What businesses need environmental impairment coverage? According to Victor Maroukian, regional underwriting manager – environmental of Zurich North American Commercial Markets – Zurich Integrated Product, contractors, agriculture, residential and commercial real estate, educational institutions, manufacturing/assembly, garage/maintenance, hospitals, hotels, laboratories, waste disposal facilities, metal processing/plating, recycling, mining, petrochemical, retail, retirement homes, smelters, transfer stations and warehousing/distribution are just a few of the classes that need and purchase this coverage.

Maybe the question should be reworded to – who doesn’t need environmental impairment coverage?

In 1942 Hooker Chemical received permission from the Niagara Power and Development Company to store its waste in the Love Canal, which was being used as a municipal dump. It lined the canal with thick clay, placed the waste in barrels and buried it more than 20 feet underground. Hooker eventually bought the land and covered it with sod, intending to keep it sealed for years to come.

In 1957 the city of Niagara was growing and needed land. They approached Hooker, which initially resisted but eventually sold Love Canal and surrounding property to the school board for $1, but only after providing a complete description of what was in the canal. Hooker also expressed its concerns in writing and stated that it was not subject to any liability for the property. The school board built an elementary school on part of the property and sold the other part to be used as a housing development.

In 1978 the area was declared toxic by the federal government, the school abandoned and the residents evacuated. The term Love Canal became synonymous with environmental disaster.

Occidental Petroleum purchased Hooker Chemical in 1968. Even though Hooker had been transparent in expressing its concerns and had specifically addressed the liability issue, Occidental Petroleum paid $129 million to the EPA as restitution for the environmental damage that occurred.

Just as Occidental Petroleum was prosecuted for injuries at the Love Canal, so can any business involved in an environmental contamination incident that has an impact on third parties.

Here is a possible loss scenario:

Pete’s Bar and Grill is located in a rural area. Its waste goes into a septic system because there are no public sewers. Pete has a contract for the septic tank to be cleaned and serviced once a year. His neighbors begin having problems with their water and have their wells checked for contamination. Samples are taken, the wells are found to be contaminated, and the source of the contamination is eventually traced back to Pete’s septic system. Apparently the septic tank cleaning contractor failed to appear for three years and Pete failed to notice!

Pete is found liable for cleaning up the contaminated land and drilling new wells for his neighbors. He is also responsible for having water delivered to his neighbors until new water sources are located, as well as for the business interruption loss of one of his neighbors. In addition, another neighbor claims her son’s illness is due to the contamination and sues Pete for her son’s medical bills and pain and suffering.

The environmental impairment market is very active right now. According to Gregory K. Steinman, vice president of Crump Environmental Services, a division of Crump Insurance Service, Inc., “There has been an influx of new carriers into the marketplace. There are currently more than 30 carriers writing environmental liability compared to 15 or so at this time last year.” Gina Jones, director of specialty programs at Burns & Wilcox Ltd., agrees and identifies a number of strong carriers, including ACE, American Safety, Century, Chubb, C.V. Starr, Everest, Hudson, Ironshore, Navigators, and Zurich. Ms. Jones adds: “There are many more solid carriers in the market.”

This class of business is primarily written on nonadmitted paper because of its flexibility. Mr. Maroukian explains: “Like most in the industry, we use nonadmitted paper for this type of coverage. In certain cases, we are able to use admitted paper through the New York Free Trade Zone or the New Jersey Exportable List.”

John Rich, environmental underwriting manager for James River Insurance Company, believes most businesses have an environmental exposure. He says, “Any business should make a thorough assessment of the environmental risk to its business a part of its risk management strategy. That includes site owners; those who lease a facility; any contractor; and any professional consultant who may render opinions in areas that involve the environment. If they are not sure what their potential environmental liability is, they should find a qualified retail agent who can help them assess their risks and exposures.”

Our other experts fully agree with Mr. Rich. Mr. Maroukian notes that, while most environmental contractors and industrial/agricultural risks have purchased coverage, “Due to the changing regulatory climate, increased awareness of environmental exposures, and the high litigation costs associated with claims resulting from pollution events, we are seeing increased activity from non-environmental contractors, real estate, educational institutions, hotels, warehousing/distribution, etc."

Ms. Jones provides some examples; “The owners of an office building need coverage if they have a boiler room, have any tanks on site, or have a potential mold situation. In medical facilities like hospitals and clinics, employees and patients may become infected by Legionella in the water supply. The owner of a storage facility doesn’t know what customers put in their storage spaces. Toxic substances can leach into the water supply and cause illness and property damage.”
To sum it up, Mr. Steinman says, “Every operation and contractor has environmental exposures. The key is defining them based on the type of risk.”

This coverage is mostly prone to severity exposure, especially at site locations. However, according to Mr. Rich, “Carriers that choose to write contracting accounts are likely to see a frequency of liability losses.” Overall, the claim activity varies based on the type of operation and is difficult to categorize.

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