The emerging risks in environmental insurance
NFP's Jared Dubrowsky explains the common risks and liabilities in the environmental insurance market.
Even in today’s highly adaptive insurance world, environmental risks often go overlooked or underestimated in risk management.
Understanding how environmental liability exposures affect businesses is critical when arranging proper insurance coverage. Jared Dubrowsky, vice president of the environmental practice at NFP, shares with PC360 the risks and associated liabilities in the environmental insurance market.
PC360: What are the common environment risks and liabilities that are often overlooked by insureds?
Dubrowsky: I still see many clients overlooking potential issues that may arise as a result of former/historical site use. While some things may not be called out as a Recognized Environmental Condition in a Phase I report, there is still the potential that it can create an issue. Furthermore, as the regulatory environment is ever-changing, something that isn’t an issue today could be an issue tomorrow. It is imperative that our clients get as much coverage as possible as soon as possible to ensure that they are protected.
PC360: What is an example of uncommon risks that can be hedged by environmental insurance?
Dubrowsky: Oftentimes in brownfield transactions, both the buyer and seller utilize environmental site assessments to gauge risk in their opinion and use the findings as transactional leverage. However, circumstances arise when the parties do not agree on the findings, and buyers are required to post environmental escrows, which are held post-close and until the environmental situation is rectified.
When this occurs, NFP encourages clients to explore environmental insurance and have the insurance company provide validity or not to the required escrow. For example, if the insurance company agrees with the buyer’s findings and crafts coverage around the recognized condition, escrow is justified. Conversely, if the insurance company is comfortable with the data and does not exclude recognized environmental conditions, this 1) negates the need for escrow, and 2) suggests both sides should rely upon environmental insurance and remove escrow requirements, which potentially makes for a cleaner transaction.
PC360: What are examples of some businesses/operations that don’t fall in the traditional “chemical, toxic, hazardous substance” category that still needs environmental coverage for potential pollutants and risk of liability?
Dubrowsky: Any habitational risk such as multi-family apartment buildings, hotels or assisted living facilities should be carrying pollution coverage. We see many claims in these categories, usually associated with indoor air quality issues such as mold or legionella. We also recommend that the coverage be placed on healthcare facilities such as hospitals and food production facilities.
PC360: Can you provide an example of the regulatory or legal consequences of an event that impacts the environment?
Dubrowsky: Regulatory agencies can take action on a variety of environmental issues. Something as simple as not filing a proper permit for wastewater or improper disposal of hazardous materials could result in significant fines and shut down an operation for an extended period of time, which results in loss of revenue for the client.
PC360: With the rising popularity of the climate change movement, how are insureds responding in regard to their insurance coverage and their operations?
Dubrowsky: NFP cares deeply about the environment and recognizes climate change as a global issue requiring collaborative action. We also recognize the impact of climate change on insurance markets and continue to see the effect on insurability for our clients. While we do not have a formal position on climate change, it is an issue we monitor closely, and clearly our insurer trading partners will lead the way on this topic. For example, many insurance companies have recently taken a hard stance against fossil fuels, which creates a considerable disruption in the market.
PC360: How would you describe the current state of the market and the availability of environmental coverage? Are insurers pulling out of some areas/coverage, similar to what’s happening with coal, or is the appetite strong?
Dubrowsky: Market appetite remains strong; however, we are starting to see more restrictive coverage associated with Indoor air quality issues such as legionella and mold due to an increase in claims. We are also beginning to see markets retract coverage on PFAS as we learn more about it and understand how widespread the use and contamination is.
Market capacity also remains strong; however, we are starting to see a slight uptick in premiums. Longer-term policies are also still available but have become more limited for certain classes.
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