Environmental insurance can be a profitable line of business for insurance agents and brokers who take the time to become functional in the coverage line.

But judging from the coverage defect rates in actual environmental insurance placements, insurance producers need to seek out qualified help to match the environmental coverage needs of their customer base with an environmental insurance policy fit for the purpose for which it is intended.

With more than 100 different environmental insurance policies to choose from, it’s certainly possible for agents and brokers to find a good insurance match for any type of insurance buyer.

Common Coverage Mistakes

Here are eight common environmental insurance coverage mistakes you might be making with your clients:

1. You sell a policy form unfit for the purpose for which it is intended. One common example: selling an insurance policy designed for an industrial site to a hotel. Another common example involves the package general liability/contractors pollution liability insurance policies necessary for a fire and water damage restoration contractor, which were originally designed to insure nuclear weapons manufacturing plant cleanup contractors. The original package insurance policy design for a nuclear cleanup contractor is not well suited for a contractor working in a private residence kitchen. Most environmental insurance policies need to be amended to address the specific coverage needs of insured parties.
2. You fail to address completed operations loss exposures in contractors environmental liability, especially on project-specific insurance placements.
3. You fail to address the full effects of pollution exclusions in standard property and liability insurance policies within the design of the environmental insurance placement.
4. You sell environmental insurance policies with fundamentally flawed coverage for fungi/bacteria.
5. You do not address preexisting pollution conditions on the environmental insurance policies sold to farms.
6. You’re sloppy regarding additional insured endorsements and certificates of insurance.
7. You underestimate the full effects of pollution exclusions in standard policy forms.
8. You leave customers ignorantly uninsured for contamination-related losses. This usually results from an agent’s incorrect, self-guided belief that pollution exclusions only apply to hazardous waste—an extremely dangerous assumption for not only the client, but also the agent from a professional E&O standpoint.

The No. 1 coverage flaw for contamination risks is unnecessarily uninsured loss exposures. Second to that problem is the sale of environmental insurance policies that contain fundamental coverage defects. This usually occurs when an agent sells an environmental insurance policy that was never designed for use in a specific class of business to an uninformed buyer in that class. As a result of these factors, the vast majority of commercial insurance buyers are needlessly and ignorantly uninsured for losses caused by some sort of contamination event.

Coverage Flaws in Action

Here are a few common examples of unnecessary coverage flaws in practice:

• More than 99% of apartment units are currently either uninsured or underinsured for losses associated with pollutants, mold, bacteria, lead, asbestos or Category 3 water. Traditionally, the $10,000 minimum premium for this coverage has been the most significant barrier to the widespread sale of environmental insurance on apartment buildings. But at press time, minimum premiums are as low as $3,500 for that same policy. Environmental insurance for apartments has been available in the environmental insurance marketplace at a cost of around $24 a door for more than four years.
• Of the 1% of apartments that actually have environmental insurance in place, it is common to find coverage only for legionella bacteria as a defined “pollutant” in the environmental insurance policy. Because of universal exclusions for fungi/bacteria, today’s property and liability insurance policies exclude literally hundreds of thousands of different forms of bacteria as causes of loss. Of interest, an environmental impairment liability policy that covers all types of bacteria as a “pollutant” can cost less than an environmental insurance policy that limits bacteria coverage to only legionella bacteria.
• Today, almost all commercial buildings are unnecessarily uninsured or underinsured for a loss that is related to a speck of fungi or bacteria in any sequence during loss events.
• More than 95% of condominium owner associations have sub-limits for Category 3 water losses that cover only 10% of the average Category 3 water loss in a high-rise condo building ($25,000 versus $250,000).
• Ninety percent of fire and water restoration contractors purchase fundamentally defective GL insurance programs for fungi, mold, bacteria and Category 3 water remediation-related job sites. Yes, you read that right—the GL policy technically excludes all claims from these job sites based on the fungi/bacteria exclusion, and not just claims arising from actual exposure to these contaminates.

Even the highest-quality contractor’s environmental liability (CEL) policy cannot fix this fundamental coverage flaw in the GL insurance policy. Customized GL/CEL insurance packages that close the coverage gap in this class of business are widely available but woefully underutilized. Based on the insurance coverage defect rate in this class of business, insurance agents and brokers apparently have no idea that fungi/bacteria exclusions common in GL policies apply to claims from the work site, not actual exposure to fungus or bacteria.

How to Fix It

The first step is for insurance agents and brokers to specifically address—rather than ignore—the environmental risks in their customer base. For a tool to help you begin the process, see the field guide in “A User's Guide to Pollution Exclusions.” Agents need to inform all commercial insurance buyers about the effects of pollution exclusions and offer insurance coverage solutions if they are available. More environmental insurance products are available at lower prices than most insurance agents and brokers realize.

To avoid coverage mistakes in environmental insurance placements, most insurance agents and brokers need to seek out specialists in environmental risk management and insurance. All the training in the world on traditional property-casualty insurance does not prepare an insurance agent or broker to work with environmental insurance. A working knowledge of the environmental risks and insurance drivers in certain classes of business is relatively easy to master with a good coach.

Why do inaccurate beliefs about the effects of pollution exclusions persist? The industry severely lacks training venues on the subjects of environmental risk management, pollution exclusions and environmental insurance. To make matters worse, most teachings about pollution exclusions in the past were simply not technically accurate.

A fledgling nonprofit educational organization is poised to help correct that problem. The Society of Environmental Insurance Professionals (SEIP) is dedicated to expanding the understanding of environmental risks and environmental insurance. Want updates on environmental risk and insurance? Sign up for the SEIP mailing list.

David Dybdahl is president of American Risk Management Resources Network, LLC (ARMR.net)—a wholesale insurance brokerage firm and leading resource in microbial matter risk management and insurance that assists insurance agents and brokers in the design and placement of environmental insurance policies. This article is adapted from “Environmental Insurance: Just the Facts.”