Environmental Risk Management Back To the Basics Hot

Environmental Risk Management Back To the Basics Hot Topics and Opportunities Avoiding the Pitfalls January 2013 Presented By: David Dybdahl, CPCU, ARM, MBA American Risk Management Resources Network, LLC 1 -877 -735 -0800 www. armr. net

American Risk Management Resources Network, LLC. • A wholesale insurance brokerage firm. • Specialists in environmental insurance. • We are contributing authors to the chapters on environmental insurance in: CPCU, ARM, IRMI Practical Risk Management, The Big I Professional Liability Loss Prevention Manual, and The IICRC S 520 Professional Mold Remediation Standards and Guidelines • David Dybdahl has served as an expert witness or provided supporting research in over $700, 000 of litigated environmental insurance coverage cases 2 © 2012 ARMR. Network, LLC

Why Work With Environmental Insurance Products 1. When efficiently produced these insurance products can make money for the insurance brokerage firm - - ARMR revenue is up 42% over last year, all organic growth 50% of our new business accounts are first time buyers of environmental insurance Our average premium per policy is up 22% in 2012 Policy count is up 20% 2. Basically you have to - Failure to offer coverage leads to professional malpractice lawsuits against insurance agents/broker for excluded pollution/contamination losses 3 © 2012 ARMR. Network, LLC

Why Work With ARMR • Our hit ratio is 7 times better than the average environmental underwriter’s hit ratio. • Our retention ratio (yours) is 4 times better than the average wholesaler retention ratio. • Our target market insurance designs are best in class. • We offer true world class subject matter expertise. Translation, we help producers win and retain business • We significantly reduce your errors and omissions loss exposures from defective insurance placements. 4 © 2012 ARMR. Network, LLC

It Is Important To Know A Pollutant When You See One • The case of Blue Fungus Death and the fish kill. • You sometimes never know what a “pollutant” is or what it can do until after a loss. • This case example is an actual loss involving a “pollutant” I am calling Blue Fungus Death today. • If you can guess the true identity of the Blue Fungus Death in this test tube; You will win a free sample to take home or use today! 5 © 2012 ARMR. Network, LLC

Fact Sheet • All the information I am providing about the blue material in the test tube is fact and is true. • Blue Fungus Death, (A stage name) fits the EPA’S definition of a hazardous material (reactive, corrosive, toxic or flammable. ) • Blue Fungus Death is a fungus produced toxin. • Weaponized Blue Fungus Death is known to kill humans, plants and animals. 6 © 2012 ARMR. Network, LLC

Fact Sheet • The Blue Fungus Death in this test tube has been weaponized up to a concentration of 505, 000 parts per million. • Blue Fungus Death has killed fish at 1 part per million. • The material in the test tube really is Blue Fungus Death, but I have altered the color to make it more difficult for you to identify it. • The toxin itself is actually a clear liquid. 7 © 2012 ARMR. Network, LLC

Fact Sheet • Blue Fungus Death is weaponized in a process similar to gasoline refining. • The weaponized version of Blue Fungus Death is sold as a “Product” at concentrations of 400, 000 and 505, 000 parts per million. • Unlike gasoline, which floats on water, Blue Fungus Death is perfectly water-soluble. • Gasoline sells for $3. 25/gallon, Blue Fungus Death sells for about $60/gallon. • You can buy Blue Fungus Death over the counter, but it is not blue. 8 © 2012 ARMR. Network, LLC

Fact Sheet • Blue Fungus Death is federally regulated. • Blue Fungus Death is not regulated by the EPA. • Blue Fungus Death is produced in only one place on earth. 9 © 2012 ARMR. Network, LLC

The Blue Fungus Death Fish Kill • May 9, 2000 - As a result of a fire at the only processing facility in the world for this product, runoff containing Blue Fungus Death reached a river. • This river supports barge traffic. • May 11, 2000 - Blue Fungus Death at concentrations of about 1 part per million of the river volume of water, set off a record setting fish kill in 66 miles of river. • Fish were killed from shore to shore, surface to bottom. • Rafts of dead fish floated to the surface 10 © 2012 ARMR. Network, LLC

Now Guess The Identity Of Blue Fungus Death - To Win The Free Sample 1. First proof that the material in the test tube really is a hazardous material. (Do not try this demonstration at home) 2. What is the true identity of the blue material in the test tube? 3. Now a free sample of Blue Fungus Death for the lucky winner! 11 © 2012 ARMR. Network, LLC

