A critical element in redeveloping contaminated properties is the use of environmental insurance through a partnership with retail insurance agents and consultative wholesale brokers.

While new legislation typically absolves entrepreneurs from historical environmental liabilities attached to the properties they are buying and redeveloping, there will be potential for other environmental issues to adversely affect the bottom line. Risks associated with new contamination which may result from cleanup activities, unexpected costs arising from newly discovered pollution, and the potential for additional cleanup sometimes occurring years after initial project completion are risks transferred to insurance carriers from owners and developers through environmental insurance policies.

As these smaller-scale redevelopment opportunities spread throughout the United States and the number of local entrepreneurs who become involved increases, more and more middle market insurance agents are being asked to provide environmental insurance. Unfortunately, for most agents, these client requests often create a problem rather than a service and revenue opportunity typical of any other request for additional insurance.

While familiarity with environmental insurance has increased among agents, it remains a specialty among a relatively small number of insurance professionals. And the universe of qualified professionals who can place environmental coverage for contaminated properties is an even smaller number.

It is not uncommon for an agent, who has worked hard to create and maintain a client relationship, to be forced to walk away from a substantial commission opportunity and send its client to search among larger competitors for assistance. The solution to this problem is to enlist the assistance of consultative wholesale environmental brokers, a new type of insurance professional whose capabilities essentially make them “specialists within the specialty.”

Typically, an agent is first called to assist with an environmental insurance need after being introduced to the client by their financial or legal professionals as a means to help close environmentally challenged real estate purchases and/or redevelopment projects. However in most instances the deal team has little to no idea of how to obtain the coverage or how much it may cost. The next move often has the entire team spread out to contact assorted insurance advisors.

In the majority of cases, the call recipients admit they know something about environmental insurance but don't have the experience necessary to place a complex policy. In contrast, the agent who works with a consultative environmental broker is then able to continue the process on behalf of its client.

The agent-consultative broker partnership normally consists of the broker being responsible for the technical elements of the placement, while the agent manages the client relationship throughout the life of the project.

For example, the consultative broker may work directly with the client's financial advisors and lenders, share scientific data with environmental consultants and contractors, and work with lawyers to conform coverage to regulatory and contractual agreements.

The agent maintains the critical client management process working as the client's insurance advisor, lending credibility to the process and providing the assurances needed to keep the ship steady as the sometimes lengthy and complex process of placing the insurance comes to a successful conclusion.

The actual process to insure a contaminated property transaction or redevelopment project often involves five basic phases:

(1) The Research Phase is when the concept of environmental insurance is broached, followed by preliminary fact sharing and ending with an agreement to pursue an insurance solution.

(2) In addition to establishing paths of communication and responsibilities, the Planning Phase also contains what is perhaps the most important but commonly overlooked part of the process often resulting in deal failure defining the risk transfer objective.

This element is key to establishing a clear understanding among all the parties of precisely what risk(s) are to be transferred to the insurer. By precisely defining the risk transfer objective, the entire team remains focused throughout the process on that goal.

(3) The Submission Phase begins with the consultative broker holding preliminary inquiries with the marketplace and selecting the best markets for the risk after assessing appropriate underwriting criteria. The data needed to underwrite the risk may be complex and often voluminous, and it is often the agent who provides the necessary help to manage the exchange of data among the parties.

(4) The Quotation Phase is when communication is critical. The agent and consultative broker work closely with the client and transaction team as specific terms and conditions are examined and negotiated with the marketplace.

Typically, the consultative broker may directly engage with legal, lending and engineering team members, using their data and guidance to specifically craft the policy terms and conditions to meet the risk transfer objective, including premium costs.

(5) The Binding Phase is the last step, again bringing the entire team together to make final decisions as to which proposal of insurance best accommodates the risk transfer objective and assuring that the needs of all parties involved in the transaction are satisfied.

The collaborative process between agent and consultative broker allows an exchange of fresh ideas and learning opportunities. The five-phase plan also helps to ensure a thorough assessment of the property in question, an understanding of potential risks, and to establish the best insurance coverage for the risks and parties involved in the transaction.

The partnering relationship of agent and consultative brokers should help pave the way for a better understanding of this relatively new arena, help middle market agents better support client needs, and create an efficient and responsible manner in dealing with brownfields and their potential risks.

John Butler heads PBC Environmental, the wholesale environmental insurance specialty practice of Hub International Limited. PBC responds to the growing need of insurance agents and brokers for customized insurance solutions for their clients who require protection against growing environmentally based risks to their business as well as accommodation regarding new regulatory demands and lending and accounting requirements. Mr. Butler can be reached at [email protected].

Reproduced from National Underwriter Edition, April 9, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.