Environmental—US - Lockton Companies

Environmental—U.S.

Market Update April 2012

When standard general liability carriers began to deny pollution

MATT PATEIDL Vice President Environmental Risk 816.960.9465 [email protected]

conditions, a select few carriers saw an opportunity to develop a specific monoline product to fill in the gaps left by the pollution exclusion in the CGL policies. For more than 30 years, risk managers have considered environmental liability policies as one of their options to transfer a company’s pollution exposures. Depending on the objectives of the client, policies have been tailored to address specific concerns. The products have evolved to respond to a variety of exposures: ™™

Historical unknown pollution conditions

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Operational risks of facilities

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Storage tanks

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Transportation

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Nonowned disposal site liabilities

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Foreign liability exposure with the implementation of the European environmental liability directive

The marketplace even got so creative at one point that clients could purchase coverage for the remediation of known pollution conditions and insure the cost overruns through a policy commonly known as a “cost cap.”

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Market Update, Environmental—U.S. Lockton

Ten years ago, there were only a handful of carriers offering environmental liability policies. Within the last 36 months, that number has quadrupled and introduced an abundance of capacity. With that additional capacity, new premium indications and renewal quotations were driven down drastically. Terms and conditions were broadened with new forms being introduced. Newly engaged carriers aggressively sought to build books of business, and established carriers were fighting for every renewal while coming out with their new forms to evolve with the marketplace. New placements were a “free-for-all” and renewals were battles for incumbents. In either case, the client benefited from the competitive marketplace. How were carriers who entered into the environmental marketplace able to be so aggressive? With regard to losses, the only predictable policy in the marketplace in being able to come close to setting a loss pick would be storage tank policies. All other policies are sophisticated guesswork as to when that phantom tank will be discovered or when the industrial chemical manufacturing facility will have an accidental release that impacts the day-care center next door. Carriers have prudently set minimum premiums and established underwriting guidelines based on their loss experiences on their books of business (or experience with former carriers before joining existing carriers and establishing new underwriting environmental divisions), but each carrier is not chained to an industry standard. The loss history has been patchy. There were the asbestos/lead paint and mold losses. This was followed closely by exclusions for exterior insulation finishing systems (EFIS). Some carriers felt it was prudent to attach silica exclusions into their forms. With regard to the meat/poultry industry, we even saw odor exclusions restricting coverage for third parties that did not appreciate the smell. Like the other lines of coverage in the industry, the marketplace reacts when necessary for exposures not previously contemplated with restrictions or exclusions and conversely evaluates after a given period of time if those restrictions or exclusions were justified. Then and Now Standard EIFS exclusions are a thing of the past and are now only applied on a case-by-case basis. Mold is now commonly written into the definition of a pollution condition where it used to have to be added via endorsement. Mold coverage is now available on an occurrence-based policy when it has historically been only offered on a claims-made form. Carriers are offering a broader coverage for remediation of soil/groundwater for asbestos and lead paint versus a total exclusion.

Market Update, Environmental—U.S. Lockton

The issue of greenhouse gas and climate change will be the focus of the next market update. In 2011, a major carrier strengthened their reserves for environmental liabilities in a disclosure statement in their 10K by $413,000,000. The majority of those strengthened reserves were attributed to pre-2003-issued policies. Another statement in the financial report is “Underwriting guidelines have been revised to no longer cover known or expected clean-up costs, which were a significant driver of historical claims,” and a “new emerging contaminants team has been formed within the dedicated environmental engineering staff to track any new cleanup standards that may be set by federal or state regulators.” Also of note from that statement, “The percentage of long-term policies (ten years or more) has decreased from a historical average of 6 percent to 1.5 percent by policy count.” Both these statements are epic with regard to the current state of the marketplace. The statements expressed in that carrier’s financial disclosure are not an isolated stance on current conditions. Cost cap policies are dead. That program died a quiet, unannounced death. Only three carriers were offering this program, and all no longer are considering these policies without significant exceptions (never say never). Long-term policies (often used in merger and acquisition situations) are no longer automatic. Bottom Line Lockton is not going on record that we have entered a hard market. However, following the financial disclosure statements, and in talking with senior management at the carriers, heavy focus is on tightening underwriting guidelines and reviewing bindable terms and conditions in quotes. Lockton continues to work with the carriers to negotiate the broadest terms and conditions available in the marketplace, but as Bob Dylan sang, “the times they are a-changing.”

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