Why environmental insurance is still solid despite major underwriting scrutiny

The environmental insurance market remains robust with stable pricing for most buyers, according to insights from Kate Dietrich, vice president and senior environmental specialist team lead at Lockton.

However, insurers are deploying capital with caution in light of emerging hazards and a challenging regulatory environment.

The environmental insurance market is primarily driven by two key products: Pollution Legal Liability (PLL), which covers fixed facilities like owned or leased properties, and Contractor’s Pollution Liability (CPL), designed for contractors working on job sites.

Dietrich said that median pricing for PLL increased by 1.4% in the first quarter of 2024, based on Lockton’s data. Over recent quarters, PLL rate changes have been modest, typically ranging from flat to 5%, as competitive pressures have curbed significant rate hikes despite rising loss costs.

Multiyear policies for PLL remain accessible, though the negotiation of terms and conditions has become a critical area where experienced environmental brokers can add value. Underwriters are increasingly requesting comprehensive underwriting information and are utilizing publicly available data more effectively.

Dietrich emphasized the importance of insureds and their brokers understanding the essential information required and how best to present their risks to the most suitable markets.

CPL pricing has also remained stable, with most buyers renewing their programs with rate changes between -2% and +3%. Supported by ample capacity, insurers are aggressively competing for new business and are showing flexibility around terms and conditions.

However, Dietrich said that environmental liability coverage and market conditions are highly individualized, influenced by the specific characteristics of the insured. Buyers in certain industries or with distinct loss histories may experience outcomes outside the norm, with variables such as surrounding property traits or proximity to sensitive areas playing a significant role in renewal results.

The rising threats of litigation

While significant pricing shifts have yet to materialize, insurers are monitoring several potential threats closely. These exposures affect not only environmental insurance programs but also other coverages, including products pollution, which is available within combined general liability/pollution programs or on a standalone basis.

Dietrich pointed to the growing focus of an increasingly aggressive plaintiffs’ bar on contaminants such as per- and polyfluoroalkyl substances (PFAS), commonly known as “forever chemicals.” These substances, used in a wide range of consumer and industrial products, have been found to contaminate food supplies and water sources.

Although litigation involving PFAS is still developing, nearly 10,000 lawsuits have been filed against companies in 140 industries through late 2023, resulting in settlements totaling $16.7 billion, according to a November 2023 report from consulting firm Milliman.

This figure is expected to rise significantly in the coming years. The same report cited an estimate from risk analytics firm Praedicat that remediating PFAS contamination in U.S. drinking water could ultimately cost as much as $370 billion.

Dietrich also highlighted litigation related to ethylene oxide, a chemical used in various industrial processes, including medical sterilization and antifreeze production. Exposure to ethylene oxide has been linked to several types of cancer, including lymphoma and leukemia.

A 2023 settlement resolving nearly 900 claims against a medical sterilization company, following a 2022 jury verdict of $363 million, underscores the potential financial risks for businesses with ethylene oxide exposures.

These emerging contaminants, including PFAS and ethylene oxide, have contributed to the rise of so-called nuclear verdicts – judgments exceeding $10 million – over the past several years.

According to the US Chamber of Commerce Institute for Legal Reform, product liability cases, including those related to health risks from emerging contaminants, accounted for nearly one-quarter of all nuclear verdicts between 2013 and 2022. In 2022, the median nuclear verdict in product liability cases was $36 million, up from $24 million in 2013.

Dietrich said that while product liability is typically covered under general liability policies, the increasing frequency and severity of these verdicts are leading to broader application and expansion of pollution exclusions within these programs.

The coverage gaps created may be addressed through environmental policies with enhancements for product liability or through a blended product that combines general, product, and environmental liability.

Insurers are also becoming more cautious about the exposures they underwrite and how they price that risk, particularly concerning companies with PFAS exposures. Dietrich explains that insurers that previously offered capacity to these companies are now limiting or excluding coverage for PFAS-related risks altogether.

This heightened underwriting scrutiny is partly driven by pressure from reinsurers to maintain profitability, alongside uncertainty about future regulations and the widespread presence of some contaminants.

Public awareness and societal pressures

Despite the growing frequency of environmental losses and the heightened public focus on sustainability, only about 20% of companies currently purchase environmental insurance, a figure that has remained consistent since 2018. Dietrich said that as market conditions have hardened across other lines, many companies have hesitated to add environmental coverage, viewing it as an additional expense.

The problem is also sometimes compounded by brokers with limited expertise in environmental insurance, who may not fully explain the risks and the potential value of transferring or capping those risks.

However, this trend may be shifting as awareness of environmental risks increases. Advances in science regularly identify potentially hazardous chemicals and contaminants, along with the health risks associated with substances previously considered safe.

Companies are becoming more aware that they must evaluate and manage the use, handling, and disposal of these pollutants.

Additionally, pressure from investors, employees, customers, and communities is prompting more companies to focus on environmental, social, and governance (ESG) strategies. Dietrich noted that public sentiment around climate change and environmental impact may be partly responsible for the increase in the size and frequency of nuclear verdicts over the last decade. Federal and state regulatory agencies have also become more proactive, leading to increased fines and penalties.

These developments are causing more companies to revisit their environmental coverage options and strengthen their controls and response plans. Environmental liability has also become a crucial aspect of mergers and acquisitions (M&A) due diligence, with insurance playing a key role in facilitating successful deal closings.

Working with the right broker

As companies assess their environmental risks and consider purchasing environmental insurance products, it is essential to seek advice from an experienced broker specializing in environmental risk.

“Environmental insurance products are highly customizable, able to be catered to a company’s specific risk. It is important that companies work with brokers that understand their unique needs, can look beyond topline premium expenses to assess the true value of coverage, and can negotiate relevant and favorable terms and conditions on their behalf,” Dietrich said.

An effective broker can provide insights from professionals with backgrounds in environmental science, consulting, broking, and underwriting, helping clients make informed decisions about insurance program features.

They can also coordinate coverage across all lines to ensure that environmental policies close any gaps and work seamlessly in the event of a claim. Furthermore, experienced brokers can assist in securing favorable outcomes from complex and potentially costly claims.

As more companies recognize the value of environmental insurance products, those that have been hesitant to purchase coverage should reconsider, particularly as this insurance is increasingly required by lenders and landlords and valued by potential M&A partners.

Dietrich said that purchasing coverage before a significant environmental exposure is discovered can help a company address potential issues proactively before they become uninsurable.

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