There are more than 17,000 environmental laws and regulations worldwide. How sure are you that your business operations are in compliance?
Environmental insurance has become a hot topic the last several years, mainly because even though most companies have environmental exposures, those risks are excluded from most liability and property policies, creating a major gap in coverage.
“An experienced, specialized broker can help you recognize exposures, understand the regulatory climate and provide solutions, whether it is insurance or other risk mitigation options to satisfy coverage needs or financial assurance requirements,” says Michael R. Szot, executive vice president, global practice leader, Environmental Service Group, Aon Risk Solutions.
Smart Business spoke with Szot, Gregory E. Schilz, managing director, Environmental Service Group, Aon Risk Solutions, and Edward X. McNamara, a senior vice president at Aon Risk Solutions, about how to protect your company from environmental risk.
Why should businesses be concerned about environmental risk?
Many companies are unaware that they do not have proper protection against environmental risk, but virtually any company that owns or leases property has exposure to environmental risk. If a company transports potentially harmful materials, it has environmental exposure. An experienced environmental broker can point where exposure exists and whether companies have coverage for it in their current program. Companies may have some limited environmental coverage built into their current policies, but a broker can identify if they have a gap.
How can businesses assess whether they have a gap in their environmental coverage?
Companies may not understand their environmental risk. The starting point is a coverage gap analysis, in which a broker reviews current policies to determine if their insurance program provides any environmental coverage. The answer generally depends on the company and the country in which the company operates, but usually, coverage for environmental exposures is limited, at best.
Next, the broker will make a site inspection and perform a policy review highlighting where the company has exposures and its gaps in coverage to environmental risk. Then, the company will receive solution sets showing how to fill any gaps with an environmental insurance product or other mechanism.
In many cases, they may choose not to buy insurance; they may intentionally self-insure risk. But to not know the risk level would be a mistake for any organization.
What types of problems are covered with environmental insurance?
The biggest issue is pre-existing, unknown conditions. Whenever a business considers buying a property, whether it is an undeveloped or currently developed piece of land, there is always a question about the historical use of that property. Even an undeveloped piece of land with grass growing on top of it could have been used 30 years ago as a plating facility, with lead, zinc or toxic minerals in the ground. That is the single largest driver that causes businesses to consider environmental insurance — what they don’t know about a property they are buying.
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 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 firstname.lastname@example.org or (213) 630-3253. Gregory E. Schilz is managing director, Environmental Service Group with Aon Risk Solutions. Reach him at email@example.com or (415) 486-7652. EDWARD X. MCNAMARA is a senior vice president at Aon Risk Solutions. Reach him at firstname.lastname@example.org or (216) 623-4146.