Environmental Insurance: The Market’s Persistent Oversupply and Underutilization

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The Paradox of Environmental Insurance

Despite an enduring oversaturation in the environmental insurance market, many companies continue to overlook the necessity of securing such coverage. Industry leaders highlight a perplexing situation: the supply of environmental insurance has remained substantial for decades, yet the demand is increasing due to evolving environmental risks. Nevertheless, the adoption rate remains low, as emphasized by David Dybdahl, the founder of American Risk Management Resources Network, now associated with Bridge Specialty Group.

Surprisingly, around 80% of businesses have not procured environmental insurance, a statistic that has persisted since 2018.

Complexity and Misunderstanding in Coverage

The intricacy of environmental insurance policies is a significant barrier. Unlike standardized insurance products, environmental insurance requires specialized knowledge, and gaps in the distribution process may hinder businesses from comprehending or accessing suitable protection.

The complexity extends beyond the policies to standard liability insurance, which is laden with exclusions that have expanded over time. Dybdahl notes that underwriters continually develop new methods to exclude contamination, including specific exclusions for lead, asbestos, and emerging contaminants like PFAs – the ‘forever chemicals’ linked to cancer.

With advancements in science, insurers have leveraged improved contamination detection as a rationale for introducing additional exclusions. As Dybdahl explains, “Science can now detect substances at smaller scales, and we are witnessing exclusions for PFAs, chemicals designed not to oxidize, thus persisting in the environment. When detected at parts per trillion, they are ubiquitous and linked to certain cancers, leading to more exclusions.”

Misconceptions and Lack of Education

Businesses often mistakenly assume their general liability policies provide sufficient protection. “Pollution exclusions are the most litigated terms in insurance history,” Dybdahl points out. “Even legal professionals find them challenging to interpret.”

This confusion extends to brokers, many of whom lack formal training in environmental insurance. According to Dybdahl, “There are limited educational opportunities for insurance producers to truly learn. The Risk and Insurance Alliance offers two classes, and the Society of Environmental Insurance Professionals organizes a comprehensive boot camp, yet few pursue this knowledge.”

Growing Exposure and Legal Risks

This educational gap leaves businesses vulnerable to growing risks, particularly as PFAs litigation accelerates, with over 6,400 PFAS-related lawsuits filed in federal courts between July 2005 and March 2022.

“PFAs could become the next asbestos,” Dybdahl warns, “due to its widespread presence. Initial lawsuits target PFAs manufacturers, but similar to asbestos, litigation could eventually extend to companies using PFAs in their products, creating substantial loss exposures over time.”

Businesses lacking pollution coverage may face substantial legal challenges alone. Dybdahl emphasizes, “Companies with policies predating exclusions were protected, but very few had such policies in place.”

Regulatory Uncertainty and Increased Litigation

Regulatory uncertainty adds another dimension of risk. Dybdahl expresses concern not about stricter environmental laws, but about the potential breakdown in enforcement due to manpower shortages.

“A lack of regulatory enforcement may paradoxically increase third-party lawsuits,” he suggests. “In the U.S., citizens can file lawsuits against non-compliant companies if regulators are inactive. Successful lawsuits can result in significant settlements and attorney fees.”

Common Misjudgments and the Need for Re-education

Businesses often erroneously believe environmental insurance is only applicable to hazardous waste sites and chemical plants. This misconception frequently leads to costly mistakes.

“A frequent error in assessing environmental loss exposures is underestimating the impact of pollution exclusions,” Dybdahl explains. “These exclusions classify pollutants broadly, including contaminants or irritants. A client’s grain elevator was contaminated due to a worker inadvertently mixing seed corn treated with pesticide, resulting in significant financial liability.”

Dybdahl advocates for a shift in communication regarding environmental insurance. He suggests removing the term ‘pollution insurance’ from policies, as it conjures images of landfills and chemical companies, which do not reflect the typical claims data. “The primary source of claims in environmental insurance, according to statistics from five years ago, was mold, not chemical companies or hazardous waste incidents,” he states.

Brokers are advised to seek specialized knowledge rather than relying solely on underwriters, who may have a limited perspective. “Without an environmental resource group, brokers should partner with a wholesaler experienced in this niche,” Dybdahl recommends. “Underwriters may not always be the best resource due to their constrained view.”

Ultimately, failing to consult specialists leaves businesses vulnerable to substantial liabilities. Environmental insurance is not a niche product limited to landfills and chemical plants. As exclusions grow and lawsuits multiply, businesses must recognize the necessity of this coverage to safeguard against unforeseen disasters.