Article by Bill Pritchard, President of Beacon Hill Associates, Inc.
The dramatic economic events of the last several years have had a profound impact on the insurance industry. As a naturally cyclical business, insurance has suffered the double whammy of a softening market cycle coming during an economic meltdown never before seen in our lifetimes. Such a historic set of circumstances will leave an indelible mark on our industry. But while there are many challenges yet to be overcome, there is certainly reason for cautious optimism; much like the American spirit, the insurance industry is infinitely resilient and creative. A key beneficiary of the bounce-back we expect to see can be found in environmental insurance. How it can help an agent become more successful, and why agent must know about it, are topics worth considering.
It can be argued that contractors are the backbone of our economy. Without them, things wouldn’t be built or serviced, torn down or reconfigured. Clearly, the contracting industry has been hard hit by the economic downturn. The construction trades in particular, along with infrastructure and service industries, have all seen record decreases. Since the majority of insurance is based on either payroll or revenues, while these industries have contracted, so have many insurance agencies’ revenues.
We are begging to see a slow reversal of the steady decline of the last several years. Over the first four months of 2010, we have witnessed a noticeable stabilization in our contractor clients. Where we had seen annual double digit narrowing over the last two years, most renewals are now coming in slightly off, or flat, and in some cases, projecting some growth for 2010 into 2011. We are still seeing some contractors going out of business, but it seems that the ones who were going to fall already have.
In addition to the slow recovery from the abyss of 2009, we are seeing growth in our business fueled by a growing national awareness of environmental exposures. Even discounting the terrible situation in the Gulf, awareness of environmental issues has grown dramatically in the last few years. Starting with sophisticated commercial customers and lenders, and spreading to most facets of the construction industry, contractors are being required to prove their ability to address environmental problems that occur on job sites.
This growing awareness has come from several different directions. The first can be found in the media. Chinese drywall, toxic mold, silicosis, fires at treatment sites, and lawsuits against land developers have all brought environmental issues to the forefront. The tragedy in the Gulf will only continue to heighten that concern to levels never seen before. The potential for a significant environmental event impacting a business or property is no longer perceived of as a long shot. Now many people recognize the ramifications can be significant, and it is important for everyone who could potentially impact a property is properly covered in the event they do.
Taking that heightened consciousness to a new level will be an increase in awareness of what might be a “pollution” problem that was not expected to be one. A perfect example of this comes from the many recent losses stemming from erosion and sediment runoff at job sites. There have been a number of well publicized six and even seven figure losses stemming from this problem that were treated as pollution claims and declined by standard GL insurers. Recognizing how broad the standard definition of a pollutant is, and also the very limited coverage provided by the ISO CGL form has lead to requirements for separate, identifiable pollution coverage.
Another impetus for coverage has come from the well-publicized understanding that coverage is available and affordable, now more than ever. In the late eighties and early nineties pollution coverage was something of a mystery. Now it is a well known, although not terribly well understood, product. Knowing that clients can afford to buy coverage, and that there are many venues for it, has lead to an increase in requirements for it.
The final driver for contractors to seek coverage comes from new regulations. An example is the new EPA regulation regarding lead paint. Effective April 22, 2010, the EPA began requiring all contractors performing renovation, repair and painting projects that disturb lead-based paint in homes, child care facilities, and schools built before 1978 be certified and must follow specific work practices to prevent lead contamination. Contractors have to be trained and be certified to evidence it. The regulation goes further, requiring any removal of possible lead containing material be done by properly trained lead abatement professionals. All of this brings environmental concerns to a huge number of contractors, and their clients, across the country.
A gradually increasing demand for these products is expected to continue. Complicating matters somewhat is the dramatic increase in the number of carriers and programs offering environmental coverage. Where there were ten to fifteen companies willing to write pollution-related coverages ten years ago, there are now close to forty today. While more may seem like a good thing, this comes with real risks for the agent. Environmental insurance is a unique class of business, with every carrier offering coverage in its own way. While there are a plethora of products labeled “Contractors Pollution Liability, or “CPL”, they are each unique to the carrier providing them. Companies may offer forms that appear on the surface to be the same as others an agent might have seen, but it is rarely the case that they are truly the same. In twenty years of working in this class, I have never seen two policies that offer the exact same coverage.
