Environmental insurance gap warning as California faces storms

At least 17 people have died after a parade of atmospheric rivers slammed into California, causing what the governor’s office has described as catastrophic damage. As of Tuesday, 41 of 58 counties were authorized to receive FEMA assistance due to the emergency.

With more bad weather expected the economic cost of the storms is yet to be determined, and businesses with unanticipated environmental exposure could be left facing a bill in the “heavily” environmentally regulated state, according to David Corry, head of environmental, Argo Group.

“The vast majority of businesses, their business owner policies or their business insurance policies have exclusions in [place] for pollution,” Corry said.

“[For these businesses] there’s really no coverage unless they have an environmental policy that’s tailored to pollution.”

Unexpected environmental exposure

Businesses that use chemical solvents, paints, plastics, and above ground storage tanks could find themselves at risk, not only of third-party allegations regarding offsite pollution, but also to onsite exposure, according to Corry.

Manufacturers could be particularly at risk, Corry said, and exposures could also be seen across agricultural businesses, construction firms, in real estate, and other industry segments.

While environmental cover is typically required for some businesses – asbestos removal or hazardous landfill companies are likely to fit into this “bucket”, Corry said – many others that have gone through a hazard identification process do choose to purchase it. Some, though, do not, or are not aware of the cover.

Businesses that might not be mandated to buy environmental insurance but may have exposure include those that use chemicals in the manufacturing process, those that have paints or solvents on site, or require a clean water or clean air permit.

“Perhaps an insured has a small above ground storage tank that has petroleum products that become dislodged, and spills,” Corry said.

“You also may have a situation where… you have hazardous materials but you’re using power to ventilate the solvents or the fumes, if you lose off-site power or you have a power interruption, perhaps that results in some sort of release that normally would be contained in some sort of a scrubber or ventilation system.

“Those damages, it’s really hard to put a dollar amount on them, because they can vary dramatically in size.”

Businesses could find themselves facing up to costs for environmental restoration, bodily injury, business interruption, or property damage – and firms could face fees of between $10,000 to $25,000 to retain and take initial steps with an environmental attorney in California, Corry said.

UPDATED total precipitation for the series of atmospheric rivers that have affected California since December 26, a period of 16 days.

In this time California averaged 8.61 inches of precipitation and the San Francisco-Oakland metropolitan statistical area averaged 13.34 inches. pic.twitter.com/Hi4MXB0Who

— NWS Weather Prediction Center (@NWSWPC) January 11, 2023

The environmental insurance market

There are over two dozen “really strong” insurance carriers that offer environmental insurance, Corry said, though “the business is fragmented”.

“The policy forms have evolved dramatically over the years – the policies really started around 40 years ago and were very limited in scope and very high in [terms of] minimum premiums, and retentions – and over the years, the forms have broadened, the premiums have been reducing, and the retentions have been reduced,” Corry said.

Recent years have seen increased education efforts around the product, with just 2% of insurance buyers having had the appropriate level of environmental cover as of 2018, according to SEIP.

As of 2020, the environmental insurance market was worth around $2 billion in premium and experiencing double-digit growth, according to the NAIC Center for Insurance Policy and Research.

It continued to experience “significant” growth into the first quarter of 2021 despite the pandemic, according to a spring 2021 market update from McGriff. Overall capacity at the time was said to be between $600 million to $700 million, “depending on industry sector risk profile”, McGriff said.

ESG programs have “increased awareness” of environmental products, Corry said, as has media coverage.

“We continue to see more and more first-time buyers of environmental insurance, and my experience is that those insureds who buy the coverage generally stay with the coverage,” Corry said.

“It’s somewhat analogous to perhaps 25 years ago when companies were first buying employment practices liability insurance because of the way those claims had crept into society, if you will.”