Cashing in on Lower Insurance Rates

Michael Fickes

Trash haulers and facility operators who failed to review and revise their insurance coverage in last year's bargain basement insurance market have gotten a reprieve.

"This is the softest market I've seen in 32 years of practice," says Mitchell L. Lathrop, an environmental law and insurance attorney with Luce, Forward, Hamilton & Scripps LLP, a law firm with offices in New York, California and Chicago.

The insurance industry traditionally passes through cycles of soft and hard (or cheap and expensive) markets. Every five to seven years, the market has swung one way or the other, depending upon insurance industry profits. Strong profits tend to produce soft, affordable markets. Weak profits lead to rising premiums. Insurance carrier profits have remained strong for the past 10 years, a phenomenon that has extended the normal life of the soft cycle.

No one predicts immediate change. In fact, some analysts say that today's soft insurance market is here to stay. Others, however, believe that sooner or later, prices will stabilize and begin to rise. If and when that happens, negotiations with insurance carriers will grow more difficult, unless you have an existing business relationship, Lathrop says.

"When the market is soft, haulers and facility operators can ask for what they want," Lathrop says. "Insurers know that if they don't provide the coverage you need, you can go down the street and get it from someone else."

But if you walk in the door cold during a hard market, an insurer may think twice about accepting the risk you want to insure, he adds. "Prices may be higher than you can afford, and you may find that insurers will refuse to provide the kind of policy you need," he says. "So there is something to be said for forming strong relationships during soft markets."

Broadening Coverage Another mark of the soft insurance market is a broadening of insurance coverages. All commercial ventures need insurance to cover worker's compensation claims, property damage, general liability problems, vehicle accidents and other liabilities. However, general liability commercial insurance policies historically have not covered the environmental liabilities that trash haulers, landfill operators and recycling facilities face.

"In 1985, carriers began excluding pollution-related liabilities from all commercial general liability policies," Lathrop says. "These policies all included a clause that read, 'We will not cover any claim connected with or arising out of pollution.' And pollution was defined very broadly."

Waste companies had two ways of dealing with this, Lathrop says. First, they could pay to eliminate the exclusion from their policy, which was very expensive, or they could buy Environmental Impairment Liability (EIL) insurance, an additional policy to cover those issues.

Fortunately, times have changed. In today's soft insurance market, the cost of EIL coverage has declined substantially and EIL coverages have broadened. [See "Protecting Landfills in a Changing Regulatory Climate" World Wastes, January 1999, page 15].

"Ten years ago, EIL coverage was restrictive and expensive," says Jefferey Lejfer, senior vice president of ECS Underwriting, Exton, Pa. "To get this coverage you had to satisfy onerous loss control requirements."

For example, a facility was required to provide the carrier with an environmental survey that could cost several thousand dollars. "Even then, the owner was lucky to get third-party property damage and bodily injury coverage," Lejfer says.

Today, many insurance carriers provide environmental surveys as part of their risk management services, and they will package policies providing third-party and first-party coverage. Third-party insurance covers incidents that do not occur on the facility's property line, but may have been caused by the facility or its workers. First-party insurance covers accidents or incidents on the facility's property.

"Today, our core product provides first- and third-party coverage," Lejfer says. "We call it Pollution and Remediation Legal Liability Insurance. Other carriers offer this kind of policy as well, but call it something else."

In addition, carriers are adding endorsement clauses to expand EIL coverage further. Ten years ago, numerous exclusion clauses limited the coverage provided by these policies. Lejfer says that ECS will add three relatively new endorsements to EIL applicants who qualify.

The first will cover certain professional liability risks that waste companies may face while providing consulting services to customers.

A second endorsement will address financial responsibilities related to closing a facility. "In the past, facility owners had to provide a letter of credit or a perhaps a bond of some sort as part of their closure and post closure plan," Lejfer says. Today, the insurance industry has come up with an insurance solution to this problem. [See "In Closure We Trust" Waste Age, May 1999, page 38].

