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Q. What were the origins of environmental insurance?

Joe Boren: There were two or three "defining events" and they came together at the same time.

Second, there were events like Love Canal, the poster child for hazardous waste disposal practices. Contaminants were seeping into swimming pools and homes. Those responsible sought coverage under their general liability policies. The carriers said, "We didn't underwrite this for you to throw chemicals on your property improperly." Soon, the insurance industry put a pollution exclusion on their policies. Then they strengthened that, or thought they did, with total pollution exclusion.

Because of Love Canal, Congress passed Superfund, the third event, making people responsible for waste material from cradle to grave: generators, transporters, anyone who touched a hazardous waste or chemical was responsible.

Q. How has it evolved since then?

Ken Cornell: Initially, most of our insureds were operators of facilities that fell under RECRA's financial assurance requirements. To cover them, we developed a pollution legal liability policy, which we still have in a more developed form today.

1986 was a big time for companies in the business of cleaning up contamination, and they needed insurance. So we developed the contractors' pollution liability policy. Soon thereafter, we developed another product that covered the professional or design liability of engineers and consultants asked to evaluate and design cleanup methodologies for these sites. Then we developed an E&O or professional liability policy to cover environmental engineers and consultants' studies and the cleanup methodologies that the contractors were implementing on the sites.

As it developed, more companies did both the design work and the actual digging-up-the-dirt work, so we combined the contractors' pollution liability and the E&O policy.

In the '90s, there was a movement to look at the industrial properties that people were cleaning up, and to try and do something with them after that. Houses, parks, office buildings and other redevelopment activities began to surface--what we call "Brownfield" redevelopment.

We had to look at our pollution legal liability policy and see if there was a way to make some changes to it.

That involved adding coverages important to new owners of cleaned-up sites, giving them coverage if they found problems after the environmental contractors had left. Under Superfund, you're responsible for it forever. The policy protected people in real estate transactions, both buyers and sellers, and became extremely useful in other types of transactions--mergers and acquisitions, for example.

In the mid-'90s, we developed a new policy to cover cost overruns associated with cleanup. A developer, for example, may want to acquire a property in its contaminated state, clean it up and then sell it. They have an estimate from their environmental consultant, but they want to know that--in case that estimate is incorrect--the project won't be impacted financially by cost overruns.

This policy is utilized, along with the pollution legal liability policy, to protect the developer for any unforeseen or unknown cleanup that comes up in the future or for third-party liabilities.

Q. What's going on today?

John O'Brian: Our "Eagle" product policy starts to go full circle. Now we're putting pollution coverage intentionally back into the general liability policy. Eagle is your same general liability, but with an additional coverage grant for pollution liability. In addition, we offer products pollution coverage [for] companies with an inherent pollution exposure embedded in the product they deliver. Again, it's an intentional coverage as opposed to unintentional coverage under the current CGL.

You have an absolute or total exclusion under most CGL policies and there's litigation that goes back and forth. Whether that policy is going to cover or not is based on the courts' interpretation of pollution exclusion. This is a policy that says you're getting coverage for your pollution. It's covering your site, and here's what it's covering. Intentional, as opposed to getting coverage through the court system.

Q. What's ahead?

Peter Gilbertson: I was a broker for 10 years and I can tell you that the notion of environmental insurance as a very specialized area has not evolved as quickly in the brokerage community.

Most brokers are generalists. For the most part, the brokerage community does not have environmental insurance specialists. They, for the most part, believe that environmental exposure exists only in the most obvious classes.

We're trying to educate the market that in any broker's book of business, any company having remotely industrial characteristics probably has some significant environmental exposure for significant environmental liability.

You can now get the important pollution coverages in a lot more streamlined way. This will get the market over that perceptual hurdle that this is too complex, too difficult, too cumbersome for me to look into, and basically send a message that you can't afford not to look into this for your clients.

John O'Brian: Mold is probably the best example of a ubiquitous exposure out there that's considered pollution and would be excluded from any standard general liability policy. Mold has come into play nationally within the past two to three years.

Q. What's next?

Peter Gilbertson: The bandwidth of uncertainty is heavy duty in environmental. If, in calculating the volume of contaminated soil to be removed, you're off by a couple of hundred cubic yards, the cost overruns from that mistake can be huge and turn the economics of any deal upside-down. Environmental insurance is a great way to manage and to put a collar around those uncertainties.

(Under GAAP), if you can demonstrate that something is highly uncertain and you can make an argument that you can't reasonably estimate it, then you just don't have to report it at all.

Sarbanes-Oxley has introduced the concept of fairness. Publicly traded companies have to certify that they have "fairly" presented the condition of the company. So the ball's back in management's court. The posture has been "don't ask, don't tell;" don't disclose anything; always reach for the opportunity to not disclose something.

One last thing on what's ahead. You're seeing a trend toward a much broader appeal for environmental insurance. The brokerage community is starting to recognize that it's no longer just for the "usual suspects"--the large petrochem or the waste industry--but for a very broad range of industries, all of which have direct or indirect environmental liabilities. Brokers realize if they're not discussing environmental risk with their clients, letting them know that insurance is available, they run the risk under their E&O insurance that, if there's an uninsured claim it might actually get paid by the broker.

It's becoming much less of a niche or specialty product.

TOM SLATTERY, a regular contributor, is former executive editor and publisher of National Underwriter and former executive editor of Insurance Journal. He is managing director of Slattery-Esterkamp Communications, Baldwin, N.Y.

April 1, 2005

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