Environmental Insurance Agency, Inc.

Environmental Insurance: Finding a Good Tailor

 An article by this author in the December 1999 issue of Brownfield News analyzed two new environmental insurance products, the cleanup cost cap and pollution liability policies, which have proven to be key factors in the success of some contaminated property transactions. The article explained that, to achieve this success, environmental insurance experts need to tailor the policy to the transaction and to the liability for which coverage is sought. This tailoring-partly negotiating, partly drafting-process is usually performed by two parties-the insured (usually represented by a broker) and the insurer (usually represented by an underwriter).

The five major insurance companies mentioned in the earlier article have many environmental insurance experts on their staffs, with all of the environmental underwriting, engineering, and legal skills that are required. But it is not so easy for buyers and sellers of contaminated property to find such experts to represent them. This article will examine the stages of the environmental insurance process at which brokers play a key role. It will explain the types of knowledge and skills required at each stage, and will provide guidelines for finding brokers whose past experience indicates they have such knowledge and skills.

The process involved in obtaining or providing any line of insurance generally consists of information gathering, marketing, underwriting, negotiation of policy terms, selection of the right policy, binding, policy issuance, and claims handling. Ordinarily the broker, as the insured's representative, plays an important role in all but the underwriting stage. The broker has one basic responsibility: to obtain appropriate coverage, if available.

The environmental broker's basic role and duties in the environmental insurance process are no different.  However, performing these duties successfully, particularly during the information gathering, marketing, negotiation, and claims-handling phases, requires specialized knowledge and expertise. There are several reasons for this, including the inherently complex nature of environmental risk, the nuanced richness of the English language, the broadened coverage of the new policies-especially coverage of known, pre-existing pollution-and most of all the very flexibility of the new policies, the ability to 'tailor' them to fit.  

Information Gathering

At the beginning of  the environmental insurance process, the broker must gather information concerning  the legal and technical/physical aspects of particular risks and sites, as well as the structure and risk allocation aspects of the transaction. This is the information upon which environmental underwriters base their decisions as to coverage and price.

Brokers and underwriters have always needed to understand the technical/physical aspects of environmental risk, as, in the past, underwriting decisions were based on environmental audits or engineering assessments of specific sites. However, now they have to delve much more deeply into those matters. Broader coverage of environmental risk, particularly coverage of known pre-existing pollution, has made underwriting much harder and more time consuming for underwriters, and therefore has increased the need for brokers' expertise at this stage. Brokers who gather this information on a contaminated site need to be able to read and understand not only Phase I's but also Phase II's, with all their attachments that concern invasive sampling. For cost cap policies, they need to read and understand remedial plans and cost estimates (with their attachments). They must synthesize this information and present it lucidly to underwriters, who will then review all of it in detail. Frequently, the underwriters will request additional information from the broker on the basis of that review, and the broker must then obtain that additional information from the client, or lawyer, or engineer who first provided it.

In addition, underwriters need to see all the documents that support and explain the structure of the deal and any risk allocation agreements. Hence, brokers must obtain, read, and understand the purchase and sale agreements, the indemnification agreements, the loan documents, and the leases. Quite frequently, such documents will not have been drafted yet. The broker must therefore obtain and understand information from the lawyer or client about preliminary discussions concerning the parties' indemnification goals and any informal risk allocation agreements.

A property in Massachusetts, formerly used as a detergent blending company, provides an example of how technical and complex the information now required at this stage can be. There was some on-site contamination, and the owner was negotiating with a prospective tenant who would not sign the 10-year lease without indemnification from the owner. What made this risk unusual was the applicable statute, the Massachusetts Contingency Plan, which follows a risk-based corrective action approach. Under this statute, a licensed site professional (LSP) performs all levels of site assessments and makes a remedial action recommendation. If the state does not otherwise intervene, the recommendation of the LSP becomes approved and accepted. The on-site levels of contamination were acceptable under the regulatory scheme of the statute. The problem was whether, when the contamination migrated off-site, the levels would exceed drinking water standards. Here, the LSP had concluded that natural attenuation plus periodic monitoring would cure the problem. The documents provided by the environmental lawyer representing the owner in support of this submission were voluminous. They included several levels of site assessments (Phase I, II, III) and the remedial recommendation with all attachments. The underwriters, in reading all of this, would basically have to decide if they agreed with the LSP's conclusion. The documents also included the lease, in which the owner was indemnifying the tenant for environmental conditions and promising to purchase a pollution liability policy to support that indemnification. The underwriter would have to pay special attention to the likely timing of potential risk, since a ten-year policy was required. It was therefore necessary to understand the Massachusetts Contingency Plan, how the scheduling in that plan affected the timing risk, as well as its legal implications.

