Printed in the February 2008 issue of American Agent & Broker
By Bill Pritchard, Jane Saliba, Amanda Duncan, Mike Tighe, and Chris Young
In 2007, independent agents and brokers saw the soft market dig in its heels. Unusually good underwriting results, fewer hurricanes than expected and an absence of other catastrophes led once again to a turn of the underwriting cycle. New carriers entered the industry as existing companies countered by lowering rates. As usual, the soft market feeds on itself, creating a larger problem over time.
The second half of 2007 showed that while the environmental sector is not immune to the general cycles that plague the insurance industry, it may be better insulated than most. The standard market saw significant softening at the end of 2006, but pollution insurers’ rates held firm until midway through last year. Even afterward, the reductions were minor compared with those in general casualty lines. This bodes well for environmental carriers and agents in 2008.
There are two principal ways that environmental insurance can help agents navigate the softening market. One is by enabling them to write new business, especially accounts in the environmental industry. The other is by helping agents keep existing clients, whether they are involved in the environmental industry or not. Account rounding will always be an industry mantra, but it’s particularly important in a soft market, because the more coverages an agent provides to a client, the more difficult it is for a competitor to take it. Environmental policies are well-suited to account-rounding. Virtually every insured has some kind of pollution exposure, whether from premises, operations or professional services. Agents familiar with the applicable coverages may well be able to persuade clients to use savings from renewals on other policies to buy environmental insurance.
Businesses are unlikely to drop environmental coverage once they buy it. Such a company usually lists the policy on the statement of qualifications that it shows to its own clients and prospects. Pollution insurance requirements become integrated into the company’s job specs and contracts, making it necessary for the company to renew its pollution coverage year after year.
Our experience indicates that agents who have strong relationships with their clients, know the marketplace and are not afraid to temper insureds’ expectations will capture the bulk of the environmental business, both new and renewal. Agents sometimes back themselves into a corner by promising prospects and clients the world before reviewing their loss experience or examining what’s available in the market. Those who take care to research the market, on the other hand, are better prepared to set buyers’ expectations at a reasonable level. This is important, because the only way to manipulate a policy’s cost to meet unrealistic expectations is to lower the quality or effectiveness of its coverage.
While environmental coverage is important in all parts of the country, market conditions vary by region. As a national broker, we see risks from 48 states. In what follows, we’ll point out opportunities we see in different parts of the country.
Career prospects in the environmental sector are becoming more attractive in the Northeast. Massachusetts, New Hampshire, New York and other Northeastern states are expanding their vocational and accredited educational opportunities in this field.
A large percentage of our submissions from this part of the country are being made on behalf of startup mold testing or abatement firms, lead and asbestos abatement contractors, restoration contractors and various nonenvironmental contractors. There appears to be a growing number of startups, which may be attributable to such factors as employment turnover and the availability of financial support for higher-education programs in the environmental field. We’ve seen numerous new business owners, who’ve left their previous employers to establish their own operations.
Though the federal and state projections vary, employment for hazardous-materials remediation contractors alone is forecast to increase by 10% to 20% over the next decade. This anticipated growth suggests that we will continue to be approached for environmental liability coverage by new contractors and consultants vying for a foothold in the region.
Other factors are contributing to the need for pollution liability insurance in the Northeast. State and local governments are including environmental insurance requirements in contracts for electrical, paving and excavation work. Commercial projects also are increasingly requiring contractors to have pollution liability insurance. Furthermore, some admitted-market classification changes (e.g., involving fire- and flood-restoration contractors) have funneled historically standard-coverage contractors into the environmental market.
Consumers’ changing needs also are prompting established firms to broaden or alter their core operations. For instance, the continuing decline in the number of privately owned structures containing asbestos and lead paint is decreasing the demand for contractors who remediate such hazards (although demand for such remediation work still exists at federally owned and historic buildings). Accordingly, many lead and asbestos contractors and consultants are moving into mold remediation, sampling or testing.
Despite the nationwide slump affecting residential construction, there are still plenty of commercial and industrial construction projects on the horizon in the Mid-Atlantic and Southeast regions. General contractors, trade contractors, construction managers and associated service providers are flourishing. Contractors and consultants will continue to be the main buyers of environmental coverage and will benefit from softening rates and underwriting flexibility. To stay competitive, environmental carriers are offering broader coverage and lower premiums. This trend will continue through 2008 and possibly beyond.
Drawn by low tax rates, and inexpensive labor and utility costs, both foreign-owned and domestic manufacturers and distributors are constructing facilities in this part of the country. For example, alternative fuel facilities are being built here. Georgia alone has 13 already operating, and other states are offering tax incentives to attract such business. Manufacturing and distribution facilities have significant environmental exposures, and carriers are eager to offer them pollution liability coverage, often coupled with commercial general liability.
The Gulf Coast
The 2004 and 2005 hurricane seasons resulted in an increase in the number of mold-abatement and disaster-restoration contractors along the Gulf Coast. These contractors needed environmental coverage, which was offered by few insurers at the time. Now, almost all environmental carriers offer coverage for this class of business at substantially reduced rates. Because of uneventful hurricane seasons, these contractors had less work in 2006 and 2007, but fires, floods and other disasters will continue to occur, so this contracting segment will keep growing.
