Environmental liability insurance in flux: Market shifts, new risks, and coverage challenges

Hello everyone and welcome to our Environmental Insurance Power Panel for Q3 here at Insurance Business America. This, of course, is where we get some of the biggest broker names across the market together to discuss the latest trends, including today, subjects such as pricing, new market entrants, audits and PFAS. To do that, we welcome Cameron Douglas, Regional Director of the Environmental Practice at Gallagher, Ed Morales, Senior Broker, Environmental Practice West at Willis, and Jared Dabrowski, Senior Vice President of the Environmental Practice at NFP. So welcome everyone and let's start by setting the scene. How have pricing and capacity shifted for primary and excess environmental liability, especially auto-related excess, over the last three months? Cameron, what are you seeing? So primary general liability and pollution liability programs do continue to experience rate increases. Typically, we're seeing on the primary side between three and ten percent, and this is more modest when compared to prior years. When talking about excess casualty programs, excess of those combined GL pollution programs, those rate increases can be more significant than the primary, and that's mainly due to whether or not there is significant auto-exposure. Auto-exposure can increase that rate quite significantly. That's driven by social inflation. So what we're seeing in jury verdicts, an increase in the severity of jury verdicts or the magnitude of jury verdicts, as well as economic inflation. What does it cost to replace a windshield or a truck or a car? So these are all different aspects of why auto is driving excess casualty increases. There are some carriers that can consider alternative exposure rating basis metrics when talking about how they underwrite and how they rate premium. Now, a lot of cases these are rated off of revenue, but some carriers consider other metrics to assist with bringing rate down, depending on if that is more applicable to that insured. So, for instance, a chemical manufacturer, you can utilize production units as opposed to revenue, if that makes more sense. So there are a lot of different creative ways that we can assist with obtaining the most competitive premiums possible. And then from a capacity standpoint, we do see capacity decreasing when looking at an excess tower. Typically, carriers are pulling back in the total limit that they can provide per layer. So, for example, it might have taken two or three carriers to get an insured to $50 million in excess, whereas now it might take three, four, or even five carriers to get to that $50 million. So, certainly impacting how overall premium spend is just experienced, because the more carriers required usually means the more premium. That was quite a brilliant overview. For the other gents, then I'm going to switch things up a little bit. Let's talk about what impact the new market entrants have had on pricing stability and underwriting capacity in the environmental insurance space recently. Jared, any thoughts on this? Sure. So we have seen some new market entrants come into the environmental space in the last few months. If anything, it's driving the premium down just a little bit. It still feels like a race to the bottom. And that's, I think, just a result of everyone trying to grow their book and take on as much as they can. As far as capacity goes, I think we have a nice level of capacity in the market. It does add some carriers to go to if we're looking for some excess pieces as well. Does that mean there's an opportunity here? Certainly, Paul, there is. And to agree with Jared, what he had said already, but I think that's the thing about a new carrier, a new entrant in the marketplace. There is an opportunity potentially to place a difficult risk with a new carrier. So again, it may have to do with their appetite and understanding what their appetite is. And perhaps you have a risk where your normal carriers that you would go to are just not interested. And so that is the opportunity there. And so as this new carrier wants to build their book, a business that they may be able to take on a placement that others may not be interested in. And it can lead to capacity. But I think at this point, the capacity is already there. But it's always good to have another option if you're trying to build a tower. We'll get a verdict from each of you as well on which emerging contaminants. So I'm going to talk about things like ethylene oxide, microplastics, formaldehyde, PFAS, Legionella, 1,4-dioxin, 6-PPD-quinone, which are presenting the biggest regulatory or litigation challenges today. And indeed, how are carriers responding? Ed, any standout for you? Some of these are, I think, a little bit more well understood than others. But certainly from a litigation, the PFAS issue continues to go on there. And although we've been able to find coverage with certain carriers for PFAS, it really comes down to the carrier's understanding of that particular chemical for that particular exposure that could lead to getting some successful coverage. So with that, some of these others, I think, are interesting. For instance, some microplastics, which are certainly not well understood. But a lot of wastewater facilities are struggling with these materials because they're in all kinds of consumer products. So it hasn't really, from my perspective, gone into more of the commercial environmental space, but it could potentially down the road. And the other one I want to comment on would be the 6-PPD-quinone, which is a byproduct of tire wear, wear and tear in the roadways, and the impact of certain types of fish, particularly in the Pacific Northwest. So not seeing anything there yet in the commercial space, but there's certainly a lot of interest in terms of impacts to fish and wildlife. So something to take a closer look down the road. Will Barron I suppose as well, and we're examining these various risks, Cameron, we should probably establish, first of all, if they are indeed still emerging or not. Cameron Correct, Paul. Yeah. Some contaminants of concern, such as Legionella, have been concerns for decades. And we've been obtaining insurance for contaminants such as Legionella for a long time. And Legionella coverage is important because we are seeing an increase in the number of cases of Legionella. Some studies report that there's been a tenfold increase in Legionella cases over the past decade or two. It's also worth noting that one in 10 cases of Legionella lead to death. Legionella can be in many different types of real estate portfolios, whether you're a senior living facility or a hospital or even a spa or a school. And when you talk about environments where there's already immune deficiencies or a distressed immune system already, such as a senior living facility or hospital, those cases, you know, that one