The U.S. environmental insurance marketplace in 2020 and through the first quarter of 2021 remains strong and stable with about $2 billion in annual premiums. Despite the pandemic, the marketplace is experiencing significant growth. Overall capacity is estimated at $600 million to $700 million depending on industry sector risk profile.

Pollution insurance policies, which followed the Commercial General Liability (CGL) pollution exclusions of the 1970s, have evolved into a variety of different products. Two primary policy types are most frequently purchased: Environmental Site Liability (ESL), also known as Pollution Legal Liability, and Contractor’s Pollution Liability (CPL), often combined with Professional Liability. 

Important other coverages are Underground Storage Tank, Lender Liability, Closure Liability and combinations thereof. Environmental casualty products are also popular and used to fill gaps in traditional property and casualty coverage. These often heavily manuscripted policies provide very comprehensive, legally vetted, and proven environmental coverage which has been invaluable to insureds for over 40 years.

Even still, carriers continue to look for ways to modify or create new products to address changing needs stemming from regulatory requirements and public demand.  Climate change, clean water and air, extreme weather events, biodiversity threats and natural disasters are major drivers of global pollution risk.

Environmental insurance products are offered today by about 40 insurance carriers, each with different risk appetites, products, capacity, and strengths and weaknesses. It’s a highly competitive environment with a surprising number of new entrants, such as Hamilton Insurance Group, and an occasional exit by an important carrier.

Following AIG’s exit several years ago, Zurich decided to discontinue their site liability product line, citing profitability issues. However, there are very qualified markets available to fill the gaps.

Key observations of the current marketplace:

• Regulatory enforcement is expected to increase under the Biden administration, resulting in an increase in violations, fines, penalties and claims. That would add to an existing steady increase in environmental claims of about 15% to 20% per year.
• Social media and environmental activism is increasing awareness of pollution risks and leading to additional lawsuits.
• Pollution incidents are more frequent and more severe, often as a result of natural hazards (e.g., flooding/water intrusion causing mold), pipeline releases, and new or poorly understood contaminant impacts.
• Carriers are very selective regarding the risk they will insure. For example, meaningful coverage for historic and operational coal mining or energy production is available from only two to three carriers. The same is true for upstream and mid-stream oil and gas pipeline operations. 
• More and more carriers are protecting themselves from complex risks by layering—offering lower primary policy limits requiring multiple excess layers through other markets to achieve higher overall limits.
• We’ve seen some hardening of the market depending upon product type, generally in the 8%–10% range. However, the hardening is also reflected by shortening policy terms and broadening exclusions or restrictions, rather than increasing premium.

Coronavirus impacts are still being determined. As expected, virtually all carriers now exclude COVID-19 outright or by broad exclusions for communicable diseases, viruses or both. Some carriers, while broadly excluding communicable diseases, may provide coverage for decontamination costs.   

The two primary environmental policy types, Environmental Site Liability (ESL) and Contractor Pollution Liability (CPL) policies, are summarized below.

ESLs are claims-made policies that generally cover the environmental liabilities of an insured’s active business operations and those stemming from historic operations. An ESL policy (proprietary versions are offered by over 20 carriers) covers most types of regulated pollution releases or incidents. The ESL is location-specific and intended to cover liability for pollution at, on, under and migrating from an insured’s real property. Coverage is often extended to a portfolio of sites, both domestic and international. Highlights of the ESL product include:

• The best ESL policies are usually heavily manuscripted by endorsement to obtain broader coverages and fewer exclusions.
• While generally similar in intent, differences in policy wording, terms, conditions and definitions vary from carrier to carrier. 
• An ESL policy can cover liability to first- and third-parties for bodily injury and property damage, remediation (cleanup) costs and the associated legal defense expenses. In the current political climate, Natural Resources Damages is a very important coverage available through an ESL policy. Available for both on-site and off-site exposures, these coverages can be offered for new (pollution conditions that occur after policy inception) and historic (pollution conditions that occurred before policy inception) pollution conditions. 
• Several enhancement coverages are available, including Non-criminal Fines and Penalties, Contingent Business Interruption, Illicit Abandonment, Property Diminution in Value, Underground Storage Tanks/Above ground Storage Tanks, Mold and Fungi, Asbestos-Containing Materials and Lead-Based Paint, First- and Third-party Transportation and liability for wastes delivered to properly permitted, non-owned treatment, storage and disposal facilities.
• A standalone ESL policy covering risk associated with pre-existing conditions may be available for up to 10 years but, in fact, that is rare. Active operations coverage is actually often limited to 3 to 5 years. Limits can be up to $50 million (higher limits are available by purchasing excess policies). Deductibles or Self-Insured Retentions can be negotiated and limits (and terms and conditions) are not shared with other coverage lines, unless desired.
• Significant information regarding environmental conditions at the location(s) to be covered is usually necessary for the intense underwriting required for a comprehensive policy.
• These policies cover both gradual and sudden, accidental releases. Some CGL, Energy, Property, Auto and other product lines will offer sudden and accidental coverage for pollution but often are sub-limited and contain coverage restrictions. Sudden and accidental coverage can augment the ESL, but is not an adequate substitute, since many pollution incidents are complex in nature and gradual in occurrence.
• ESL policies can also provide substantial excess coverage above pollution indemnifications.

