ENVIRONMENTAL
POLLUTION INSURANCE COVERAGE FOR COMMERCIAL REAL ESTATE
The commercial real estate marketplace in the United States is growing
along with the rest of the economy. For
instance, the second-quarter survey by the National Association of Realtors
revealed that “sales volumes rose 7% from a year ago,” while year-over year
prices increased 3%. Furthermore, a study, “Emerging Trends in Real Estate
2014,” conducted by PricewaterhouseCoopers L.L.P. and the Urban Land Institute,
also stated that “2014 may well be the year that the real estate markets
recovers” due to the “consistent and growing demand for commercial real estate
across all property types.”
Unfortunately, there are still many obstacles to the industry’s
growth. Included among these is the ongoing potential for environmental
exposures, which have been known to derail the closure of commercial
transactions, building new structures or renovation of old ones based on
suspicion alone.
This is in large part due to the introduction and strict
enforcement of stringent regulations demanding a higher level of transparency
among owners and investors as well as the costly cleanup or remediation of any
number of environmental threats ranging from the contamination of groundwater
to the poor storage of hazardous waste to the identification of mold, bacteria
and fungus in ventilation systems.
As a result, contractors pollution liability insurance has
become an increasingly viable option for covering bodily injury, property
damage, defense and cleanup as a result of pollution conditions caused by
contracting operations performed by or on behalf of the contractor or named
policyholder. Purchased on a “blanket” or “project” basis, the insurance can
include coverage for transportation of waste and materials and the
policyholder’s legal liability at nonowned disposal facilities, as well as some
level of coverage for the policyholder’s owned/leased locations and “base” job
site activities.
In the marketplace, it is estimated that approximately 40
insurers offer some form of contractor pollution liability coverage. The
expansion is expected to continue due to the low frequency of claims and the
modest loss ratios over the products’ lifetime. As indicated by the “2014
Market Update” developed by New Day Underwriting Managers earlier this year,
nearly all insurers also will likely modify or update current policy forms,
making it “fun” for even the most experienced insurance professionals to
analyze the differences.
With the large number of competitors in the market, the pricing
for contractors pollution liability has remained relatively soft over the past
five years.
Subsequently, contractors that renew their coverage can expect a
flat to a slight 2% to 3% rate decrease — provided that revenue, project type
and claims remain static. If significant fluctuations occur with any one of the
aforementioned factors, rate increases could exceed 10%. In contrast, the
pricing for individual projects will remain aggressive, with limits in excess of
$5 million tending to be erratic among different insurers.
Capacity is not an issue and can be as much as $50 million for
a single company, although most companies normally top out between $10 million
and $25 million. Excess limits typically are available if needed, for both
project/practice and project policies.
In addition, contract specifications requiring pollution
insurance will be the biggest buying motivator for such coverage among
contractors going forward. This will extend to public entity owners, which will
increasingly require contractors to purchase pollution legal liability
insurance for the real estate risk on which projects sit.
For many insurers offering contractor pollution liability as a
package of basic jobsite coverages, the usual expansion of insurance will
include:
• Coverage of pollution conditions as a result of claims
associated with transportation — either by or on behalf of the named
policyholder.
• Coverage of pollution conditions as a result of the named
policyholder’s disposal of waste at disposal facilities.
• Coverage of emergency response expenses — or costs incurred
by the named policyholder to prevent further damage.
• Some level of pollution coverage associated with the named
policyholder’s owned/leased locations, such as maintenance shops/facilities,
offices and warehouses related to the construction business.
At this stage, most contractor pollution liability policies are
written on an occurrence basis with claims-made triggers, such as pollution
legal liability for covering a policyholder’s location.
Mold, microbial matter/bacteria or bacteria are typically
insured on a claims-made basis, although some insurers are increasingly
offering this insurance on an occurrence basis. Other coverage also is becoming
more available for exposures such as low-level radioactive waste,
electromagnetic fields and medical/ infectious/pathological wastes.
Furthermore, supplemental coverage that range from $100,000 to
unlimited for defense expenses are available from some insurers, with additional
enhancements offered as a supplementary limit or a sublimit. These can include:
• Emergency remediation expense: assists with expenses
associated with a pollution condition’s cleanup prior to notifying their
insurer.
• Crisis management expense: assists with expenses associated
with managing the media by providing public relations assistance and media
management as a result of a pollution condition.
• Litigation and subpoena expense: assists with the expenses
associated with loss of earnings and reasonable expenses, for example
attendance at depositions.
• Green building materials: assists with increased expenses for
remediation if using such materials to replace standard materials.
• Mediation credit: uses an approved mediator to settle claims
disputes, which then could result in a reduced retention for the policyholder.
In the future, the trend toward the migration of only
contractor pollution liability insurance to a combined professional and
contractor coverage will continue to evolve in relation to the ever-changing
professional liability risks of contractors. This alone may significantly
affect premium writings/volume. Consequently, as the number of insurers
offering contractor pollution liability coverage expands, the number of
experienced underwriters per company will decrease, leading to the use of
underwriters with little experience as the expansion outruns the talent pool.
This, in turn, will have a direct effect on responsiveness, as most insurers
commonly rely on experienced, in-house contractor pollution liability staff
and/or vetted claims providers rather than “generic” professionals to promptly
and appropriately fulfill claims.
Despite these challenges, the availability of contractor
pollution liability insurance will remain plentiful with soft and competitive
premiums. This also will include enhancements and supplementary coverage that
are likely to continue well into the future.