In surfing the web or otherwise searching for an environmental broker who is expert at this stage, the reader should look for those whose resumes include experience with the technical-physical (engineering) and legal aspects of environmental liability. Such experience can be derived from a variety of backgrounds or combinations of backgrounds - as an environmental engineer, underwriter, lawyer, or claims person (who has handled claims under environmental policies), or lengthy enough experience as an environmental broker.

The Marketing Phase

The  broker for most lines of insurance will usually try to market a risk to as many companies as possible, because only then can the insured obtain a meaningful choice as to price and coverage. In the past, it was the rule for brokers of environmental risks to market only to one or two carriers (of course, for years, there were only one or two, and then just three, major environmental carriers). Some environmental brokers still continue such a pattern to this day. Yet it is particularly important for environmental brokers to be able to market a risk to as many companies as possible and to have a detailed understanding of the nature of the market. This is because there can be significant variety and contrast in the quotations on the same risk from underwriters-even in the same company. Environmental underwriting was always more art than science. It is largely based on subjective assessments of conditions at specific sites. This fact, together with the new flexibility of the policies, the greater creativity allowed to underwriters, the willingness to cover known pollution and, sometimes, unusual liabilities, all appear to have led to much wider differences in coverage offered for the same risk, and sometimes, also, in price.

The best example in this writer's experience of an unusual risk which occasioned very different reactions from different companies involved a landfill which had become a Superfund site. The owner of a very successful company had become a PRP at the landfill, basically because he had the same last name as the landfill's owner, who was his grandfather. His company had only the faintest of relationships with the landfill (and would not have been considered an 'operator' under current Supreme Court law). Nevertheless, as a 'deep pocket' the client had been allocated a sizeable share of the cleanup costs (which it was fighting) and had been automatically named in several toxic tort actions (for which it would never be found liable since, in such actions as opposed to Superfund actions, a negligence, not strict liability, standard applies).

The client's lawyer was negotiating a settlement of the action against the client's commercial general liability ('CGL') carrier of many years for coverage of environmental claims emanating from the landfill. The carrier had no real duty to indemnify the client for these claims, because of its excellent coverage defenses, including the fact that its policies excluded landfills. Nevertheless, it was willing to pay the client a handsome sum to apply to its defense obligation in exchange for relieving it of any further environmental liability under its policies (a partial 'buy-back'). As is usual in such agreements, the carrier wanted the insured to indemnify it against potential direct claims against the carrier by third-party plaintiffs .

There was virtually no chance of such claims being brought successfully against the carrier because New York is not a 'direct action' state where plaintiffs can directly sue a carrier before they have obtained a judgment against the insured. Therefore, in order to bring a law suit, there would have to be a successful toxic tort action against the insured, which was not about to happen; the insured would also have to have gone into bankruptcy, which, as also indicated above, was unlikely. Yet the client, being very conservative, did not want to sign this agreement without the further protection of an environmental insurance policy.

From the point of view of the five environmental carriers whom I approached about this risk, it was highly contingent. Not only was it almost impossible for a claim to be brought successfully by a third party on the CGL carrier that would trigger the indemnity agreement, even if that unlikely event occurred, the pollution liability carrier would be able to assert all of the CGL carrier's coverage defenses against the third party. Nevertheless,  only one out of the five carriers was willing to quote on the risk. It was just too peculiar and too off the beaten track for some of the other four. For others, it may not  have fit within underwriting guidelines that precluded covering any risk where there were existing claims. Fortunately, the fifth carrier, Kemper, did not have such underwriting guidelines and had experts on its staff with experience in CGL coverage litigation. 

