Due to the sustained increase in social inflation, combined with the uptick in restrictions and environmental terms and conditions being inserted into standard policy forms, the remainder of 2023 will, in our view, likely see continued increase of environmental liability insurance claims. This is in addition to the expected continued erosion of limit capacities related to project-specific professional liability.

Here are several trends that we feel are likely to grow or emerge for environmental or pollution insurance policies throughout the rest of 2023:

Contractors Pollution Liability (CPL)

Insurance specifications, asset protection and the awareness of pollution claims remain the strongest buying motivators we see for this coverage. However, certain contractor disciplines and project types have been impacted by claims, changes to federal and state regulations, and additional information obtained during the COVID-19 pandemic.

Due to mold claims being historically associated with wood-frame projects, carriers tightened their appetite by either applying an increased rate or retention, decreasing the amount of exposure, or by declining to offer terms entirely. However, after having time to review additional information and data, markets loosened restrictions related to communicable disease exposures.

The trend of either consolidating or bolstering the insurance portfolio by attaching professional liability coverage to existing CPL policies also remains competitive, while project-specific programs continue as a popular alternative—especially for large projects requiring substantial limit of liability or a prolonged completed operations period.

Pollution Legal Liability (PLL)

During the first half of 2022, PLL demand remained strong as the U.S. economy continued to emerge from the COVID-19 pandemic. However, during the second half of 2022, a rise in interest rates initiated by the Federal Reserve's efforts to curb inflation impacted the commercial office, industrial, habitational and retail sectors. As a result, demand for transactional PLL is likely to remain soft due to inflationary pressures on insureds relying on third-party capital for asset acquisition.

In contrast, we also expect the expansion of development projects to continue in conjunction with the continued strong forecast for the construction industry.

Future construction outlook predictions vary, with some outlets pointing to strength in 2022 construction as a positive. Others approach today's market with caution with the possibility of a recession. For the 12 months ending August 2022, total construction starts were 15% above the 12 months ending August 2021, according to Dodge Construction Network. Nonresidential starts were 33% higher, residential starts gained 4%, and nonbuilding starts were up 15%. Notably, there is optimism that 2023 will see stability in the cost of construction materials even as inflation remains an area of concern, according to the IHS Markit's Engineering and Construction Cost Index. Predictions include the belief that construction revenues are expected to rise by 10% to 12%, supported by the industry finishing 2022 strong with bond premiums projected at $7 billion, “the most in history since that number has been tracked," according to the National Association of Surety Bond Producers. Also, the Infrastructure Investment and Jobs Act, passed in November 2021, continues to impact construction and the insurance market with the anticipated requirements for environmental insurance.

General Liability/Pollution Legal Liability (GL/PLL)

Originally intended to cover chemical manufacturers, distributors and waste management facilities, the marketplace has expanded toward higher hazard general liability classes. As a result, the main motivators and driving forces for the GL/PLL policy form have remained consistent: regulatory compliance for waste facilities where financial responsibility is needed; asset protection; and products with pollution exposures.

However, exacerbated by the growing emergence of contaminants like per- and polyfluoroalkyl substances (PFAS), also known as “forever chemicals," this coverage has been tightening. This is in addition to the increased carrier concerns for rising litigation claims, the costly effects of natural disasters, COVID-19 and social inflation.

Environmental Casualty Program (GL/CPL/PL)

This combined policy form typically provides GL, CPL and professional lability (PL) to specific market segments consisting of environmental contractors, waste transporters, environmental consultants and oil, gas or renewable energy contractors.

Carriers are likely to be more flexible writing the professional exposures associated with large environmental contractors—in excess of $100 million—who have broadened their services. However, we expect this flexibility to be tempered by the carriers protecting their loss ratios by limiting their limits, lowering the tolerance for the frequency of claims and focusing on the insured's potential for large losses. Small premium increases of around 5% or less can be expected for better-performing contractors, with a push for higher rates for poor performers.

Emerging Trends Shaping Environmental Liability

Coverage terms for environmental liability have likely been impacted in recent years by the types of risk and a combination of high-profile mold exposures, rising legionella claims, natural disasters, contaminated site development claims and the growing focus on emerging contaminants, such as PFAS.

Many carriers are monitoring changes to federal and state regulations associated with PFAS after these compounds contaminated soil and groundwater at thousands of locations across the U.S. As a result, some carriers excluded coverage for these chemicals entirely.

While more research must be done to determine the full impact of these forever chemicals, studies by the Centers for Disease Control on humans suggest that high levels of PFAS may lead to a slew of negative impacts, including increased cholesterol levels, changes in liver enzymes, increased risk of kidney or testicular cancer, increased risk of high blood pressure or pre-eclampsia in pregnant women, small decreases in infant birth weights, and decreased vaccine response in children.