Now The Rest Of The Story • This loss really did occur in the Kentucky river. • The fish died as a result of an algae bloom caused by the alcohol, not the alcohol itself. • The fish exposed to the alcohol were happy fish. • The decomposing algae used up all the oxygen in the water. • Without oxygen the fish died days after the spill. 12 © 2012 ARMR. Network, LLC

Pollution Exclusion Facts • The ISO standard General Liability policy Pollution Exclusion F. is commonly referred to as the Absolute Pollution exclusion. The word “Absolute” does not appear in it and it does not absolutely exclude all pollution losses. • Products and Completed Operations losses are not excluded by the ISO “Absolute” Pollution Exclusion in the Commercial General Liability insurance policy. • Losses as a result of a Hostile Fire are commonly exempted from the GL pollution exclusion. 13 © 2012 ARMR. Network, LLC

The Loss: From An Insurance Prospective • How does the pollution exclusion in the GL policy apply to the loss? The pollutant was still at the insured premises, it was not a “product”. Exclusion F. applies. • Are “Natural Resource Damages” considered “Property Damage”? Not really. • Is a Clean Water Act violation considered property damage? Not really. • Are the dead fish in the river covered by the debris removal section in the property policy? No the dead fish were off the insured premises. 14 © 2012 ARMR. Network, LLC

Lesson Learned From The Wild Turkey Spill • In sufficient quantities, any material can have unanticipated environmental impacts. Drywall? • Environmental damages do not follow standard insurance policy definitions of loss. • The effects of pollution exclusions cannot be accurately forecasted pre-loss because of the timing of environmental damages. • This loss was paid because the proximate cause of the loss was lightning and the insurance company was being nice. What if the loss was caused by vandalism? 15 © 2012 ARMR. Network, LLC

Environmental Loss Exposures - The Basics Environmental liability is created by statute Liability can attach to your status not just your actions Liability can follow the title to land Liability follows waste streams from cradle to grave This statutory liability lasts forever, it is strict liability, that applies jointly and severally • Historically applied mostly to Hazardous Materials that may damage human health and the environment • Fungus/mold /bacteria exclusions were game changers • Today water creates “environmental” loss exposures that are newly uninsured • • • 16 © 2012 ARMR. Network, LLC

Pollution Exclusions, The Basics • Bar insurance recoveries on liability and property policies • Have never been limited to “Hazardous Waste” • Essentially apply to losses associated with “contamination” • Excluded “contaminates” can vary state to state • Nobody knows how a pollution exclusion will apply to a loss before the loss event happens • Always plan for the broadest application of pollution exclusions in property and liability insurance program designs for your clients 17 © 2012 ARMR. Network, LLC

Environmental Insurance - The Basics • Environmental Insurance fills coverage gaps created by various forms of pollution exclusions in property and liability insurance policies. • Over 140 different environmental insurance policy forms are available. • There are no industry standards for environmental policy forms and there is great variation between them. • Insurance is available for everything from a single UST to a nuclear bomb plant clean up contractor. 18 © 2012 ARMR. Network, LLC

Basic Environmental Insurance Products • Site specific- Environmental Impairment Liability – Sold as Pollution Legal Liability, Site Pollution Liability, Pollution and Legal Liability and many other brand names. – Insures specified sites a can include products pollution liability non owned disposal sites, transportation, UST’s • Contractors Environmental Liability – Sold as Contractors Pollution Liability and other brand names – Insures losses from described operations, can include non owned disposal sites, transportation and office/yard exposures • Professional Liability • Hybrids combine GL, Pollution and Professional coverage parts 19 © 2012 ARMR. Network, LLC

Environmental Impairment Liability • Site Specific Pollution Liability Insurance • Covers third party claims for Bodily Injury, Property Damage, First Party No Fault Clean Up of Pollutants /Mold and Defense • This is the preferred policy form to insure mold risks in buildings. • Specially modified versions of this insurance is now needed to comply with insurance specifications requiring All Risk property coverage. 20 © 2012 ARMR. Network, LLC

Contractors Pollution Liability • Insures Bodily Injury, Property Damage, Clean Up and Defense, from a release of “Pollutants”, arising from the insured’s described operations: – Appropriate for general contractors, home builders, remediation contractors, roofers, plumbers, trades, fire restoration, ect. • For mold exposures beware of exclusions for “Your Work”, “Impaired Property” “Subcontractors” and “Claims Arising From Materials Supplied By The Insured”. 21 © 2012 ARMR. Network, LLC

