During this time of significant regulatory change at the federal level, businesses need to carefully review the role of environmental insurance in their overall risk management strategy. It is often thought that an easing of federal regulations will mean a lowered environmental responsibility for various industries. While on the surface this seems correct, it does not mean the environmental risk a business has is correspondingly lowered.
While environmental products are uniquely tied to regulatory standards, they are not entirely driven by them, nor does a federal position necessarily change a state level one. This requires risk managers to carefully think through the ramifications of having the right coverage at the right time, both as it addresses prior risk and future exposure. Understanding how the policies work, as well as the factors driving the need for coverage, is of paramount importance to the decision-making process.
There are two very important elements of environmental policies to be clear on before looking at how the regulations work. The first is the role of regulatory standards as part of the coverage determination. Environmental policies generally provide coverage for third-party claims for Bodily Injury and Property Damage, as well as Cleanup Costs. Bodily Injury and Property Damage claims are typically triggered by the insured’s legal liability for the damages caused. If a pollution condition makes someone sick, or damages the property of a third party, the policy should respond to those types of claims.
Cleanup costs, on the other hand, respond to the costs associated with cleaning up the contaminant to the regulatorily level required. This is a critically important point. It means that if you have a leaking underground storage tank and you release petroleum hydrocarbons into the soil, the policy will pay for the remediation of those hydrocarbons to the levels allowed by law for that particular constituent in that specific area. This is the part of the policy governed most specifically by changes to the standards for acceptable contamination in the environment.
The second policy-specific issue to be cognizant of is the claims made trigger which is used in the majority of site or Premises Specific Pollution policies. The claims made trigger means that only those pollution conditions that occur on or after a specific date (called the claims made retroactive date) are covered by the policy, assuming they are reported during the policy period or any extended reporting period purchased. The retroactive date is generally the first date the insured purchased the specific coverage. At each annual renewal, the retroactive date stays the same, so as the years progress the coverage value increases as it’s picking up more and more historic exposure. If, however, the insured drops or restricts their coverage for any reason, the original retroactive date goes away. If they elect to buy coverage again in the future, their retroactive date will reset to the new date of coverage. For this reason, dropping coverage for any reason should be very carefully considered before making a change. Years of historic coverage can be lost.
With an understanding of these two critical policy considerations, the next item to review is the relationship between a federal and state level cleanup standard. Federal legislation, such as the Clean Water Act, sets a baseline cleanup standard for the constituents it covers. Each state then has the ability to enact equal or more stringent environmental regulations, and many do. The federal government only establishes the minimum, with states having the discretion to be stricter. So, while the federal government may be backing off of certain standards, it does not mean the states within which the business has exposure are also reducing their requirements.
It is also important to remember that regulatory stances by the federal government tend to change with the administration in power. They often swing from one extreme to the other as key office holders change. While these changes take time to work their way into regulations, the time is relatively short when compared to the long-term planning businesses must perform.
Remember, when a regulation changes to be either more lax or more restrictive, it applies to those contaminants at the moment. This means that even if you cleaned up contamination to an acceptable level in the past and received a No Further Action letter from the regulating agency, you could be required to reopen the cleanup based on the new in force standard if it is stricter than the old one. This is not a time you want your coverage to be inadequate.
This future uncertainty is yet another reason not to dramatically alter one’s environmental insurance stance based on recent news stories. If an insured elects to drop or limit their environmental coverage because of a current event, they will most likely be giving up or limiting their retroactive date at the same time. If regulations are reinstated in the future, the insured may only be able to get coverage for new conditions going forward, not for the period of time during which their coverage was reduced.
Beyond the cleanup requirements created by various pieces of legislation, environmental policies also allow businesses to respond quickly and effectively to environmental incidents that impact the communities around them. Policies from high quality carriers become valuable tools to help manage and mitigate the fallout from a pollution release. Highly experienced claims teams work with insureds to get the best professionals available on the ground to assist in the response. Carriers who deal with these issues every day provide their expertise to help manage and control the broader fallout to the business. Many policies also include coverage extensions for image protection and restoration in the event of an environmental loss. These are valuable tools regardless of the cleanup standards in place at any given moment.
The final reason to keep environmental coverage in force regardless of the changes in governing regulations is the business’ responsibility to the communities in which they operate. Having a policy in force to respond to an environmental release empowers the company to respond quickly and effectively to an adverse event. The reputational damage to an insured with meaningful coverage in place is significantly lower than for those that do not. It is no longer acceptable to clients and customers to work with companies that have a blatant disregard for the environment. Social media and the heightened awareness of the negative health impacts of pollutants have created a complicated environment for businesses to navigate. Companies have to be proactive, responsive, and transparent to have any hope of getting through a major event without lasting damage.
It is clear that even with potential changes to environmental regulations at the federal level, insureds would be wise to continue and even expand their environmental insurance coverages. Paid pollution related losses in 2024 grew yet again due to a range of factors, and should be expected to continue to grow going forward. With coverage costing very little compared to the risk assumed, every business should be carefully reviewing their environmental insurance needs.
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