By: David Dybdahl
There is a game of reverse musical chairs going on in the environmental insurance marketplace today. There are now more places for a piece of environmental impairment liability (EIL) business to land than the number of pieces that need a home.
Switching insurance providers could erase 30 years of IBNR (incurred but not reported) losses that would have been covered by the insurance company exiting the marketplace and not picked up by the new insurers. The original insurer who covered the claim when it was first reported may deny later coverage if you switch insurers because of a perpetual renewal provision within the EIL policy. The new insurer would deny coverage because the original claim was first reported to the previous insurance company and could not be “first” reported to them and therefore would not trigger coverage.
A large contributor to this phenomenon is a major underwriter of environmental insurance abandoning the site pollution insurance market, putting countless policies and hundreds of millions of premium dollars up for grabs.
With more insurance companies scrabbling for EIL premium dollars, brokers have a wide choice of homes for their accounts. From the early days where there were only a handful of insurers, there are now over 40 insurance companies providing environmental coverage. Greater competition leads to lower premiums. I have heard multiple underwriters complaining recently about greater than 30 percent price reductions compared to the expiring premiums of the company that is abandoning the site pollution coverage line due to a crippling loss ratio.
Most brokers and buyers do not understand how such price reductions might be possible for the replacement underwriter to still make a profit. On the surface, it looks to be an act of kindness by the underwriter. What lies beneath the surface and goes almost entirely unnoticed is that the switch from insurers has the potential to erase 30 years of incurred but not reported (IBNR) losses that would have been covered by the insurance company exiting the marketplace and not being picked up by the new ones. Those legacy losses were incurred during the go-go years of the cleanup of America from 1996 to 2007.
One way to avoid an unfortunate situation like this is to never get into one like it in the first place. There are policies out there in the marketplace that do not contain the perpetual renewal provisions. A policy that does not give the insurer unilateral control to shut off coverage for IBNR losses is immensely more valuable to the buyer as it won’t leave them uncovered for subsequent claims should they ever have to or decide to move coverage.
Unfortunately, an awful lot of insurance buyers who have had a pollution loss reported under an EIL policy some time over the past 30 years are going to lose their coverage for IBNR losses because it is impossible to renew a policy when the insurer is abandoning the product line. It is sometimes possible to endorse a replacement EIL policy with an endorsement proclaiming a new claim from a previously reported pollution loss will be covered by the current EIL policy. However, in practice, these endorsements are underutilized. It will be interesting to see how this plays out in the EIL realm as those policies are placed elsewhere and unrealized subsequent claims start rolling in.