A Big Picture on Environmental Insurance
By: David Dybdahl
Environmental insurance products have been in abundant supply since 1975 but have had little market penetration. Expertise in environmental risk and insurance is the main constraint but education, standardization of policy forms, and self-preservation risk management in the insurance brokerage ranks should lead to a greater market acceptance of the environmental insurance product line over time.
In abundant and continuous supply since 1975, the market penetration of the environmental insurance product line is currently less than 10 percent. The poor market penetration of the environmental insurance product line cannot be attributed to limited product availability or to excessive price. Historically, many environmental insurance policies were being sold at a fraction of their inherent loss costs. The minimum premiums today are at an all-time historical low, making environmental insurance affordable for virtually any commercial insurance buyer.
Although the number of environmental insurance policies sold every year is growing, the capabilities of the insurance distribution system in the coverage line are not growing as fast as the rapidly expanding need for environmental insurance coverage in new classes of business. The main reasons for the poor market penetration of environmental insurance are as follows.
- Insurance brokers are not technically proficient in the unique aspects of environmental risks.
- The effects of pollution exclusions in property and liability insurance policies and the need for environmental insurances are not well understood by insurance practitioners.
- The plethora of complex, nonstandardized environmental insurance policies makes it difficult to match environmental insurance policies to the needs of insurance buyers.
Today, the majority of insurance buyers remain needlessly and ignorantly uninsured on both property and liability insurance policies for losses arising from a broad spectrum of potential contaminated losses. Insurance agent and broker professional errors and omissions loss exposures for failing to advise their clients on the need for environmental insurance are expanding at an unprecedented rate due to the widespread availability of affordable environmental insurance coverages. The professional liability loss exposure for agents and brokers for uncovered contamination claims extends beyond current customers—failure to advise loss exposures may arise from customers who, 15 years ago, were not presented with the documented opportunity to purchase inexpensive environmental insurance for known and unknown pollution liabilities dating back to the beginning of time.
The good news for the agents and brokers is decades-old gaps in insurance coverage can effectively be erased through the current offering of environmental insurance written on a claims-made coverage basis that either does not have a retroactive date at all or has a retro date far into the past. However, it will require proactive measures by insurance brokerage managers to eliminate historical insurance coverage gaps and the resulting legacy professional liability loss exposures for the brokerage firms.