The Basic’s - Who Needs What Type Of Environmental Insurance • EIL is needed by all owners of commercial property the only limiting factor is minimum premium. Apartments, condos, hotels, resorts, schools, shopping malls, office buildings, ware houses, farms, oil wells, all forms of wasted disposal operations, mines, pipe lines, utilities… • Contractors Pollution Liability is needed by every contactor in the US that can be associated with a water or contamination loss. • Insurance advisors need to keep the notion of hazardous waste out of your thinking when advising on environmental loss exposures. 22 © 2012 ARMR. Network, LLC

State Of The Market Contractors Pollution Liability • Minimum Premium $3500/ with mold coverage • Minimum SIR $3, 000 • Typical rates for $1, 000 limits – – Fire water damage restoration 1/3 of 1% HVAC 1/10 of 1% Mold Remediator. 5% of revenue General Contractor 1/10 of 1% of revenue • Similar rates for CPL covering Chinese drywall – Backed dated CPL coverage is available to address previously uninsured years. 23 © 2012 ARMR. Network, LLC

State Of the Market EIL • Minimum Premium about $4, 000 • Over $200, 000 in Market Capacity • Typical pricing for $1, 000 limit – – – – 24 Salt water disposal well, $12, 000 Oil Wells Landfill, $10, 000 Waste Lagoon $7, 000 Underground storage tanks $1500/tank Bulk Oil Storage $8, 000 Apartment units $7/unit Hotel $6, 000 © 2012 ARMR. Network, LLC

Hot Topics and Opportunities • Fungus/ Mold/Bacteria exclusions increase the need for various forms of environmental insurance policies dramatically. • These exclusions effectively make some water losses a excluded “pollutant” • Technical insurance expertise is much more important than it once was in this line of coverage. • The hard insurance market is creating opportunities to write new business 25 © 2012 ARMR. Network, LLC

My target accounts, 1980 -2005 26 © 2012 ARMR. Network, LLC

A Nice Target Account Today 27 © 2012 ARMR. Network, LLC

A New Source Of Lethal Pollutants 28 © 2012 ARMR. Network, LLC

Really Important Things For Insurance Brokers To Know About Mold and Bacteria • They are omni present on the planet earth • Moisture on drywall leads to mold growth on the drywall within 72 hours at room temperature – every time • All water in a drain pipe is classified as Category 3 Water – Category 1 water is drinking water – Category 2 water comes from washing machines for example – Category 3 water has bacteria and other contaminates in it • All water in a drain pipe is Category 3 water • Flood water is Category 3 water, so are tidal surges 29 © 2012 ARMR. Network, LLC

Food Services And Hotels Are Good Prospects for New Business • Legionnaires disease is cause by legionella bacteria. • Food borne illness is caused by bacteria. • Pollution exclusions did not work very well to exclude mold and bacteria related losses. • So ISO invented some new exclusions for losses associated with these contaminants. 30 © 2012 ARMR. Network, LLC

What Everybody Missed In Universal GL Mold/Bacteria Exclusions • Fungi and Bacteria are omni-present on the planet earth. • The “threatened existence of, or presence of, any "fungi/bacteria“(note the exclusion does not say how much or what kind) on or within a building” is a certainty in every building in the world. • If only a speck of these materials is involved in any sequence in the loss the exclusion eliminates all the GL coverage on the loss, not just the fungus/mold/bacteria part of the loss! 31 © 2012 ARMR. Network, LLC

A Common ISO Based Fungi & Bacteria GL Exclusion This insurance does not apply to: a. "Bodily injury" or "property damage" which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any "fungi" or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage. b. Any loss, cost or expenses arising out of the abating, testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of, or responding to, or assessing the effects of, "fungi" or bacteria, by any insured or by any other person or entity. This exclusion does not apply to any "fungi" or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption (the Blue Cheese exemption) emphasis added 32 © 2012 ARMR. Network, LLC

A Wake Up Call For Insurance Brokers • What does a plumbers completed work do that might cause damage? • Slow leaks that reach dry wall not discovered within 72 hours (Mold) or all water loses from a drain pipe are now effectively excluded in the General Liability policy • What completed operations coverage is left on a plumber’s GL policy today? • What does roofers completed operations do that can cause damage? • Many other classes are similarly affected. 33 © 2012 ARMR. Network, LLC

