The insurance industry is most often seen as the safeguard against unexpected risks. However, the environmental insurance market is often challenged to help clients address potential liability arising from expected or “known” clean up costs.
Based upon loss development associated with some of these “known” issues, many carriers have revised underwriting guidelines over the last few years and this has lead some to question; How has this impacted the ability of property owners and redevelopers of contaminated properties to manage the risks associated with Brownfield redevelopment?
Underwriters will often classify the exposures associated with a known condition as being an “unknown known” vs. a “known known.”
An ‘unknown known’ is the potential for liability arising from the existence of a known environmental condition for which current legal responsibility has not been established or identified. For example this could be a regulatory reopener risk associated with known environmental conditions that have been left in place subject to current regulatory no further action (NFA), the failure of an approved institutional or engineering control, or third party legal liability due to exposure to the known contamination that had not been identified at the time of purchasing coverage.
A ‘known known’ condition is often referred to as the burning building syndrome, since liability of the responsible party has already been established and they have responsibility to address the legal and regulatory ramifications of this known condition. And like a burning building, it is very difficult to obtain insurance coverage to address the liability associated with the known loss; there are some insurance solutions that may assist clients in limiting their ultimate exposure.
When looking for protection against the potential liability arising from a known condition, it is critical that due diligence has been completed. At a minimum a Phase I should have been conducted on the site that identifies the recognized environmental conditions (RECs ).
These assessment reports must be forwarded to the underwriter. They become the foundation of the underwriting process and will establish the ‘unknown known’ and the ‘known known’ issues that need to be addressed. Insurance against these ‘unknown known’s can be addressed under traditional pollution legal liability policies that normally afford both on-site and off-site liability protection for existing and new pollution conditions.
Most of the carriers, such Beazley, that employ a technical underwriting approach to assessing environmental risk will craft exclusions that specifically address the known conditions of concern and offer the client with a bespoke insurance policy to provide a necessary level of protection to allow a transaction to move forward or protect a business for on-going operational liability.
The environmental insurance market for these ‘unknown known’ issues continues to be robust with many of the established and new carriers offering a wide range of underwriting approaches to provide some level of protection associated to a known environmental condition.
However, where in the past it may have been possible to obtain pollution legal liability protection excess of a known environmental condition and/or indemnification or secure ‘cost cap or stop loss’ protection above expected clean up costs, this capacity has eroded substantially over the past few years due to adverse loss development by many leading carriers.
Only recently have a few carriers, including Beazley, taken a fresh view of the successes and failures of the cost cap products offered over the past decade and have attempted to establish an improved underwriting approach that would allow the industry to bring capacity to the market. This insurance coverage is critical in the successful redevelopment of Brownfield properties.
Strong due diligence will be critical, and the limits and terms once previously offered are likely to be much tighter under the new underwriting approach. To be successful everyone must enter into the insurance negotiations with a realistic perspective of what may and may not be achievable under the insurance program.
For the right project, securing insurance protection associated with known conditions can be the linchpin to bring all parties together and provide a sufficient level of financial certainty to allow the remediation and redevelopment to move forward.
John Beauchamp is an underwriting executive with Beazley, which has been underwriting U.S. risks since the company's formation in 1986. Today, the bulk of its U.S. business continues to be underwritten in London by Lloyd's underwriters, but the company also has a rapidly growing local presence in the U.S. www.beazley.com