This Year’s Biggest Opportunities: Mold & More
Evaluating Opportunities Relating to Mold, Site Pollution Liability, Auto, Contractual Requirements for CPL/E&O, and Carrier Stability
This year has seen a period of continued changes in the environmental industry.
Market challenges are leading to opportunities in many areas, and agents and brokers who pay attention to the underlying trends can capitalize on them. We have identified five areas that will lead to significant market opportunity in the coming months.
The first, and the one getting the most attention right now, relates to mold. There has been a large uptick in mold claims in hospitality related risks, both in frequency as well as severity. This activity is leaking into other habitational risks, creating a new landscape for indoor air quality focused coverages.
While mold related exposures have long been a concern in the environmental industry, the evolution of coverage over the last ten years has created the environment for claims to occur in a way not necessarily expected. Carriers that are focused on long-term stability realized some time ago that the race to the bottom on price was not sustainable. Insurance professionals want the carriers they work with to be solvent when a claim is reported in the future, and know that policies that sell for less than the expense of issuing them are bad business. Winning on price was, and remains, unsustainable.
Consequently, over the last several years key environmental markets have changed the dialogue to one of quality and scope of coverage instead of price. They have offered broader, better coverage than ever before, and have counted on quality-based brokers and agents to sell that quality over cost.
On the whole, this has worked, as evidenced by the growth at many of the best carriers, in spite of continued pressure from price-based markets. A continued influx of new carriers and programs over the last five years has added additional pressure as many of these work to obtain market share.
Inevitably, broader coverage leads to more claims, and that is what has happened recently with mold. There are a few specific coverage enhancements that have a great deal to do with the uptick in mold losses. The first was the addition of “restoration costs coverage” or “restoration expense coverage.” In the early days of environmental insurance, the policy typically paid first party claims to remove the pollutant from the location, but nothing more. In the case of a storage tank leak at a gas station, the policy would pay to break up the parking lot, excavate the contaminated soil and haul it away, and test to determine that the contaminant was removed. Once that clearance was completed, the insurance company would leave and the insured would be left with a hole in the ground. Over the last five years or more, carriers have begun adding coverage for the cost to put the site back into the condition it was in when the pollution event occurred. So, in the above example, the hole would be filled in, the parking lot repaved, and all signs of the remediation would effectively be removed.
The second enhancement has to do with adding “Business Interruption” or “Loss of Rental Income” coverage, or both, to policies. As the names imply, this coverage extends to the lost income due to a pollution event at a site. While these are often endorsed enhancements, they have been added to virtually every quote over the last several years.
Additionally, policies have done little things that have added up as well. Redefining a pollution event to include the “presence of” mold has been an important enhancement, as has very broad definitions of mold, fungus, and legionella. All of these have made the presence of mold in any form an actionable event.
Surprisingly, the focus of some of the largest mold related claims to date have not been third party Bodily Injury as many imagine, rather they have been first party clean up. There have been a number of claims at hotels that have ballooned into very large losses, some totaling into the tens of millions.
What has caused these claims? The intersection of broad, high quality coverage and unique exposure characteristics. In several of these scenarios, hotels have gone into a room to renovate, and have peeled back the vinyl covered wallpaper that is often used and discovered mold. Apparently, the mold has then been found in the walls, the floor under the carpet, in the bathrooms, and in the hallways. As the mold is uncovered, it becomes a pollution cleanup claim. Due to the “restoration costs” language, the policy is paying to entirely get rid of the mold, often having to tear the room down to the studs and subfloor, and then paying the costs to put it back into similar condition. Multiplying this cost over dozens of rooms at a time has quickly taken losses from the tens of thousands to the millions.
As this is occurring, the “business interruption” enhancement has kicked in, providing coverage for the lost income because of the extensive time required to abate the mold, significantly longer than a planned renovation. This has further aggravated a bad situation.
The surge in claims in this space, along with the various ways carriers are responding to them, has created an opportunity for agents that understand the forms and coverage constructs utilized.
Site Specific Pollution
The second situation creating opportunity in the marketplace is AIG’s decision in 2016 to pull out of the Site Specific Pollution market. Several hundred million dollars in premium will be non-renewed over the next four years or so. Policy counts up to one thousand are possible.
The challenge with these opportunities is replacing the expiring coverage with a carrier that wants the risk, and on terms that match up with, or improve, the expiring. The complexity of these risks, and the fact that many of them are coming off long term policies, make this a challenge. Carefully reviewing coverage in place and supporting documentation, and then a commitment to get that documentation for your carrier, will get it done. In some cases, this is fairly easy. In others, next to impossible. But with the size of the book out there, agents prepared to do the hard work can reap the benefits.
The next area of opportunity relates to Automobile Liability coverage. While not a specific environmental issue, auto has become a problem for everyone. Distracted driver claims, time demand losses, and inadequate pricing have caused virtually every carrier to demand rate on renewals. One company has advised that any risk with a Conditional Safer Rating, regardless of actual loss experience, will be non-renewed.
This sort of disruption creates challenges and opportunities. The agent with the right market access will be able to offer these risks a new home at hopefully favorable terms. And once the auto challenge is solved, the balance of the casualty and environmental lines will follow.
Contractual Requirements for CPL/E&O
The final area to watch is the growth of contractual requirements for combined Contractors E&O and Contractors Pollution. A big uptick in these requirements is leading us to offer as many combined quotes as standalone CPL, a balance that has not existed in the past. Agents that know, or work with brokers that know, the nuanced differences in these forms will have a distinct advantage over their competitors.
The final opportunity is a long term topic and one we have discussed many times before: carrier stability. It is a given that a producer needs to find the best coverage for their client at the best price. The best coverage, however, speaks not only to breadth of coverage, but to security of the carrier providing that coverage. Claims such as those recently experienced in the mold space are a reminder that the security of the carrier is of paramount importance. Many of these claims have come late in multi-year policy terms. Many other pollution claims go back to the completed operations of a contracting operation. All of these require a solid, well-funded, committed insurance company to stand behind the broad terms offered. Selling broad coverage from a carrier with a passing interest in the environmental marketplace is asking to have a dissatisfied client if a claim occurs.
Agents who choose to partner with carriers and specialty brokers that have a history in the environmental marketplace will have a long-term advantage. Quality coverage clearly makes a difference as evidenced by some of the claims described above. Having a carrier with in-house environmental claims departments also makes a difference. Having a carrier who is invested in these products and is consequently motivated to stand behind them makes a difference. While these products may be marginally more expensive in the short term, the long-term dividend is significant.
We fully expect the environmental industry to continue to have pockets of significant, unexpected losses similar to those experienced recently with mold. Trying to win an expiring book of business, or take on a new auto risk and making it profitable, are significant challenges. But like all challenges, they are also opportunities. The lessons learned in the last year in Mold, Site, and Auto, are that broad coverage needs to be offered thoughtfully, that premiums need to be adequate to sustain losses, and that carriers invested in this space make the strongest partners. Carriers and brokers that do this stand the best chance of staying in the market and supporting their clients for decades to come.
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