Why Hotels Need Environmental Insurance Marjorie Braucher and Bonnie E. Leiser alleged that the swimming pool and hot tub at the Comfort Inn of Lincoln, Ill. , d/b/a Best Western of Lincoln, Ill. , were infested with Legionella bacteria. Marjorie’s daughter died from legionnaires disease. The lawsuit brought by the family against the hotel was for causing the wrongful death of their daughter. (AMCO Insurance Co. v. Swagat Group LLC, d/b/a Comfort Inn of Lincoln, et al. , No. 07 -3330, C. D. Ill. , Springfield Div. ; 2010 U. S. Dist. LEXIS 4770; See 2/19/09, Page 4). 34 © 2012 ARMR. Network, LLC

Illinois Case Law On Bacteria Caused Losses Both a general liability policy and an umbrella policy exclude coverage for bacteria-related liability, an Illinois federal judge found Jan. 21, granting an insurer's motion for summary judgment seeking a declaration that it had no duty to defend its insured hotel owners and operators against underlying claims that guests contracted Legionnaire's disease from the hotel Translation - there is no liability insurance protection at all on the GL policy in Illinois for losses associated with bacteria due to the fungus/ mold/bacteria exclusion endorsement. 35 © 2012 ARMR. Network, LLC

The Rest Of The Story • The GL and Umbrella Policies sold in 2005 had the new ISO based fungus Bacteria Exclusion Endorsement • The policies in 2004 did not have this exclusion endorsement • In 2011 the hotel owner sued the insurance agent who sold the restrictive policy in 2005 for malpractice – Failure to advise – Failure to offer coverage • Environmental insurance with bacteria as a pollutant was not available in 2005 (a viable defense) • But is has been very available since 2009 36 © 2012 ARMR. Network, LLC

Case Study - Mold Exclusions In Effect Property Insurance • A windstorm breaks $100, 000 of windows in a hotel. Wind driven rain enters the building. Unable to dry the building within three days mold grows throughout the building. – Remediation takes 6 months and costs, $500, 000. – All contents need to be replaced, $500, 000. – Business interruption, $500, 000. 37 © 2012 ARMR. Network, LLC

Mold Losses On Property Insurance Coverage • Traditional Mold Exclusion – The proximate cause of the loss was wind driven rain. – Mold was an ensuing damage from a covered peril • Therefore the entire loss $1, 600, 000 is covered © 2012 ARMR. Network, LLC • Mold Related Claims Exclusion – The glass is covered – The other damage was caused by or contributed to by mold; it is now sublimited usually to $25, 000 • Therefore only $100, 000 + mold sublimit is covered • What will the owner and lender think of this settlement? All Risk?

Actual ARMR Mold Claim • A plumber installs defective toilet wax o-rings during the remodeling of 200 apartments for an ARMR client. – ½ leaked, causing “pollution” and mold related losses. – Each leak causes $100, 000 of damages X 100 toilets= loss. – The All Risk Property carrier denies the pollutant/mold related loss. – The GC and Plumber have the same exclusions on their GL. – The EIL/mold DIC policy on the owner is pays $4, 000. – The owner is short $6, 000 plus legal expenses. – The GC and Plumber will eventually go under. – Their insurance agent might be along for the ride. 39 © 2012 ARMR. Network, LLC

Tips For Surviving And Thriving With Pollution, Mold & Bacteria Exclusions Explain the loss exposures to customers. Point out the exclusions and discuss their effect. Always offer appropriate coverage. Utilize premium indications to save time. Use ARMR subject matter expert resources to help with this process. • Do not waste time with applications and getting quotes for an unqualified buyer. • • • 40 © 2012 ARMR. Network, LLC

• How To Mess Up A Environmental Insurance New Business Production You are filling out a. Opportunity pollution insurance application before you know: – – What insurance the customer needs How much they are willing to pay for it Which underwriter has the right policy form Which underwriter can get you to the price the customer will pay • You are proposing an environmental insurance quote before you have: – Established the need – Pointed out the gaps in the existing coverage 41 © 2012 ARMR. Network, LLC

How To Improve Your Closing Ratio On Environmental Insurance By 700% Traditional Sales Process – – – 42 Complete applications Obtain multiple quotes Choose the best one Propose Hopefully get an order Somebody will bind it © 2012 ARMR. Network, LLC The ARMR Process Figure out the need Craft a placement Benchmark the price Sell it Get one application Get one quote Turn around in less than two weeks – You should bind every time – – – –