The recent entry of a number of admitted carriers does not help this problem. While their forms have been approved by the State, that does not mean they are the same as each other, or for that matter, that they offer better coverage than that offered in the Excess and Surplus market. Unlike standardized commercial property and auto forms, States do approve different environmental coverage forms. Admitted does give the agent the security of the State guarantee fund, but should not be inferred to mean the product is actually better in any other way.
It is crucial that agent review and understand the coverage they offer their clients to be sure it is adequate for what the clients do. There are many examples of forms in the market that have very restrictive language in them which can lead to inadequate coverage. Agents should request specimens of all policies and read them carefully before presenting terms to clients.
Once coverage is understood, the next hurdle is the carrier itself. The wide range of companies, new and old, requires the agent to make choices for the client. There are several key elements that should be considered. First is the overall rating of the carrier offering coverage. In today’s volatile world, the better the A.M. Best rating, the better off an agent will be in the long run. In addition to the Best rating, it is also very important to choose carriers that have made a commitment to work with environmental risks. This means those companies that have in-house environmental claims staffs as well as significant environmental underwriting departments.
It also helps to work with carriers that offer supporting lines of coverage. You may be looking for Contractors Pollution Liability for your street and road contractor, but the ability to add premises pollution coverage for their yard could dramatically enhance your proposal, and their coverage. Many of the top carriers offer a full suite of coverages, and this gives you the ability to round out the offering to your client, while also being a testament to their commitment to the line of business.
An additional benefit of the growing environmental marketplace is the range of products available, as well as the appetite for offering coverage. The top-tier carriers are all open to providing pollution coverage to a wide range of contractor types. A few years ago residential contractors had trouble getting pollution coverage that would include Mold. That has changed, so that now most companies are willing to cover those risks. This increased appetite has made it possible to cover this environmental exposure of most all contractors.
In addition to a wider appetite, the current market is trending toward providing broader coverage than what was available only a few years ago. Many carriers are offering defense outside the limits with a cap, blanket additional insured where contractually required, and limited site coverage. In addition, many of these carriers are willing to work with their agents to broaden coverage further. It is important to recognize that much of this coverage is negotiated, and “off-the-shelf” products are seldom the best deal you can get for your client. Educating yourself as to what may be available is an important part of working with environmental products.
One such enhanced coverage for contractors is Contractors Pollution Liability with Professional coverage including Mold. Very few carriers offer this coverage with Mold in both coverage parts. The Professional coverage is significant for a number of reasons. Most CPL policies exclude Professional, which therefore eliminates coverage for supervision of subcontractors. If a sub causes a pollution problem, and the suit alleges that the insured failed in their obligation to properly supervise that sub, professional coverage would come into play. Contractors also often make modifications on the job to plan items. A duct might get moved, and the resulting re-routing might lead to a mold problem. Again if that claim comes in as Professional, this coverage enhancement would suddenly be very important.
The final area that we believe bodes well for the environmental insurance industry is green technology firms. This market segment has boomed in the last year, and with current events such as they are, the expectation is that significant growth will continue for the foreseeable future. Many green tech firms are seen as excellent prospects by environmental insurance carriers, who are willing to provide a full range of coverages for them. While many of these firms are true contractors with a green tech focus, they are perceived as good risks due to the sophistication of the work they often do. The enhanced training leads to a better paid, generally better trained workforce, which historically has led to a better risk for the insurance carrier.
While the market is still very soft, and the overall economic fragility continues to keep companies in a very conservative posture, there is reason to believe that times are getting better. Finding additional coverage that enhances a contractor’s ability to compete and function effectively in the marketplace is a perfect way for agencies to not only serve their clients better, but to increase their revenue as well. In the changing marketplace, opportunities abound for the agent who wants to develop an understanding of this complex but valuable coverage.
