to environmental, social and governance (ESG) risks and investing have moved the needle on the uptake of environmental and pollution liability coverage, according to the November 2021 report from Beazley titled “Spotlight on Environmental Risks.” Among the key takeaways: Only 12% of business leaders across ten major industries in the U.K. and U.S. ranked environmental concerns — including pandemic, climate change, pollution damage, food security and energy transition — as their top risk category in 2021. That percentage is expected to fall to less than 10% in 2022.
“Environmental risk mitigation presents a significant challenge,” says Chris Illman, head of Responsible Business at Beazley. “The complexity and interconnectivity of the risks have the potential to generate claims that straddle traditional areas — from pollution and environmental damage, through to new areas of risk like greenwashing and reputation damage.”
This leaves an opening for insurance and risk management experts to help clients better understand their environmental exposures. The market is especially ripe for sales to “mom and pop” businesses, where environmental insurance penetration may be as low as 5%.
The task at hand, says Susavidge, is to educate clients and prospects about their potential environmental exposures. That way, should there be a pollution or contamination event, insureds have the opportunity to undergo a covered cleanup process that may ultimately leave their site or community in even better condition than before the event.
This coverage need is especially pronounced in industries where pollution insurance may not be compulsory in the way that it is for energy producers or chemical facilities.
There are a myriad of examples of the potentially negative environmental exposures to today’s businesses.
For instance, after Hurricane Harvey dumped nearly 36 inches of rain in four days, according to the National Weather Service, some 22,000 barrels of oil, refined fuels and chemicals were reportedly released into the Galveston Bay. Meanwhile, industrial facilities emitted toxic fumes into the air. “Industrial and municipal plants reported that more than 150 million gallons of sewage and industrial discharge spilled across the Texas coastline due to Harvey,” the Houston Chronicle reported.
Hiral Shah, senior vice president and environmental practice leader at Sompo International Global Risk Solutions, adds: “Benzene, vinyl chloride, butadiene and other known human carcinogens were among the industrial toxic substances released into surrounding neighborhoods and waterways following Hurricane Harvey’s torrential rains.”
In another example, North Carolina is home to thousands of pig farms that house massive waste lagoons. When these lagoons flood, nearby land and water sources are contaminated. And the push by some food processors to turn their waste into methane gas can present fresh pollution risks.
Even without a major weather event, oil and gas businesses face pollution exposures. For instance, well casings can fail and pipelines can be breached, causing significant environmental damage.
Elsewhere, the longtime practice of using urban fill, or soil mixed with waste products such as construction and demolition debris, to modify site elevation and facilitate property development is now revealing cleanup exposures when construction begins on those sites.
And finally, exposure to fine particulate matter, a form of wildfire pollution, is responsible for some 335,000 deaths every year, according to a study published in Lancet Planetary Health and covered by Forbes. This includes nearly 7,000 deaths from heart-related issues and 3,500 from breathing problems.
The liability issues raised by each of these events can be massive for insureds.
“It’s not only the immediate impacts on the environment,” Padula notes. “You could be an adjacent property owner that gets impacted or who doesn’t necessarily have the resources to respond to an environmental incident.”
Today’s pollution and environmental liability insurance policies can respond to contamination events in a way that traditional commercial liability insurance cannot. Insurance professionals also have a role to play in terms of revealing fresh mitigation strategies.
“We bring an expertise to the table,” Padula says. “At the end of the day, we’re helping a community or an insured get back on their feet in the event that some type of pollutant is released into the environment.”
Despite some contraction within the environmental insurance space in recent history, there remains an abundance of coverage capacity along with relatively favorable terms for many potential insureds.
“There are still a number of carriers out there,” says John Heft, senior vice president and National Environmental and Construction Professional Liability Practice leader at RT Specialty. “Environmental insurance is a valuable tool for satisfying contractual obligations, sales agreements, lender requirements and state and federal regulatory requirements.”
It follows that dozens of carriers have entered the environmental insurance market.
“Carriers have certainly realized that there’s something to this product,” says Susavidge. This is happening at the same time that government regulators are becoming more sensitive to pollution issues as commercial enterprises and environmental protection are now “intrinsically tied together,” she says.
What’s more, companies that are slow to align their operational practices with the new regulatory landscape as well as ESG expectations could face legal, reputational and regulatory risks, Beazley reports.
“Establishing emergency contingency response plans is key to avoiding or mitigating large losses,” says David Schechter, claims focus group leader for the environmental practice at Beazley. “Sometimes these issues can arise during the night or off hours, so having preselected response firms that can be reached 24 hours a day in case of an emergency is vital.”
Hiral Shah with Sompo International Global Risk Solutions says environmental insurance rates may vary dramatically from one industry to the next.
“For site specific pollution liability products, the market is hardening around rate, terms and conditions and risk selection due to an increase in severity and frequency related losses around mold, redevelopment, weather-related events and emerging contaminants (and related defense costs), as well as an increase in third party claims litigation.
An example of the hardening market is that now, many carriers are sub-limiting business interruption coverage,” she says. “The contractors’ pollution liability market is still fairly aggressive due to heavy competition.”
She adds that the evolving pollution market is a growth opportunity.
“There is a renewed focus on product innovation to address extreme weather, emerging risk (contaminant and regulatory) and increased third party litigation,” she says. “In addition, there is a push to address the needs of middle market insureds. Lastly, with an increase in M&A activity and construction and redevelopment, there is a continued focus on using environmental insurance as a risk management tool.
Insurance experts such as those interviewed for this article also anticipate an uptick in environmental coverage needs in the U.S. as the country begins to address its aging infrastructure. They caution that underwriting for such projects will be detailed. With an eye toward potential claims or pollution cleanup demands, underwriters will want to know specifics about the insured’s location, capital improvements, permits and more.
Many in the insurance space also are watching closely as scientists become more familiar with the impact of “forever chemicals” such as per- and polyfluoroalkyl substances (PFASs), perfluorooctanesulfonic acid (PFOS) and perfluorooctanoic acid (PFOA). These agents, which were long used in commercial products and industrial manufacturing, have the potential to contaminate food, drinking water, outdoor and indoor air quality. Consider that people who lived in the PFOA-contaminated area around DuPont’s Washington Works facility were found to have higher levels of PFOA in their blood from drinking water, according to the National Institutes of Health. Should studies of these chemicals kick start corporate liability claims and lawsuits, the issue has the potential to usurp the financial impact of asbestos liability.
“A major objective for the industry must now be to plan for potentially changing regulations, to ensure that it stays abreast of the associated risks,” Schechter says of the issue around emerging contaminants.