in 10 lead to death, that number really decreases to about one in five. So it's significant for many different types of insurance, but has already existed for some time. Whereas compared to, you know, chemicals such as ethylene oxide, ETO, this is a chemical that's been used for sterilization and various industrial processes or sterilization and in various industrial processes. And so it's a concern for these sterilization facilities, chemical manufacturers and other industrial users. And this is something that insurance carriers are still getting their hands around, grasping, because some carriers might exclude it outright, whereas some carriers might consider it. You know, I have one carrier that's considering a product liability policy right now for a company in the ethylene oxide space. And so coverage is still available. It's just a matter of who you talk to. But with time, we'll have to see where that goes. That's been great to hear both Ed and Cameron address quite a number of the different contaminants, Jared, but is the biggest one still PFAS? I think the carriers are finally coming back down to earth with PFAS and starting to take a realistic approach, whereas maybe five, six months ago, they were a bit more conservative than they are now. I do think with time, we're just going to adjust to the fact that PFAS and all of these other contaminants are here, such as Legionella. You know, Legionella, like Cam said, it's been here, been here forever. And it's something that's included on most of our policies. So I think with time, carriers will come back down to earth. We'll get a little more comfortable with what's going on there and how to deal with it. Important to note there are, there is some legislation right now being proposed in the state of California around micro and nanoplastic. We do have to pay attention to that to see how that plays out. And there are some major PFAS cases being heard this summer, more on the bodily injury side. So again, depending on how those pan out, I think it's going to give a little more guidance for carriers. Cameron, just to flick it back to you, I'm wondering how have the regulatory audits, particularly those targeting gas stations and old infrastructure, have they affected submission volume and policy terms over this quarter? Pre-audits and just overall increase in awareness of environmental concerns and liability has led to an increase in submission volume. When looking at older gas stations or older infrastructure, maybe even older in abandoned oil and gas wells, we've seen these regulatory audits lead to, again, that submission increase because of concerns from owners and operators regarding liabilities associated with maybe current operations or prior site use in what might have occurred in the past at those properties. And from a governmental entity standpoint, we're seeing a lot of regulatory requirements to meet certain levels of financial responsibility or some other level of financial ability to provide coverage in the event of a spill or contamination requiring cleanup costs. So we do see an overall awareness of environmental liabilities associated with old infrastructure leading to more, I guess, desire and more need for environmental insurance. Okay. So an increase in submissions, is that something that you've seen as well, Jared? We haven't seen that much of an increase in submissions around gas stations and all their infrastructure as a result of regulatory audits. I don't know if that's just something that's coming down the pipe for us, but our clientele hasn't seen it too much. Okay. And then Ed, on your perspective, a little uptick or not much at all? Yeah, I would say it's just a slight uptick in submission flow, but I think it's, from my perspective, it's always, even though it can be regulatory driven in terms of an audit, it's going to be transactional nature in terms of the insurance piece from my perspective. And this sort of describes what the brownfield marketplace is like in terms of where you see older industrial facilities that are either audited or just going through some due diligence through prospective purchaser, aside from regulatory, where it's part of a transaction and insurance might be something that'd be a useful tool to make the transaction happen. So anyway, I think there's been just a bump, but I don't think it's been a significant increase. Ben, I hate to do it, but Jared, you mentioned PFAS earlier, and I just want to bring the conversation back around to it if I can. To what extent are PFAS and indeed, wildfire exclusions as well, impacting coverage availability or cost, particularly of course, for higher estates, the obvious one right now being California. And indeed, what creative underwriting solutions are carriers offering, if any? Jared, what are you seeing? So personally, I haven't seen much wildfire exclusion, but what we have seen is a lot of PFAS. I don't want to say exclusion, but I think concern is better. And you are able to address it with some creative underwriting. And depending on types of triggers you have on a policy and some other exclusion, carriers are willing to provide some level of coverage for it, usually excluding first-party discovery, but they will put it on a policy. And very often, they won't limit the, or they won't sub-limit the coverage. So I think you have to go into it understanding and asking the right way, but at the same time, you have to understand that this isn't something carriers are going to jump on for $30,000. We typically see it on larger transactional, long-term deals where there is a higher premium. The carriers are putting a little more premium on their book to cover it as well. So Jared has answered the PFAS side of that question. Ed, any thoughts on the wildfire side? Yeah, certainly. From wildfire, it's interesting that I think what I've seen lately is that there's a little bit better understanding of the kinds of contaminants that can be created sort of post-fire. And so there's a lot of concerns about that, what they are in terms of toxic metals and other organic chemicals and so on that are getting to a point where it's being understood a little bit better in terms of that. But with respect to response actions, it's been more preventing these materials getting into the environment further. In terms of the carriers, I haven't seen a lot of specific exclusions for wildfire, although there have been one or two carriers that I don't really work with often have come out with endorsements that it would have just for blanket wildfire exclusions for pollutants. So I've seen that. I haven't seen a lot of it. There may be more down the road, but I think it hasn't been prevalent in the marketplace. It's round up there. Indeed, huge thanks again to our panellists, to Ed, to Jared and to Cameron. Remember, they will be back again one more time in 2025 for our Q4 edition. I'm Into Lent. Keep it right here on Insurance Business TV.