A CLOSER LOOK AT SPECIALTY RISKS: ENVIRONMENTAL & PROFESSIONAL LIABILITY

Widespread interest among businesses and property owners is prompting the development of new environmental insurance products and approaches to meet specific needs.

Not only has interest in insurance to guard against pollution exposures never been greater, but it also reaches across the spectrum of property owners and business types, according to those in the industry.

"We see everything, I always say, from graveyards to gold mining," said Scott Britt, an assistant vp in the Industrial & Commercial Facilities customer business unit of ECS Underwriting Inc. in Exton, Pa. "Everybody's concerned about pollution these days.

"As far as the submission flow we see coming in, it seems to us now, more than ever, property owners need environmental insurance," Mr. Britt said. "The property owners that face these environmental exposures realize that the typical general liability policy provides either no pollution coverage or very little pollution coverage.

"We see golf courses, we see industrial tracts," Mr. Britt said. "We're also seeing. . . a lot more banking institutions or financing-type firms are requiring in their loan agreements some sort of environmental or pollution insurance.

"A lot of times the board of directors of some of these firms are concerned that they are protected," he said. Other organizations "want smooth financials, if you will."

Some of the greatest interest seems to be in protection from environmental exposures associated with selling property, with all the major environmental insurers developing products aimed at responding to those concerns.

"One of the hottest areas of environmental coverage truly deals with the transfer of environmentally impaired property," said John J. Theiss, vp/director of environmental risk management services at Sedgwick of California Inc. in Orange, Calif.

Typically, those concerns are twofold: protection against cleanup cost overruns and protection against any environmental liabilities that might appear once the property is sold.

"Inasmuch as you can only poke so many holes in the ground, there's always some question as to what the ultimate cleanup cost will be," Mr. Theiss said.

Beyond that, "even after remediation, there is always going to be some level of contamination on the property," he said.

"A number of companies that have been burned because they've sold sites, and then they've had someone come back after them," said Steven I. Werner, president of AIG Environmental Management Inc., a consulting arm of American International Group Inc., in New York.

Several factors are driving companies' interest in cleaning up and selling environmentally impaired property. One is a desire to rid the company's books of environmental liabilities.

As the real estate market hardens and property values increase, "companies are looking at divesting themselves of non-performing assets-specifically environmentally impaired property that they're now carrying as a liability," Mr. Theiss said. That translates into a dramatic increase in the transfer of those environmentally impaired sites.

Joseph L. Boren, president and chief operating officer of AIG Environmental, formerly Commerce & Industry Co., in New York, noted that changes in state regulations aimed at encouraging property cleanups have been another factor spurring the interest in remediating environmentally impaired property.

At least 36 states offer voluntary cleanup programs, he said, providing property owners such inducements as covenants that the state won't sue those undertaking voluntary cleanups.

"As they do that, the property owner has been looking at the one other thing that has been an uncertainty," he said. "There was always the sense of 'How can I guarantee what my cleanup costs are actually going to be?' and this sort of coverage sort of plays into that."

AIG offers a cleanup cost cap product to address that concern, as do the other major players in environmental insurance: ECS, a unit of Reliance Insurance Group; and Zurich-American Insurance Co.

Essentially the stop-loss coverages are based on an agreed-upon scope of work with an associated cost estimate. The coverage then pays for any overruns on that cost beyond a self-insured retention up to a designated limit.

"The key is there has to be a scope of work," Mr. Werner said.

New York-based broker J&H Marsh & McLennan Inc. has crafted a similar program called Envirocap to cover cleanup cost overruns.

"We work with our clients to understand the scope of the contamination problem," said Ana Maria Zalles-Moore, head of J&H/M&M's global brokering environmental unit in New York.

After staff experts in environmental site assessment and remediation planning consider the customer's needs, the broker structures an insurance program.

"Most of the situations are different, so we will customize a program with the intention of capping that remediation cost," Ms. Zalles-Moore said. Then J&H/M&M does "traditional broking," she said, going to the market to find an insurer that fits that approach.

The insurer ultimately could be one of the big writers of environmental coverage, such as AIG, Zurich or ECS/Reliance, "but there might be other carriers, too, smaller carriers that have developed niche specialties," she said.

After regulators are satisfied that decontamination or remediation has been completed, those regulators typically will issue a "no further action letter" or similar document, Mr. Theiss said.

"Once that is done, we can then sit down with the underwriter and develop a really meaningful insurance policy that will cover any ongoing pollution liability," he said.

For example, if a "hot spot" missed in the original cleanup is discovered during the policy period, those policies would cover any related liability.

