VideoFor now, however, the pressure for deeper reporting represents only a potential source of growth in the use of pollution coverage. Insurers — having been hit with losses, a contraction of their reinsurance, and the prospect of new risks — have reportedly gotten picky about providing such coverage at all.
One threat that has spawned caution among underwriters is the possibility that many states will follow the lead of New Jersey and start pursuing "natural resource damage" claims, according to Ken Radigan, a senior vice president of AIG Environmental. Last year, New Jersey's Department of Environmental Protection decided to pursue 4,000 potential damage claims "for the lost use of natural resources caused by industrial pollution," according to a release issued by the department. Thus, if a company contaminated a river and killed its fish, the company's pollution insurance carrier could be responsible for paying for the restoration of the river to its original state as well as for the cleanup, says Radigan.
That current case of risk aversion has led pollution carriers to tighten policy conditions, increase underwriting scrutiny, and boost prices, brokers and insurers say. The long-term coverage needed to protect companies on those lengthy site cleanups has shrunk, for example.
Two or three years ago, companies could buy policies stretching out 15 to 20 years, and they could pick up as much as 30 years if they were willing to let insurers include a "finite risk" element in the coverage, according to Donna Sandidge, a managing director specializing in large industrial entities for Marsh Inc.'s environmental unit. (In a finite-risk approach, the buyer makes an upfront payment of most or all of the present value of the expected costs of a cleanup to the insurer. In exchange, the insurer assumes the interest-rate risk and the risk that the money will be needed sooner than expected.) Lacking such a pre-funded provision, buyers are now looking at policy terms of just 5 to 10 years, says Sandidge.
That might not be as alarming as it sounds. A decade of coverage is quite enough for most situations, says John Welter, president and chief underwriting officer of the environmental division of Quanta Capital Holdings. Although Welter notes that most cleanup costs are spent in the first five years, he acknowledges that the risk persists for longer-range remediation and that "the reinsurers have pushed back and cried 'no más' " in terms of policy lengths.
Yet even though environmental carriers are seeking to limit their risks, hefty amounts of coverage are still available. AIG, for instance, can supply $150 million of insurance for an environmental hazard. While there are many permutations of policies, there are two basic offerings for corporate buyers: cleanup-cost-cap insurance and environmental impairment liability (EIL) insurance.
The distinction between the two boils down to the difference between insuring known and unknown risks. Cleanup-cost-cap insurance covers the possibility of cost overruns on a planned remediation of one or more sites; EIL coverage (also commonly called pollution legal liability insurance) insures against lawsuits and government-enforcement actions resulting from unexpected or unknown pollution stemming from an insured's location.
Finance executives and risk managers in the market for cost-cap coverage, in particular, might well find their companies paying more than expected and assuming more risk. After some previously avid insurers got their "noses bloodied" by losses, says Kenneth Anderson, a managing director with Gallagher Environmental Risk and Insurance in Chicago, pollution cost-cap insurance prices rose 10 to 15 percent compared with last year.
Previously, commercial insureds would assume a deductible of 10 percent of the overrun above the expected cost of the cleanup, and the insured would pay for all costs above that, according to the broker. Now, deductibles have expanded to 15 percent, and insureds are being asked to cough up a percentage of the cost that exceeds the deductible. Insurers have added coinsurance provisions such as these, notes Anderson, to motivate polluters to curb their remediation costs. In addition, carriers who once signed off on drafts of work plans now often demand that companies provide final plans, preferably ones approved by government officials.
Market conditions for EIL are a tad more variable. Indeed, "schizophrenia rules" in pricing the product, notes Anderson, because there's a great deal of subjectivity in underwriting unknown risks. Recently, for instance, the broker says he shopped the risk of a multi-campus university to four different insurers; one provided an estimate that was a mere 35 percent of what the others expected to charge.
Insurers and brokers are also pushing finite-risk approaches for EIL, cost-cap, and a bevy of other products. AIG, for example, is offering a new "specialty litigation risks" program that would cover the costs of expected or threatened toxic-tort lawsuits. (In such suits, which are often class actions, plaintiffs claim to have been injured by contact with poisonous chemicals.) Under the finite-risk program, the insured would pay the insurer the net present value of its legal costs, plus a premium, said AIG's Radigan. If the outcome is better than expected, some of the money would be returned to the insured.
Reader Comments» Post a comment