More than 6,400 PFAS-related lawsuits were filed between July 2005 and March 2022, according to Bloomberg Law, with a widening scope that has not only included PFAS manufacturers but has also begun to reach companies that use PFAS as a component of a product. In June, manufacturing giant 3M agreed to pay $10.3 billion to public water suppliers to settle claims of PFAS contamination. Weeks prior, paint manufacturer Dupont and its spin-offs, The Chemours Co and Corteva, inked a $1.18 billion settlement to resolve similar claims. Also, according to ADVISEN, the American subsidiary of Solvay, which is a Belgian chemical manufacturer, agreed to pay $393 million to settle PFAS-related claims in New Jersey in what state officials called a “historic step."

The market will see continued increases in underwriting scrutiny for industrial, hospitality, habitational, health care, energy sector, and development or redevelopment risks. This includes a heightened sensitivity for construction-related pollution liability exposures like PFAS, particularly for contractors using associated products or working at jobsites known or expected to contain such chemical exposures.

Other concerns for the market include rising litigation of claims, costly effects of natural disasters, COVID-19 impacts and social inflation, which has not abated its impact on the economy.

In addition, auto coverage and its impact overall via nuclear verdicts has not diminished, and the continued driver shortage remains a noteworthy safety and profitability concern. Insureds, who have taken significant rate increases over the last three years, invest in driver fleet safety to support profitable accounts with moderate increases. However, the marketplace continues to attempt to insulate themselves from auto, and, as a result, many carriers continue to deploy lower limits.

Many insureds who already may be struggling with material costs and worker shortages may seek alternative solutions—or they may look for ways to economize by splitting up their combined environmental program. However, the risks include leaving themselves more exposed to catastrophe and significant swaths of their environmental exposures uninsured.

On a global level, some insurers have begun to pull out of high CO₂-emitting sectors to carry out their environmental, social and governance (ESG) initiatives. For example, in October 2022, 62% of reinsurance companies said they planned to stop covering coal projects, while 38% exclude some oil and natural gas projects, according to the nonprofit Insure Our Future.

The impact to insurance carriers is, in our experience, negligible, as they are simply leaving classes of businesses like combustible coal mines, tar sands extraction and more. However, the clock is ticking for the owners of these businesses. In fact, it's uncertain how long they will be able to insure against the exposures in these sectors.

New Underwriting Developments

While the impact of emerging contaminants and the general pushback by markets on site coverages will likely continue, the marketplace is also looking for ways to grow as new technologies for renewables are center stage. Additionally, the near future is likely to bring expanded capacities with new carriers entering the pollution liability marketplace and some major carriers providing new and improved policy forms. This will include stable rates for insureds with flat exposures and clean loss reports.

In addition, we expect the continued entry of new policy forms or the enhancement of existing ones to broaden the coverage for a wide range of exposures. This could include a renewed emphasis on fire or water restoration enhancements, which can combine with environmental casualty programs to provide professional liability and excess liability coverage forms to fire and water restoration contractors.

In the coming year, carriers are likely to pay more attention to the insured's professional liability exposures and professional services. Carriers are developing a more disciplined approach and are consciously working to stay within their appetites, while choosing not to broaden the standard professional liability coverage grants afforded under these policies.

Tips for Agents

Agents should meet with their clients at least annually to review their environmental exposures. For example, insureds in the habitational, health care or education sectors should revisit their mold management plans to make sure they are up to date—or create plans if they don't exist. Similarly, insureds representing the manufacturing fields should evaluate their material handling systems as well as their hazardous and non-hazardous waste stream risk management protocols to ensure they are in place.

Another consideration should be the ongoing compliance with regulatory and financial protocols. As an example, storage tanks both aboveground and underground should be reviewed to make sure the best risk management practices are being utilized.

Agents and brokers who are not thoroughly conversant in this space should regularly reach out to market experts to determine competitive risk management solutions available and to continually learn about the latest enhancements, exclusions, regulations and claims procedures.

John Heft is executive vice president at RT Specialty.

This article is provided for general information purposes only and represents RT Specialty's opinion and observations on the current and future outlook of the environmental and construction insurance market and does not constitute professional advice. No warranties, promises, and/or representations of any kind, express or implied, are given as to the accuracy, completeness or timeliness of the information provided. Any forward-looking statements contained herein are based upon what RT Specialty believes are reasonable assumptions. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. RT Specialty undertakes no obligation to update forward-looking statements if circumstances or RT Specialty's estimates or opinions should change. The reader is cautioned not to place undue reliance on forward-looking statements. No user should act on the basis of any material contained herein without obtaining professional advice specific to their situation.

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