An unprecedented number of disasters that each caused at least $1 billion in damages—28 in total—struck the U.S. in 2023, according to the National Oceanic and Atmospheric Administration (NOAA). This was a dramatic increase from the 18 separate billion-dollar weather and climate disasters in 2022. The resulting impact of these disasters—from floods to hurricanes, earthquakes to wildfires—is being seen in several ways in the environmental insurance market, which has an important role to play as natural catastrophes impact customers' lives and properties.

“With the increase of natural catastrophes, we are experiencing more pollution releases, escapes and dispersal events," says Kari Dybdahl Kohal, president, American Risk Management Resources Network LLC (ARMR). “For example, if a chemical manufacturer company was in the path of a natural disaster, their raw products or end product could be released from their containment, resulting in first and third-party damages and cleanup costs."

As natural disasters become more frequent and more costly, insurance carriers are experiencing an increase in the frequency and severity of environmental claims.

“Since a pollution condition and pollutant can be defined generally as 'a release, escape, discharge, or dispersal of any solid, liquid, gaseous irritant or contaminant,' the application of a pollution condition can be applied on a very broad spectrum, resulting in increased pollution events during natural catastrophes," Kohal explains. 

As a result, “the increase of claims frequency and severity in the environmental insurance space has been a hurdle carriers and brokers have needed to navigate in the past year," Kohal adds.

And carriers offering environmental coverage have responded in various ways in different areas of the country.

“Because natural disasters occur in specific geographic regions—for example, hurricanes in the Southeastern U.S. and the Gulf States—underwriters take a more discerning look at these risks because of the more frequent and severe storms from climate change," says Canaan Crouch, managing director, Jencap Specialty Insurance Services. “The risks from these storm events are built into how underwriters approach and price pollution lines of coverage."

Meanwhile, on the other side of the country, when California experienced a dramatic increase in wildfires, most notably in 2017, 2018 and 2020, “we saw a number of carriers including wildfire exclusions on their liability policies," Crouch says. “What we are observing today is that underwriters are pulling back on wildfire restrictions since California, and the West overall, is inundated with water and precipitation, so there has been a very quick retraction and then softening of exclusions on policies specific to wildfire in this region."

Despite the challenges, the environmental market is growing, and “it is expected to grow through the second quarter of 2024," says Gina Jones, vice president and director of environmental programs, Burns & Wilcox, who points out that while the environmental insurance market is not considered to be hard, “we are seeing that, in some segments, rates are increasing due to the catastrophes—from water losses to fire losses."

In particular, the biggest rate increases are on excess limits. “Where you have general liability coverage with pollution coverage and there's excess over it, the excess has definitely become more difficult and more expensive," says Daniel Drennen, environmental practice leader, Amwins. “This is due to social inflation and the large verdicts that are happening related to auto."

Supporting environmental coverages, such as commercial auto, have become “virtually impossible to purchase on a standalone basis," Crouch agrees. “It's become quite difficult to place commercial auto, whether it be from the retailer's direct or the wholesale auto markets. If a carrier offers auto in support of their environmental package, they're going to secure the business."

Essentially, “auto is your linchpin, and there are very few carriers that are still looking at auto because the losses have been problematic over the previous years," Crouch explains. “Moreover, we're seeing tremendous rate increases—on average between 10% to 30% rate increase—on supporting excess liability policies when auto is a scheduled underlying coverage."

Meanwhile, regarding habitational coverages for mold and legionella, “there has been a lot of claims activity over the last four or five years around that segment of the market," Drennen says. “Some carriers have gone to where they're either putting sublimits or high deductibles on the mold cleanup or even a per-mold deductible."

Further, escalating awareness around contaminants like per- and polyfluoroalkyl substances (PFAS) in the environment is certainly playing a role in the growth of the environmental market and the increase in frequency and severity of claims.

“This is certainly something that's an emerging issue," Jones says. “It's a growing trend—one where we're seeing carriers attaching exclusions."

While the rise in the frequency and severity of environmental claims has been closely linked to the escalation in natural catastrophes, stricter governmental rules and regulations are also playing a role. With the introduction of President Joe Biden's Executive Order 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis," the Environmental Protection Agency (EPA) continues to consider rulemaking proposals to address some of the nation's largest sources of climate- and health-harming pollutants.

As a result, businesses are witnessing increased environmental liabilities due to higher compliance and cleanup costs, while insurers are seeing increasing liability claims.

Olivia Overman is IA content editor.