How does environmental insurance handle new issues?
Typically, this coverage focuses on insuring unknown issues that may be associated with a site. But there are also insurance policies for situations in which you have existing contamination on a site and you are trying to cap the potential cost of that risk.
You may think the risk is a $5 million problem and you don’t want it to end up being a $30 million problem. By capping that cost, businesses know if a risk becomes a larger problem than anticipated, additional insurance can protect them from that worst-case scenario. Also, most pollution policies are written on a ‘claims-made’ basis — a claim has to be reported during the policy term. However, environmental insurance policies, if crafted correctly, can have full pre-existing coverage conditions applying, with no retroactive limitation. So if the policy is placed today, it covers everything that happened in the past but that you don’t know about yet.
Why is environmental insurance growing in popularity?
It is a very advantageous market for companies considering environmental insurance for the first time or renewing their coverage. Conditions are favorable primarily due to the fact that the market has grown. Three years ago, only a few major insurance carriers offered environmental products or coverage. Today, more than 20 active markets offer some form of pollution liability coverage.
Current events — the Gulf Oil Spill and the Japanese earthquake and tsunami — cause people to think about the environment. Those are dramatic events, but smaller issues happen every day. Awareness is augmented by public and government regulators and the number of laws in place — more than 17,000 worldwide — many of which are conflicting and very complex. Companies require individuals who are staying on top of those issues to advise them on their potential liability and how best to mitigate that liability.
The market is also growing in response to major regulatory changes in the European Union. The regulatory framework of the EU’s Environmental Liability Directive (ELD) creates new liability — a ‘polluter pays’ model. It also requires financial assurance, which can usually be satisfied by insurance, bonds, surety, escrow accounts, trust funds or cash.
Assurance is voluntary, but several countries have committed to moving to compulsory financial security, and there is pressure for others to do so in the name of consistency.
For affected companies, specific pollution legal liability coverage is a solution. It can be modified to match ELD requirements and exposure for environmental liability.
Michael R. Szot, CPCU, ARM, is executive vice president and global practice leader, Environmental Service Group, Aon Risk Solutions. Reach him at [email protected] or (213) 630-3253. Gregory E. Schilz is managing director, Environmental Service Group with Aon Risk Solutions. Reach him at [email protected] or (415) 486-7652. Paul D. Maxwell is a senior account executive with Aon Risk Solutions. Reach him at (248) 936-5356 or [email protected].