Contractor’s Pollution Liability (CPL) is a very popular insurance product offered by over 40 insurers. It is designed to protect against third-party claims for damages caused by “pollution conditions” arising from an insured’s covered contracting operations, by or on behalf of the insured. The CPL marketplace is growing rapidly to keep pace with construction sector growth. A CPL policy in fact is now often required by contract. While there are fundamental differences between the CPL and ESL products, coverage and definitions are often similar.

• These policies are available as claims-made (less expensive) or occurrence-based forms. Occurrence-based is recommended since completed operations coverage is generally unnecessary (a claim can be made for an incident that occurred during the policy period after the policy expires), assuming the CPL policy term is long enough to capture possible latent defect exposures.
• The coverage can be provided on a project-specific or blanket basis for the insured’s overall operations.
• CPL coverage is a vital component of the insurance program for any contractor involved in construction or excavation activities.
• Limited coverage can be extended to the insured’s owned and leased properties for their covered operations.
• Transportation, Non-Owned Disposal Sites, Non-criminal Fines and Penalties, and Emergency Response are significant coverage offerings.
• Since consulting, contracting, design and field work performed by architects, design firms, engineers, environmental consultants and contractors can result in significant claims, CPLs are often paired with Professional Liability coverage.
• CPL coverage can respond to pollution conditions created by both current and completed operations. Long-term completed operations coverage (tail) can be added to the claims-made policy.
• Coverage limits are generally in the $5 million to $10 million range, although limits of $100 million and higher are not unusual for larger projects and may require excess layers offered by other carriers.
• A CPL can be structured within or outside of an Owner-Controlled Insurance Program/Contractor-Controlled Insurance Program. These programs provide coverage for subcontractors working under written contract on the insured’s project(s).
• As with the ESL, while generally similar in intent, differences in policy wording, terms, conditions and definitions vary from carrier to carrier.  

• The ESL market exit by Zurich mentioned above will require policy replacement upon expiration. It’s very important to involve other qualified carriers early in the renewal cycle to allow adequate time to underwrite potentially complex risks. Several very qualified markets are available to fill the void left by Zurich.
• In the words of one underwriter, “massive” claims are arising from 1,4-Dioxane (a stabilizer in some chlorinated solvents) and Ethylene Oxide (a flammable gas used for sterilization, often in hospitals), primarily from air quality impacts.  
• Major claims are arising from Per- and Polyfluoroalkyl & Perfluorooctane Sulfonates (PFOS), used as stain and fire repellants. According to the U.S. Environmental Protection Agency, they can harm both humans and the environment. 
• Glyphosate (Roundup) continues to be a concern, with several related lawsuits pending or active.
• Because of real estate vacancies related to COVID-19, Legionella and mold claims are expected to rise significantly. Mold claims already have had a major impact on several markets.   
• Litigation is resulting from misrepresentation of policies with language related more to exclusions than coverage.
• Transactional liability transfer program deals, particularly for energy companies divesting coal combustion residuals, are becoming more common.

Many of you probably read about the incident below, but may not be aware of our team’s analysis, which reflects the sometime overlooked technical aspects of a pollution incident.

Six employees died and more than 100 were hospitalized following a tragic accident earlier this year at a food processing plant in Georgia. The likely cause was a release of nitrogen from processing equipment. An ESL or CPL policy would be considered the most likely coverage for an incident of this type.    

Nitrogen is not commonly considered a pollutant. After all, it makes up about 78% of the air we breathe. It’s a nontoxic and odorless gas often used to reduce the risk of chemical accidents by creating an inert environment. Seemingly harmless. However, when accidentally released it can be lethal, causing nitrogen asphyxiation in a matter of minutes. There is also a cryogenic hazard associated with the liquid form. 

From an insurance perspective, a release of nitrogen is likely to fall under the pollution exclusion of most commercial insurance policies. It is beyond terrible when an employee dies from an accident. However, the potential claims impact following the injury or death of someone not covered by workers’ compensation would be hard to imagine. We also should consider the emergency response, crisis management and business interruption costs. 

A safe working environment is paramount. However, even with strong safety and health programs, accidents happen. While insurance is not a substitute for excellent management programs, environmental site pollution insurance is a product line that can help lessen the financial damage if a catastrophic release of nitrogen or something similar occurs.

The McGriff Environmental Practice is a horizontal product line consulting and brokerage team charged with helping our associates and clients understand and better manage environmental and natural resources risk from a broad perspective. We are committed to providing consultative and brokerage services through personal accountability, continuous improvement and responsiveness. Thought leadership, outstanding consultative environmental risk management, and brokerage and superior claims management are all part of McGriff’s service commitment.