Thus, the knowledge that is required of a broker for this marketing stage is that of the market-of whom to call for a specific risk, which companies are likely to be interested, and which underwriters at each company are best qualified to take it on. Contractual relationships with all the companies are obviously also necessary so that, practically speaking, the risk can be marketed to any and all. Environmental brokers with enough years of experience should have developed relationships with all the major, and some of the minor, carriers. With enough experience, they will know the right underwriters in each company to talk to about specific submissions, which departments at large companies handle certain specialized areas, and which underwriters are most proficient and at what. However, it is important for the prospective insured to inquire if the broker can market the risk to several companies, particularly if it involves known pollution or is off the beaten path  like the New York risk discussed above.

The Negotiation Phase

It is any broker's basic duty to obtain the exact coverage that is needed, if available. That means making absolutely certain that what the client has purchased is sufficient in terms of language and provisions. The new flexibility of the policies, the very fact that they can be 'tailored to fit' the transactions and liabilities, makes this duty much harder to fulfill adequately.

The language of environmental policies was always problematic for several reasons. Such policies have usually been issued as excess and surplus lines forms,  which, in contrast to 'admitted' policies, are not filed and approved by the state insurance departments. Thus, for excess and surplus lines policies, the broker has always had to do the pre-approving on behalf of the insured. Moreover, the language of environmental policies has always been tricky. It tends to be driven by environmental laws and regulations, and the elusive nature of the pollution risk combined with the nuanced layers of  English vocabulary creates drafting traps. One need only think of all the ink that has been spilled over the meaning of 'sudden and accidental' in the CGL pollution exclusion.

A claim under a pollution liability policy issued in the mid-eighties for a site in Florida is a good example of the importance of getting the language right. The broker had  notified the carrier that there had been a release to the 'surface water'. In doing a coverage analysis of this claim, I discovered from the underwriting file that the policy had a manuscript endorsement excluding 'groundwater discharges' as referred to on a certain page in the environmental audit. Unfortunately, the line between surface and ground water in Florida was not at all clear since the water table is so high, and the language on that page in the audit was not helpful.Therefore, my firm had to arrange an elaborate investigation by an outside engineering firm to help determine if this was a covered claim.

These old policies were not subject to as much negotiation as the new ones. Here, the underwriter probably put in the manuscript endorsement referencing 'surface water' without any input from the insured's broker. The new flexibility makes broader coverage possible, but also means that the insured (or broker, or lawyer) doing the negotiating must understand important coverage issues under all of the forms, the peculiarities of any particular form that may cause problems for particular types of risks, and how the forms can be molded to accommodate risks without doing violence to the standard language. The broker must have sufficient knowledge of environmental coverage law as it pertains to these types of policies and sufficient drafting skill to be absolutely sure that the ultimate policy accurately covers the particular liability. It is particularly important for the insured that the language be legally sufficient. As a result of this new two-sided negotiation process between the underwriter and the insured , the courts will no longer automatically construe ambiguous policy language against the insurance company.

The Massachusetts risk discussed above under information gathering and the New York risk discussed under marketing both required considerable negotiation and redrafting of the policies to suit these risks. There were two problems with the Massachusetts risk which prevented it from fitting easily into either the pollution liability or cost cap policies. It did not fit well into the liability policy because even if a loss  occurred, the policy might not be able to be triggered in the usual way, by a claim. It did not fit well into the cleanup cost cap policy because no real remediation (or cleanup) was going on, and those policies generally apply to remediation, not monitoring.

As expected, the carriers who quoted on this risk under the pollution liability policy placed a governmental mandate trigger on the policies in their quotations. Underwriters frequently like to use a claims or government mandate, not discovery, trigger when there is known pollution because, arguably, they are otherwise covering a known risk. In this way, they are clearly covering the risk that there will be a governmental claim, or the risk of governmental 'reopener'. However, because of the role of the LSP, and non-role of the governmental agency in the Massachusetts Contingency Plan program, there wasn't likely ever to be a 'claim' by a third party even if additional cleanup costs were incurred. Nevertheless, the underwriters were understandably adamant about using the claims trigger in this situation.

