Are brokers overlooking environmental insurance?

“I think what most people do not understand is the breadth and vastness and how it can be used”

Demand for environmental insurance seems to be growing at a slower pace than rising political concerns about climate and increasing liability costs related to damaging land, air and water. Part of the reason may be that insurance brokers don’t know much about the coverage.

“The demand, ironically, is very low,” said Angela Oroian (pictured above, left), director of internal operations and marketing at American Risk Management Resources Network. “It is not because there isn’t a need for environmental insurance or that there isn’t availability. The demand is low because there’s a lack of knowledge of the product line by the general insurance sales distribution channels.”

Brokers tend to have trouble getting their arms around the nuances of the line.

“There’s so many different solution agreements,” said Will Denbo (pictured above, center), president of Commercial Insurance Associates. “I think what most people do not understand is the breadth and vastness of the environmental insurance space and how it can be used.”

Environmental insurance essentially is a line that protects a company from any damage it may cause due to pollution. As more general insurance policies include pollution exclusions, it’s a coverage companies may need.

In a report last year, Aon estimated the environmental insurance market to be more than $3 billion in premiums annually. But the broker also noted that fewer than 20% of insurance buyers purchase specialized polices to protect them from environmental exposures.

The firm expects demand for environmental insurance to increase this year and premiums to rise by a single-digit percentage, year-over-year, as they have for the past decade, said Veronica Benzinger (pictured above, right), Aon’s environmental practice national leader.

M&A, construction, political pressure drive demand

The increase in demand is partly tied to corporate mergers. Environmental insurance facilitates acquisitions “by taking the liability off the table during a deal,” Benzinger said. She also anticipates increasing demand due to a need for the coverage for construction and infrastructure projects and an increasing interest in carbon sequestration.

Political advocacy for environmental justice and increasing interest in environmental, social and governance investing is also raising the profile of environmental insurance.

“With visibility sometimes comes concern,” Benzinger said. “It is an overlooked line that, I think, is being brought into the spotlight with the ESG mantra, the net zero mantra, and, I think, people are looking toward it to see if they can transfer risk.”

Not just for hazardous waste

Unlike auto and homeowners’ insurance, which are must-have coverage staples, environmental insurance is supplemental and often ignored.

“The discretionary dollars are not spent on environmental unless [a company has] to buy it,” Benzinger said.

There is a perception that environmental insurance is just for hazardous waste, and if a company isn’t involved in that, it thinks it doesn’t need the coverage, Oroian said.

Companies – and insurance brokers – need to take a more expansive view, she said. For instance, a restoration contractor might have a mold exposure that’s not covered in a general policy.

“Pollution is present in anything you do,” said Oroian, who is president of the Society of Environmental Insurance Professionals. “I think it should really be called contamination insurance, and then people, when they’re buying it for their business, can [ask], ‘Is there anything I do in my operations that might contaminate something?’”

Coverage for business customers, severe weather

The push for environmental protection is no longer coming solely from the government, Denbo said. The private-sector focus on the issue is adding to insurance risks.

“For instance, if you [work with] Walmart right now, you have to have a carbon footprint analysis on…the product you sell into them,” said Denbo, whose family once owned a waste-management business. “And I think that’s where most brokers fail to understand. When it shows in a contract that Walmart deems that you need to buy environmental insurance, is that site specific? Is that off-site? Is that contractor’s pollution liability?”

More frequent severe weather can create a need for environmental insurance. For instance, runoff from a refinery caused by damage from a storm may not be covered in a general policy.

“We just think it dovetails nicely with the other tools in the toolbox to make sure that clients are protected as they face exposures they may not have seen with the same frequency as in the past,” said Catherine O’Leary Smith, chief broking officer for environmental at Aon.

Excess & surplus steps in

Although companies may not pay attention to environmental insurance most of the time, when disasters involving significant environmental damage hit, such as last year’s train derailment in East Palestine, Ohio, they make headlines. Those incidents, as well as pollution tied to chemicals such as PFAS, also draw costly lawsuits.

“Carriers are concerned with an increasing trend in toxic tort and class action,” Benzinger said.

That can cause admitted carriers to shy away from covering environmental risks – and create an opportunity for excess and surplus lines.

“Utilization of excess layers is increasing because primary insurers are deploying their primary capacity on a more discretionary basis,” Benzinger said. “They are not willing to put out their total capacity on a primary risk due to their underwriting concerns.”

Environmental risks and coverage for them can be complicated. But it’s a discussion brokers must have with their clients, Oroian said.

“I do believe we need to change the dialogue [around] environmental insurance,” she said.

