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Tightening terms and conditions in the environmental insurance market point to a hardening market, with buyers seeing higher deductibles and a pullback in limits and capacity in some areas, experts say.
An uptick in claims associated with per- and polyfluoroalkyl substances, known as PFAs, and indoor air-quality exposures related to mold and legionella, are driving greater underwriting scrutiny by insurers.
PFAs are manmade chemicals that have been manufactured and used in various industries since the 1940s and can contaminate drinking water and groundwater, causing adverse health effects in humans.
The environmental insurance marketplace continues to be stable but is showing the initial stages of a hardening market, said Gene Nosovitch, Allentown, Pennsylvania-based commercial insurance consultant at HMK Insurance, an Alera Group company.
“We’re seeing a slight uptick in premium renewals, anywhere between zero to 3% increases, but also we’re seeing a bit of constriction where limits are concerned,” Mr. Nosovitch said.
For larger companies that typically buy anywhere from $50 million to $100 million of coverage and spread it across two insurers, there are now three or four insurers on the program, he said.
Like other lines of business — such as property, management liability and excess liability, environmental insurance capacity is shrinking by insurer, said Tony Lehnen, Chicago-based managing director at the environmental practice at Arthur J. Gallagher & Co.
Where insurers might have been willing to put up $25 million for a risk, now they are pulling back to $15 million, depending on the account and type of environmental coverage, Mr. Lehnen said.
He cited the example of site pollution liability coverage for a municipality account renewing this year where the insurer is already pulling back limits and reducing coverage.
The insurer is also taking away some products pollution coverage it was previously providing and adding the PFA substances restriction, he said.
“But then if you have an electrical contractor, someone who doesn’t have a lot of risk, insurers are going to be very aggressive to write” that account, he said.
Several major insurers, most recently Zurich North America, have withdrawn from the site pollution liability market in recent years.
“Zurich has decided to non-renew certain environmental coverages and is no longer offering fixed site pollution or environmental site pollution insurance,” a company spokesman said in an emailed statement.
Zurich still provides insurance for environmental contractors and environmental consultants.
“The portfolio has shrunk over the past several years with continued profitability challenges,” the spokesman said.
The move followed a similar withdrawal from the site pollution market by American International Group Inc. in 2016.
Claims related to PFAs are starting to impact the environmental insurance market, said Arthur Lu, head of global environmental impairment liability at Allianz Global Corporate & Specialty, part of Allianz SE, in New York.
Such claims can be for damages to the environment, or remediation costs for cleaning up certain areas where the chemicals have affected the soil and groundwater, Mr. Lu said.
Litigation trends are also a concern. “We’re seeing more plaintiffs lawyers involved. The legal expense from insurers’ perspective is seeing an uptick,” he said.
For a long time, coverage for PFAs under environmental policies was silent, Mr. Lu said. “Fast forward to today, there’s been more of a push to exclude this contaminant,” he said.
“If you’re a chemical manufacturer that perhaps has dealt with this type of compound before, it’s questionable whether underwriters would be willing to provide historical coverage,” Mr. Lu said.
It’s common to see underwriters use retroactive dates or site-specific exclusions to “get around those potential problems that occurred in the past but might rear their head in the future,” he said.
Environmental claims costs are on the rise, Mr. Nosovitch said. He cited a recent claim in the retail gas industry that became a $1.5 million loss because the fire company that handled the petroleum release treated it with a chemical that caused more contamination. “That would have been a $50,000 claim four years ago,” he said.
Positive factors for the environmental insurance industry include an increase in construction activity and in mergers and acquisitions emerging from the pandemic, brokers say.
“Opportunities from changes in infrastructure and energy policy are leading to construction activity in solar, wind and geothermal projects,” said Tim Donnellon, Charleston, South Carolina-based senior broker, environmental, at Burns & Wilcox Ltd.
Construction activity will generate risks and greater demand for environmental insurance coverages, Mr. Donnellon said.