Perfectly Paired: The E&S Market and Environmental Risk
Printed in the August 2009 issue of American Agent & Broker
By Bill Pritchard, President of Beacon Hill Associates, Inc.
The movement of business from the standard market to the excess and surplus market and back again is a continual process. Whenever rates soften and capacity is underused, standard carriers entertain more and more environmental risk. While a degree of this is certainly acceptable, there is a point where the standard market cannot adequately address the coverage needs of the environmental insured. Agents and brokers need to be careful to identify, and not cross, this line.
The reasons for writing business in the standard market over the E&S market are well known. Regulatory review of rates and forms, coupled with the security of a state guaranty fund, provide a degree of protection for the insured and agent alike. In a marketplace challenged by as much uncertainty as what we face today, this difference cannot be overlooked. For many agencies, placement outside of the admitted market is not even considered except for the most challenging risks.
The security represented by the admitted market unfortunately carries inherent weaknesses for some insureds. While the review and approval process for forms and rates confirms that coverage is adequate and rates are fair, it also limits a carrier to using those forms and charging those rates. While in many cases this is fine, in others where the exposure is complex it may be severely limiting. Often this is the case when dealing with environmental policies. Additionally, it easily can lead to insureds with slightly complicated operations simply being declined outright.
E&S carriers, on the other hand, have the ability to craft coverage specifically for their clients, charging rates that make them comfortable assuming the level of risk required. Insureds are then given the option of purchasing that coverage. This makes the consumer the ultimate arbiter of whether a rate is acceptable or fair, or not.
That still leaves two components of the situation unresolved. The first is the security of the company offering the coverage. Being an admitted carrier does not necessarily mean that a company is a particularly strong one. However, it does mean that a state's regulators are reviewing the company carefully. With E&S carriers, the only regulatory body performing the review is the company's home state. In this situation it is crucial for the agent to select a well-rated E&S carrier. There are many excellent insurance carriers functioning on an E&S basis that are closely related to their admitted counterparts.
The final unresolved issue is perhaps the most critical of all: Coverage. If the state is not approving forms, how can the agent know he or she is selecting the best, or even acceptable, coverage for the client? While this varies by line of business, a few principles remain constant. The first is that the agent must recognize and accept responsibility for reviewing and understanding the forms being offered. The next step is to be sure the agent is working with carriers who have a good reputation in the segment of the industry in question. The final step is to get multiple sets of terms to review. By doing this, and comparing one to the other, an agent can understand not only what the carrier is offering, but what is available to the client in the wider marketplace.
One of the real strengths of the E&S market is that once agents develop this understanding, they can move to the carriers they are working with and try to improve the offered coverage. Because of the flexibility inherent in the E&S market, carriers can decide where to expand or reduce coverage. By using a large array of standard endorsements, along with the ability to manuscript others, E&S carriers can fine-tune coverage to be exactly what the agent and insured want.
The value of the general E&S market's flexibility is evident when working with environmental products. While there are several admitted programs offering environmental policies, most of the sizeable pollution marketplace is written by E&S carriers.
Environmental in the standard market
As with most situations, the most consistent types of coverages often are offered by admitted carriers. A clear example of this is coverage for underground storage tanks. This coverage is an option for tank owners and operators wishing to comply with the EPA financial responsibility requirements. The policies must be precisely written to provide compliance with the governing regulations. What we end up with are policies that are very similar, with a few coverage differences, much like admitted market commercial property coverage. There is little or no need for manuscripting endorsements, so the admitted approach works wonderfully. If something unique does come up, most admitted carriers have a relationship with an E&S company to take over the account.
Unlike storage tanks, most site-specific pollution policies are written in the E&S market, generally for good reason. Take the example of an oil refinery seeking both on and off site cleanup coverage, as well as BI and PD. The insured and his agent have assessed the overall exposures and decided the risk they most want to transfer is the one arising from fuel storage. The refinery has several million gallons of fuel stored above ground, and a catastrophic release could be financially crippling. They are not concerned about the possible presence of asbestos containing materials in their old buildings. Many carriers are willing to assume the risk of the fuel spillage, but given the information available, not necessarily the asbestos. E&S carriers can craft coverage addressing exactly what the insured wants to address. An admitted market may wish to do the same, but be prevented from doing so by the forms they have filed. This will often lead to a declination.
A similar limitation in the same scenario comes from filed rates. A carrier which has filed rates, credits and debits may be unable to charge what is necessary to bear a certain risk. In the previous example, an older site with significant storage may fall outside of the approved rating parameters. The carrier is forced to either write for far less than the risk should bear, or again, decline.
Beyond just basic acceptability and pricing, E&S carriers have the tools to modify and enhance the insured's coverage. A site-specific pollution policy often can be written with coverage for non-owned disposal sites, natural resources damages, diminution of value, phantom tanks and more. Standard carriers rarely are equipped to offer such a wide range of enhancements.
The challenge of contractors' coverage
Contractors' coverages suffer from limitations as well. Many standard companies writing contractors provide contractors' pollution liability coverage for the job site. However, the breadth of that coverage varies widely. Some are limited to sudden and accidental spills, such as a drum of lubricating fluid being knocked over. Others only cover pollutants on the surface of the soil. Some require the contractor to be on the site when the accident occurs. Still others only provide coverage for specified pollutants. For contractors wishing to transfer their environmental exposures more completely, there are limited admitted markets, and many of those suffer from the same flexibility issues.
E&S carriers often are willing to provide full sudden and gradual coverage to contractors, including such enhancements as loading and unloading, off-site transportation, limited premises storage of waste, extended completed operations, and more. In addition, carriers can craft unique endorsements for specific project requirements that may come up during the policy term.
In addition to the more standard environmental coverages outlined above, E&S carriers are able to write coverage for a wider range of risks. Transportation pollution liability, or over-the-road pollution, is available to provide coverage for fuel, chemical or waste material transportation. Carriers write coverage for asbestos and lead in place, as well as for the cleanup or associated BI and PD relating to toxic mold.
While the security offered by admitted carriers is important, the overall effectiveness of an insurance program is equally important. In today's environmental market, there are more than 20 A.M. Best "A" rated or better carriers offering these coverages. Often these are sister companies to well-known admitted carriers. Finding the right balance between insured, carrier, coverage and cost is crucial.
Agents can access this coverage in several ways. For agents and brokers equipped to handle excess and surplus lines taxes themselves, one approach is to go to large, nationally recognized environmental insurers. These are well known and many agents will already have appointments with them.
Another is to seek out smaller, lesser known but still well-rated carriers. These are found through Web searches, review of print publications, and by word of mouth. Many of these carriers, while less advertised, have excellent track records of writing environmental insurance.
Still another approach is to go to a general wholesaler to see what they offer. Many wholesale brokers can access a number of products. In those situations, assessing the strength of the carrier offering coverage and the adequacy of the coverage being offered are crucial. It is important to first talk with the broker and gauge his or her level of expertise. Ultimately, it is up to the agent to be comfortable that the product being offered is appropriate for his or her client.
The final option is to work with a specialty broker. There are several national brokers who focus exclusively on environmental coverages. They can typically bring agents proposals from a number of high-quality markets, several of which are only available to the wholesale marketplace. Many of these brokers have a great deal of product knowledge to share with their agents, adding real value to the process. They can help the agent understand the intricate coverages being offered, as well as any enhancements that are available for the specific exposure.
While the admitted market provides many very important benefits to agents and their clients, the highly complex coverage required by many environmental risks often makes the E&S marketplace the better choice. As long as agents use care and diligence in exploring this segment of the market, they can find high quality, effective coverage for their clients.