Some of the biggest contamination claims

In the United States, notable environmental insurance claims have often been tied to large-scale industrial accidents or contamination events that led to significant environmental damage and substantial cleanup costs. These incidents highlight the critical role of environmental insurance in managing the financial risks associated with environmental disasters. Here are some key examples:

Deepwater Horizon Oil Spill (2010) 

  • Overview: One of the most infamous environmental disasters in US history, the Deepwater Horizon oil spill in the Gulf of Mexico resulted from a blowout of the BP-operated Macondo Prospect. Over 87 days, approximately 4.9 million barrels of oil were discharged into the Gulf, causing extensive damage to marine and coastal ecosystems.
  • Claims and costs: BP reported spending over $65 billion on cleanup, fines, settlements, and compensation related to the spill. The incident led to numerous claims under environmental liability policies, highlighting the astronomical costs associated with major oil spills.
  • Deepwater Horizon: Torrent of oil, flood of insurance issues (milliman.com)
  • “According to the Insurance Information Institute, initial reports indicate first-party participants in the Deepwater Horizon project are insured for losses totaling $1.4 billion, while total insured losses for all affected parties could top $3.5 billion.”

The majority of the losses so far have been to BP which, along with Transocean, has been named a responsible party. BP has some insurance through Lloyd’s of London, as well as through its captive, Jupiter Insurance Ltd, which has already set loss reserves at its policy limit of $700 million. Losses above this amount return to BP. This sole fact—that BP is essentially self-insured—greatly reduces actual insured losses, which is some relief to energy insurers who have gained a renewed appreciation of the high loss potential of such an event.”

Hannover Re CEO Ulrich Wallin expected his company to take a net loss of approximately €40 million ($53 million) from the explosion, which, he said, was still “considerably below our major loss expectancy for the second quarter.”

Exxon Valdez Oil Spill (1989) 

  • Overview: The Exxon Valdez oil tanker ran aground in Prince William Sound, Alaska, spilling approximately 11 million gallons of crude oil. This spill affected 1,300 miles of coastline and led to the death of thousands of marine animals.
  • Claims and costs: The cleanup effort cost Exxon around $2 billion, with total costs, including fines, settlements, and environmental restoration, reaching approximately $7 billion. This incident spurred significant changes in US environmental and maritime laws.
  • EXXON VALDEZ TEACHES INSURERS A HARD LESSON | Business Insurance
  • “The loss would be covered by the International Tanker Indemnity Assn. Ltd., a Bermuda protection and indemnity club.

That $400 million in coverage was paid several months after the spill.”

  • “Exxon also filed claims under the global policy written in European and US markets. The coverage was written to limits of $600 million with large deductibles and covered Exxon affiliates for property/casualty risks.”  
  • “It took almost eight years for Exxon to settle all its claims with insurers. A 1996 Texas jury award and settlements later that year totaled $780 million that the oil company collected related to its claims against the global policy”

Love Canal Chemical Waste (Late 1970s) 

  • Overview: Love Canal, a neighborhood in Niagara Falls, New York, became the symbol of environmental catastrophe when it was revealed that Hooker Chemical (later acquired by Occidental Petroleum) had buried toxic waste that later contaminated the surrounding area, including homes and schools.
  • Claims and costs: The cleanup and remediation efforts were substantial, leading to the creation of the Superfund program. The costs associated with Love Canal, including relocation of residents and cleanup, were significant, though difficult to quantify precisely. The event underscored the need for environmental liability coverage and rigorous waste management practices.
  • Love Canal | Environmental Disaster, Toxic Waste & Health Effects | Britannica
  • “After protracted litigation, 1,300 former residents of Love Canal agreed to a $20,000,000 settlement of their claims against the Occidental Chemical Corporation, which had taken over Hooker in the late 1960s, and the city of Niagara Falls.”

Pacific Gas and Electric (PG&E) Hinkley Groundwater Contamination 

  • Overview: In the 1950s and 1960s, PG&E used hexavalent chromium in its Hinkley, California, compressor station, which led to groundwater contamination. The case gained fame through the legal battle led by Erin Brockovich.
  • Claims and costs: PG&E faced a settlement of $333 million in 1996 to more than 600 Hinkley residents. The case highlighted the potential for extensive liability from industrial contamination and the importance of environmental insurance in managing such risks.
  • PG&E Hit With Class Action Lawsuit Over Lingering Hinkley Contamination | SBCSentinel
  • “In 1996, the case was settled for $333 million, the largest settlement ever paid in a direct-action lawsuit until that time.”