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Environmental risks spread in soft market

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Insurers covering environmental exposures are getting worried about the growing number of mold claims, particularly in the hospitality sector, although the market overall remains competitive, experts say.

Also of concern are environmental risks associated with development and redevelopment and petroleum pipeline-related risks, among others.

In addition, some risks previously insured by American International Group Inc., which withdrew from the site pollution coverage market early last year, are having difficulty finding a new home, experts say.

Meanwhile, any slackening of regulation by the federal government is expected to be taken up by state regulators.

The environmental market overall remains soft, observers say. “Except for a few specific industry sectors, the market pricing is competitive, and the terms broad,” said Catherine O’Leary, New York-based managing director with Aon Risk Solutions’ environmental practice.

Environmental insurance market

“It’s a robust marketplace,” said John Wasilchuk, Chicago-based vice president, environmental practice, for Lockton Cos. L.L.C. “There’s upwards of 30-plus carriers, with capacity exceeding $200 million.” “With all that competition, there comes aggressive rates and also broad coverages, he said. “There are carriers that are definitely trying to differentiate themselves by being creative with coverage offerings, because pricing isn’t necessarily the way they can do that anymore,” Mr. Wasilchuk said.

Mold, however, in general and particularly in the hospitality sector, is a growing issue being driven, perhaps, by a rainy season followed by humidity and heat in much of the country last year, as well as increased renovation activity.

“We’re actually seeing more claims on mold than we have seen in a number of years,” said Ms. O’Leary. “When it first became an issue in the early 2000s, people were very concerned,” but “over time, the terms became very liberal, and for a while it didn’t seem like it was a major risk driver,” she said.

But, “What we’re seeing today, particularly in the hospitality space, is that when property owners do a planned renovation, they’re discovering mold,” which is leading to unanticipated claims, she added.

“That’s the main trend that carriers are reporting right now,” said Christopher V. Smy, Atlanta-based global practice leader for Marsh L.L.C.’s environmental practice. While the hospitality sector continues to obtain coverage, “they should perhaps anticipate” tightened terms and conditions and higher retentions, he said.

Environmental insurance coverage for development and redevelopment projects is an issue as well. “We’re dealing with a lot of issues in the area of development risk,” said Richard M. Sheldon Jr., environmental practice leader with Willis Towers Watson P.L.C. in Radnor, Pennsylvania.

“It could be brownfields, it could be property that never had any significant industry history,” such as a shopping center, dry cleaner or gas station, or an old golf course where pesticides and herbicides were used regularly and in large quantities, he said.

Matt O’Malley, Exton, Pennsylvaniabased president of XL Group Ltd.’s North American environmental insurance group, pointed to development or redevelopment on urban landfill. “That is significantly different in terms of development risk relative to a suburban expansion, where someone is building on what used to be farmland,” he said.

In addition, there are “older sites that had some contamination that had been cleaned up based on the current regulations at the time that are now being re-looked at” because there may be stricter regulations, said Mark Vuono, president of Great American Insurance Group’s environmental division in Exton.

There may also be chemicals not looked at 10 or 20 years ago that must now be investigated, he said.

A related, although possibly separate issue, is vapor intrusion, where chemicals migrate from a subsurface to an overlying building.

This can include cases where a dry cleaner had been on the property and may have polluted the ground with certain contaminants that became volatile and gaseous and then found “their way to the path of least resistance, which can be someone’s basement on a nearby property,” where it can create bodily injury risks, said Mr. Sheldon.

It is a risk underwriters are “keeping an eye on,” he said.

There have also been tightened capacity and increasing rates and retentions for midstream energy accounts, most notably around petroleum pipelines, said Mr. O’Malley. With an aging infrastructure, “even a premier carrier can have a significant loss in the tens of millions (of dollars) in a matter of minutes,” he said.

Experts say while there have been some new market entrants, some policyholders who were previously insured by AIG have not yet found new homes for their policies.

Although AIG had “pretty much pioneered commercially viable environmental insurance,” they “couldn’t make a profit,” said David Dybdahl, president of American Risk Management Resources Network L.L.C. in Middleton, Wisconsin.

“XL Catlin will put out terms and conditions on many of those accounts, but we also found that there have been some data gaps, where we haven’t necessarily been as opportunistic as some other carriers have been,” said Mr. O’Malley.

Many of these accounts had been with AIG for a significant period, and some of their engineering reports were written in the early 1990s, so information that may have been used to underwrite the account “may no longer be currently available,” he said.