Likewise, any liability for contamination at the site resulting from the ongoing operation of that property would be covered, as would migration of contamination onto or off of the property, bodily injury, property damage, legal expenses and cleanup.

AIG, ECS/Reliance and Zurich all offer such coverages. The policies also can include property owners' deep-pocket tenants as additional insureds "to preclude any environmental liability once they sign that lease," Mr. Theiss said.

AIG's policy, for example, covers a gamut of exposures, including cleanup, third-party liability and transportation liability. The insurer also is adding first-party business interruption and diminution in value to the package.

"Often properties that are cleaned up still have a stigma attached to them," causing their value to decrease, said Kenneth B. Cornell, a vp at AIG Environmental. The diminution-in-value cover would insure against those decreases.

ECS/Reliance recently announced a policy that combines under one form the remedial action cost cap plus coverage for any liabilities once remediation is completed, Mr. Theiss said.

ECS/Reliance's Commercial Property Redevelopment policy provides onsite and offsite coverage for third-party bodily injury and property damage claims, covers remediation expenses, defense expenses and offers stop-loss protections for cleanup costs exceeding an agreed-upon estimate.

"That is a policy that we've done very well with, and that is a policy that comes into play a lot with the Brownfields sites," according to Mr. Britt.

"Another thing we have the ability to do is provide business interruption coverage if that business interruption is due to an environmental issue," he said.

Coverage for environmentally related business interruption can be obtained separately, Mr. Theiss said, but as with cleanup cost cap and post-remediation coverages, it's very project-specific.

And, he noted, in a case where business is interrupted by delays in the remediation process, "just because a contractor is behind on a project doesn't mean it's an environmental issue. That's a traditional contractor issue."

J&H/M&M also has developed a post-remediation program "designed to provide the site owner with protection for all the risks that are created by all the parties that go to a site when that site needs to be cleaned up," Ms. Zalles-Moore said.

For example, it provides pollution liability, general liability, contractors liability and transportation liability aimed at covering such issues as errors in specifications by environmental consultants involved in the remediation, errors by the contractor doing the cleanup or spills by those transporting any contaminated material that might create vicarious liability for the property owner, she said.

"Traditionally these have all been provided under separate policies," Ms. Zalles-Moore said. "What we've done is consolidate them under one program. The approach of consolidating coverages under one program reduces insurance expense."

Once again, after the program is crafted for the client, J&H/M&M shops it to the market.

Mr. Theiss also noted that some coverages insure exposures related to contractors working on a formerly environmentally impaired site.

"General trade contractors normally don't have pollution insurance," he said. "So, as a result, the exposure is bare." The response has been the development of wrap-up or owner-controlled programs that will provide pollution liability and errors and omissions coverages for contractors.

"Reliance, Zurich and AIG all have programs that can be structured in that fashion," Mr. Theiss said.

Coverage can be achieved through endorsements to general liability policies in some cases.

"It depends upon the project. If the primary exposure is a time-element exposure, if it's a sudden and accidental exposure, then there are several endorsements to the GL that can cover that," Mr. Theiss said. The specialty products are more commonly required in cases of pre-existing or gradually occurring pollution, however.

Insurers offer various programs combining general liability coverage with pollution coverages, a move some observers expect to develop as a trend among casualty companies.

AIG, for example, offers a program that provides full pollution coverage by combining a general liability form with site-specific environmental coverage, including products pollution liability, said Shaun E. Kelly, a vp at AIG Environmental.

Another program combines general liability, contractor liability and professional liability forms under a single liability limit. AIG is targeting this approach to midsize and smaller clients, but it even has attracted some larger clients, Mr. Kelly said.

"They like the ease of having the entire range of coverages in one form," he said.

The usefulness of the remediation cost cap and post-remediation programs "sort of depends on the company, I suppose," said Richard M. Inserra, assistant treasurer-risk management and insurance at Union Carbide Corp. in Danbury, Conn.

"If you're a transaction-oriented company interested in acquisitions or divestitures, these products may play a role in putting fences around liability," Mr. Inserra said. "From an ongoing company perspective, I don't know if there is that much value there."

That latter group of companies' concerns are based more in sudden and accidental environmental exposures, he said.

"But supposedly there have been some new things offered we're going to take a look at when the time allows. There are some policies that combine some of the elements of the sudden and accidental with some of the aspects of gradual pollution," said Mr. Inserra.

While insurers' development of new pollution coverages is a response to customers' specific needs, like most everything else in today's insurance market, there's no denying the influence of tough competition.

"It's one more element that has to do with a soft market," said Mr. Inserra.