"We'll add an endorsement related to this matter to a qualified company's EIL policy," Lejfer continues. "We have gotten approval from the environmental regulatory authorities in 30 states that such an endorsement provides acceptable evidence of financial responsibility. For a facility operator, especially small and mid-sized operators for whom capital is at a premium, this kind of endorsement will free up capital."

A third endorsement will cover non-owned disposal sites (NODs). This coverage protects companies that may have used, but don't own, a U.S. Environmental Protection Agency (EPA), Washington, D.C., Superfund site from the expense of being named a potentially responsible party (PRP) [See "Does Your Insurance Add Up" Waste Age, April 1999, page 14].

Lejfer notes that the NOD endorsement will cover a waste generator but not a hauler. Nevertheless, it illustrates the broadening of EIL coverage available in today's market.

Carriers also have grown more flexible about coverage limits. Yesterday's environmental insurance market set specific limits on first- and third-party exposures as well as on defense costs. "Now we provide flexibility allowing customers to parcel out limits according to their perceptions of their exposures," Lejfer says.

For example, facility managers who believe their greatest risk lies in a potential first-party cleanup expense can weigh limits in favor of remediation and reduce limits related to third-party and defense exposures.

Also indicative of insurance market changes is a drop in the levels of self-insured retention, or the deductibles on self-insurance policies, according to Lejfer. Ten years ago, environmental companies would self-insure starting at $50,000, he says. In other words, these companies were willing to pay the first $50,000 on a claim in exchange for lower premiums on insurance coverage above that level.

"Today, depending upon the risk a company is willing to take, we're seeing self-insured retention levels as low as $10,000," Lejfer says.

Important changes also have come about in the area of vehicle insurance. "Haulers are regulated under the federal Motor Carrier Act of 1980," says James Cox of J&H Marsh and McLennan Inc., New York. "That legislation required a hauler's insurance contract to carry an MCS-90 endorsement, which ensures funds are available in the event of an overturned vehicle-caused environmental release.

Ten years ago, all a hauler could get was an MCS-90 endorsement with a subrogation, Cox says. If a hauler had a spill that caused an environmental loss, then the insurance company had to put the money on the table immediately. But the insurance company then had the option to subrogate the claim back to the transporter, requiring the transporter to pay back the claim. If the hauler couldn't pay the cost of cleanup, the insurance company would look for a deep pocket, such as the owner of the waste carried on the truck, Cox says.

"This has changed in today's market," he continues. "Waste haulers can buy business-auto insurance along with hazardous transporter liability insurance, a product that has full extensions for any environmental losses a hauler may face. In other words, this product provides true insurance or risk transfer."

Which Options To Choose With more complete coverage available in the environmental insurance market, haulers and facility operators face the problem of structuring insurance policies to provide maximum coverage at minimum cost.

"You can talk to your broker about how to do this," Lathrop says. "A number of brokers specialize in insurance related to environmental liabilities." Insurance brokers identify insurance needs and negotiate with various insurance carriers for policies on behalf of clients. Following an underwriting procedure designed to assess risk, the carriers issue the policies.

To ensure you and your broker are updated on the newest wrinkles in environmental risk, Lathrop suggests commissioning a review by a law firm with expertise in the area. This generally takes a couple of days, Lathrop says.

But the time and investment should result in a report that evaluates the kinds and levels of risks a hauler or facility operator may face, including estimated potential financial losses and the maximum losses a company could suffer without going under. It also should recommend an insurance structure to deal with these problems, including suggested levels of self-insurance appropriate to a company's finances, recommended levels of primary general and environmental liability coverage, and options for excess and umbrella coverages that pick up where general coverages end. By molding these considerations into a package related to specific risks, a company can take full advantage of today's soft insurance market and position itself to deal with a changing insurance market if and when it comes.