Hot New Business Production Opportunities • Fire & Water Damage Restoration Contractors – 95% of these firms have fundamental coverage defects in their current insurance program. – 25% have fraudulent insurance certificates of insurance outstanding. (coverage's certified that are not on the policy) – ARMR’s hit ratio on new business in the sector is > 70%. – The local restoration contractors are prospecting your office looking for referrals what is easier than prospecting someone who is prospecting you? – ARMR offers the best insurance products in the world for this class of business. 43 © 2012 ARMR. Network, LLC

Contractors Pollution Liability • CPL insurance was invented by the current ARMR team in 1986 to insure contractors working on Superfund sites • CPL is now needed for any contractor who may become involved with a water loss • Admitted, occurrence based CPL policies are available thru ARMR for $2500 • Rates for artisan and general contractors are usually 1/10 of 1% of the contractors total revenues. • One in a hundred contrators is properly insured today 44 © 2012 ARMR. Network, LLC

State of the Art General Contractors - Gap Filler Policy • One policy fills the coverage fills the gap in the GL for pollution, mold and professional loss exposures • The need for this coverage is easy to establish – GCs have significant uninsured professional, pollution & mold risks now – Have the customer read their exclusions • Premium = usually 1/8 th of 1% gross receipts • $10, 000 Minimum Premium • Every GC over $15 million in revenue needs one of these policies today. 45 © 2012 ARMR. Network, LLC

Environmental Services Sites, Transporters, Contractors, Engineers • GL/CPL/Professional/Work Comp and Excess all with Nautilus • There can be glitchiness in the current coverage’s • ARMR has in-depth expertise in the sector • A harder insurance market is throwing some of these accounts into non renewal 46 © 2012 ARMR. Network, LLC

The ARMR PERM Product (Property Environmental Risk Management) • Features exclusive, free water intrusion loss control services • EIL based insurance product • Fixes coverage gaps in GL and Property policies created by pollution, fungus/mold/bacteria exclusions. • Needed by all building owners, condo associations apartment complexes, shopping malls, public entities , REIT’s, office buildings, schools, virtually all commercial buildings • Premiums are based on the Property Schedule, MP $6, 000 47 © 2012 ARMR. Network, LLC

Avoiding The Pitfalls In Environmental Insurance • The professional liability loss exposures are extremely high for insurance producers in this line of coverage; - Failure to advise and offer coverage can get you sued - Selling the wrong coverage can get you sued 48 © 2012 ARMR. Network, LLC

The Professional Liability Loss Exposure In Environmental Insurance Is Extreme • Litigated claims from just 4 defective environmental insurance placements exposed the big 3 brokers to $300, 000 in professional liability claims. • A insurance audit on 18 fire water damage restoration contracting firms this year revealed insurance certificate fraud in 18 out of 18 insurance programs reviewed– (the coverage shown in the certificate that was not on the policies as it was represented on the certificate) 49 © 2012 ARMR. Network, LLC

Avoiding Environmental Insurance Pitfalls • Avoid professional liability by – – Advising of the loss exposure Point out the effects of pollution exclusions Offer environmental insurance with a recommendation to buy Use premium benchmarks not quotes for efficiency • Never bind a environmental insurance policy that has not been reviewed for its efficacy on that account by qualified specialist. • ARMR can help you through the entire process 50 © 2012 ARMR. Network, LLC

The Broker E&0 Traps With Project Specific CPL Policies • Buying Occurrence based CPL does not provide completed operations coverage. • To have a covered claim both the pollution event and the resulting damage must take place within the policy period. • Only claims otherwise covered during the policy period apply to the Extended Reporting Period. (ERP) • Project CPL policies need to have policy terms of at least 7 years. • Blanket CPL on the firm is almost always a better choice. 51 © 2012 ARMR. Network, LLC

Professional Errors and Omissions Loss Prevention Tips • Advise customers that they need environmental insurance • Never propose coverage without the policy forms and endorsements being supplied • Never select or recommend coverage without performing a forms comparison first • Always ask to see the actual insurance specifications in contracts asking for environmental insurance 52 © 2012 ARMR. Network, LLC

Environmental Insurance Can Be Profitable and Fun! • Let ARMR help you: – – identify environmental loss exposures evaluate existing insurance coverage's, benchmark pricing and design/place environmental coverage • We can help you round out your book • We can help you with strategies to win on new business by playing the ARMR Resources card! 53 © 2012 ARMR. Network, LLC

Environmental Insurance Presents Opportunities and Risks • Do not ignore the environmental risks and new business production opportunities in your book of business and prospect base. • Offer environmental insurance from a bench marked premium indication from ARMR to every commercial account. Thank you for the opportunity to make this presentation today! 54 © 2012 ARMR. Network, LLC