Over the last few months, we’ve witnessed a number of other changes in the Southeastern environmental marketplace. More standard-market carriers are non-renewing the CGL coverage they write on fire-restoration and water-damage contractors. This is understandable, since such work as water-extracting, drying, mold remediation and build-back work clearly has environmental implications, which a CGL policy from a standard market may not address. New environmental carriers are entering the marketplace, offering limited grants of coverage. These E&S carriers do not use standard forms, so it’s important for agents and their clients to examine policies carefully. Some E&S markets, for instance, offer mold coverage to contractors only while they are on the job, thus leaving the client unprotected for completed-operations losses.
With few major windstorms in the past two years, many restoration contractors have experienced a drop in sales. Some have traveled to Mississippi and Louisiana to aid in the Katrina restoration, but much of that work has been completed. Consequently, many of these contractors have expanded into general carpentry and remodeling work. These changes in operations affect their coverage. Agents should review their clients’ policies for gaps. Meanwhile, we expect comprehensive GL/pollution liability package policies for such contractors will become more affordable in the soft market.
As urban sprawl extends the boundaries of cities, even contaminated property is becoming more valuable. The EPA estimates there are more than 450,000 “brownfields”-sites with known pollution conditions-in the U.S. Since 1995, the EPA has facilitated redevelopment of these sites by empowering local governments and responsible parties to work together to assess, remediate and reuse them.
While most of our premises pollution book of business is in the Northeast, we’ve noticed an uptick in inquires from the Southeast. Real-estate development companies are seeking to transfer pollution risks associated with land previously used for manufacturing or storage of potential pollutants. Armed with historic information on the property, environmental insurers are becoming more aggressive in providing multiyear policies to cover these risks. First- and third-party coverage, including defense, is readily available for periods up to 10 years. Some carriers will consider additional coverage enhancements, including coverage for loss of rents associated with the discovery and remediation of contaminants on property.
Interest in pollution insurance is not confined to industrial and commercial property; we’ve also noted an increased demand for such insurance among owners of retail and office space. Along with soil or groundwater contamination exposures, these properties can face indoor perils arising from mold, mildew, radon, etc. In older buildings, asbestos and lead paint are still issues. New environmental insurance programs are available for commercial and retail property owners/tenants that can cover these exposures at a reduced cost and with fewer restrictions. We anticipate a greater demand for premises pollution coverage, since minimum premiums and the amount of information required for submissions have been greatly reduced.
Another growing need for environmental insurance is associated with crime trauma scene decontamination (CTS decon), although carriers are cautious about insuring this class of business. Part of the concern is that the CTS decon industry is relatively new and lacks national standards. The cleanup after violent crime, suicide or accidental deaths requires rigorous effort. It may also require compassion and a delicate touch, since cleanup may take place in the presence of the victims’ families and friends. These factors lead to increased claims and reduced insurance capacity.
It is also difficult to deconstruct and remediate property that has been used for methamphetamine labs. Trace contamination can be found on absorbent materials such as carpets and furniture, as well as in sinks, drains and ventilation systems. Even in trace amounts, meth-lab contaminants may pose health threats.
Some carriers are offering coverage for these exposures on a claims-made basis only. Agents arranging coverage for CTS decon clients should choose a combined GL/pollution liability policy that includes microbial-matter coverage. CTS decon is a rapidly growing industry in Southeast, and we expect the environmental insurance market will increase its capacity for such business under varying grants of coverage.
The Midwest has seen more than its share of plant closures and lay-offs in the last decade. Such events provide opportunities, however, for those who clean up such properties. Some large contracting firms that have been involved in plant maintenance and turnaround are now providing plant decommissioning and tear-out services. Many of the old plants can contain sizable quantities of lead and asbestos, which must be removed before the structures can be razed. This has led to a growth in demand for coverage applicable to environmental consultants and contractors.
Once structures on these sites are cleaned or demolished, many are converted to retail or light industrial uses. Those with waterfront or downtown locations often include a residential component. These projects typically need considerable funding from financiers, who require the developers to obtain environmental impairment insurance to cover the lenders’ interests, in the event that a borrower defaults as a result of a pollution condition.
For plants and facilities still in operation, there’s been a boost in demand for contractors pollution liability coverage, as more facility owners add environmental insurance to their coverage requirements for approved vendors. With multiple carriers and the present soft market, CPL is one of the better bargains available in the environmental insurance market. Additionally, facilities that are refinancing or expanding now find themselves required to provide lenders the previously described environmental insurance protection.
While residential construction is down in the Midwest, a large number of major public works projects and commercial construction jobs are still being undertaken. Sophisticated project owners and managers are looking to their design professionals or construction managers to protect them from any environmental impairment arising from the project. A project-specific or annual practice policy written for such professionals, combined with environmental coverage that affords additional-insured status to project owners and managers, achieves this goal with relative ease.
In contrast to the Midwest’s industrial/manufacturing sector, its agricultural economy has been growing. The region is producing record amounts of corn in its effort to become a big player in biodiesel and ethanol production. We’ve seen a number of new fuel manufacturing facilities planned and developed. Many should come on line in 2008, and even more are proposed for 2009. These facilities will be prime prospects for combined GL/pollution liability insurance. More traditional agricultural businesses, such as dairy farms or fertilizer blenders, also have pollution exposures from their lagoons, tanks, silos, etc., all of which can be easily addressed within the environmental insurance market.
Different parts of the country have different economic drivers, which fuel the demand for insurance. Contractors, consultants and business owners of all types are working to keep pace with the realities of their markets. As businesses evolve, various forms of pollution insurance often can help them start up new operations and reach out to new clients. In the soft market, meeting these businesses’ needs for environmental coverage is easier than ever for the agent who has a finger on the local economy’s pulse.