Insights into the environmental liability insurance market growth trend
Environmental exposures that once would have gone unnoticed or ignored are now receiving attention thanks to heightened focus on pollutants.
The environmental liability insurance market is experiencing significant growth due to several convergent factors impacting the supply chain and construction sector.
Passage of the Infrastructure and Jobs Act in November 2021 has cleared the way for a construction boom fueled by a $1 trillion investment in the United States’ critical infrastructure. Many of these projects will create exposures that necessitate — either by contractual obligation or pragmatic self-interest — protection in the form of environmental liability insurance.
At the same time, ongoing supply chain disruptions are causing or extending delays in construction projects, creating compressed schedules for developers attempting to maintain deadlines. Rushed projects are more likely to lead to errors, and errors frequently result in claims — including claims related to environmental liability.
And that’s not all. Like most American industries, the construction sector is feeling the effects of a significant labor shortage, forcing many contractors to work shorthanded or employ less-experienced workers. Understaffing and inexperience also increase the likelihood of errors that result in costly claims.
All of this comes at a time when regulatory enforcement is expected to increase under the Biden administration, bringing more fines, penalties and claims. Exposures that once would have gone unnoticed or ignored are now receiving attention thanks to heightened focus on pollutants such as poly- and perfluoroalkyl (PFASs), a class of chemicals found in many common household products and linked to serious medical problems. An increase in lawsuits involving pollution liability claims and greater severity in judgments are also driving growth in the environmental liability market.
Types of environmental liability coverage
Coverage for pollution damage is excluded in most general liability policies and was, until recently, considered a niche product necessary only for parties working with pollutants or engaged in projects on properties with known or suspected exposure to hazardous materials. The reality is that environmental exposures are wide-ranging, and something contractors in every field must consider. Obtaining adequate environmental liability insurance is essential to protect against property loss and costly pollution-related claims.
Environmental liability insurance falls into two main categories. First-party liability provides the insured with funding to clean up a spill or contamination from chemicals or hazardous waste. Third-party coverage provides protection against claims for personal or bodily damage or loss, or damage to property due to contamination or pollution.
Within those two categories is a vast array of specialized coverages allowing for customized solutions to meet the unique needs of the client. Examples include contractors pollution liability, site pollution liability, contractors indemnity for subcontractor’s pollution liability, non-owned disposal site pollution legal liability and contractors asbestos pollution liability.
Environmental liability insurance outlook
Alera Group’s Property and Casualty 2022 Market Outlook highlights the changing environmental liability insurance market. As forecasted, rates continue to increase for all risks, reflecting an increase in loss frequency and severity, while pricing pressure applies equally to primary and excess layers. Availability for most business classes remains stable for at least the near future. High-hazard risk classes, such as oil and gas, mining, chemical, habitational and hospitality, continue to find it difficult and expensive to fill their excess layers and may require multiple insurers to secure desired limits.
Capacity also remains stable but is being judiciously allocated to risks meeting underwriters’ risk guidelines. As much as $200 million in limits is available for exceptionally large and superior risks, while small-to-medium risks may find it difficult to renew with the same level of excess limits.
Underwriting scrutiny continues to follow a disciplined approach to risk evaluations; risk control and safety programs are essential. The same level of scrutiny applies to excess layers. For habitational and hospitality risks, restrictions apply for mold and the potential for Legionnaire’s Disease. Pandemic and communicable disease exclusions are commonly included in coverage forms.
Because environmental liability insurance is so customizable, it’s important for contractors and others to work with knowledgeable agents or brokers who can identify and fill gaps in coverage and support risk-mitigation efforts. Agents and brokers in the environmental liability market, meanwhile, need to brace for the increase in demand and continue to focus on finding comprehensive, cost-effective solutions to meet the unique needs of the client.
Gene Nosovitch, commercial insurance consultant, HMK Insurance, an Alera Group Company, has more than 35 years of experience consulting with and providing insurance solutions for contractors and other businesses.