Fortunately, AIG was more flexible. The underwriter suggested issuing two policies - a cost cap one for cleanup costs, and a liability policy for bodily injury and property damage - nothwithstanding the fact that cost cap policies are generally written only for large scale cleanups, and this one was very small, and the additional fact that such policies usually apply to real remediations, not mere monitoring. This dual approach worked out very well so long as the underwriter was willing to modify the definition of 'cleanup costs' in the cast cap policy to include monitoring.

The policy involved in the Massachusetts risk discussed above also required considerable negotiation and redrafting of some key policy terms. 'Claim', a key word in the policy, had to be redefined to apply only to the narrow risk the insured was concerned about: that a third party would assert a claim against the CGL carrier under the particular CGL policies that were subject to the indemnity agreement. Also, the third-party liability policy that the underwriter wanted to use had to be modified to cover on-site pollution conditions.

Clearly, what is needed at this stage is a fairly in-depth understanding of coverage under all the forms that are available and also of underlying environmental liability law. The ability and creativity to redraft new language on the spot, in the context of quickly moving deals, and in a way consistent with the manner in which the policies were originally drafted, is also a pre-requisite. The ideal background for the knowledge part of this equation would be that of an environmental coverage lawyer, particularly one with experience in litigating coverage under pollution liability policies. However, experience in handling environmental claims in an insurance company or brokerage or in placing environmental coverages as a broker could also impart this kind of knowledge.

As for the drafting part of the equation, experience in drafting environmental and other specialty lines policies and in developing environmental insurance programs is obviously important. It is good to have had this experience as a lawyer because insurance policies are contracts, and lawyers have some sensitivity to the legal effects of their drafting. However, not all lawyers are good drafters of insurance policies. Underwriters or claims people with experience in an insurance company developing new policies and  drafting policy language, whether in a specialty lines department, contract department, or environmental department, and environmental brokers with sufficient drafting and policy development experience and innate skill should be amply prepared to fulfill their responsibilities at this stage.

The Claims Handling Stage

The final stage of the environmental insurance process in which a broker plays an essential role is when a claim comes in. Claims handling represents the back-end phase of a broker's basic duty to obtain complete coverage. It is very important that the claim be properly presented to the insurance company, in the proper manner, at the proper time, and with the proper information. The broker must know how to submit the claim and what exactly to demand. The main goals are to get the claim covered and to prevent litigation.

Take the example of a developer who had purchased a site as a speculative investment. He did not know for certain how the property would be used, and the pollution liability policy that he purchased for the site specified industrial use of the property. When on-site contamination was discovered due to construction of a utility line, the carrier would only pay to remove pollutant levels beneath 1000/ppm, as permitted by industrial use. This situation could have been avoided upfront through proper drafting of the policy specifying highest and best use. At the back end, it illustrates that the broker should demand the fullest coverage permitted by the policy. Similarly, by characterizing the release in the Florida case as a 'surface water' release, the broker was trying to present it so that it would be covered. (Ultimately, coverage was declined, but for valid reasons having nothing to do with surface versus ground water.)

The knowledge required for this stage is of environmental coverage law as well as the technical and legal aspects of the underlying liability. The best background for acquiring that knowledge would be as a claims person in the environmental department of an insurance company or brokerage, or as an environmental lawyer or environmental coverage lawyer who has handled such claims. Experience as an environmental engineer would prepare any broker to analyze and investigate the technical aspects of claims. This is an area in which an individual broker can rely on resources within his or her company. For example, environmental brokers at the large 'alphabet houses' can rely on the substantial environmental claims departments in those companies.

The Broker for You

We hope that this discussion of the issues will help the reader who needs environmental insurance for a particular risk to find a broker with the knowledge and skills required at each stage of the process. The selection of an environmental broker is multifaceted, and few individuals can possess the perfect combination of attributes. Because of that, selecting an environmental insurance broker is like selecting a tailor-you need to look for someone with the knowledge and skills to match your needs.
As in finding a good tailor, word of mouth is often useful. The internet is also a starting point. You can ask environmental lawyers or underwriters who have experience with such brokers for their recommendations, and you can surf the web. In either event, you should examine the broker's resume to see what it tells you about the broker's knowledge and skills.

The examples in this article will give you some sense of the many issues that face people seeking environmental insurance for brownfield properties. Armed with this information, you should be able to select a broker who can tailor a policy to fit your needs.  

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