The movement of business from the standard market to the Excess and Surplus market and back again is a continual process. Whenever rates soften and capacity is underutilized, standard carriers entertain more and more environmental risk. While a degree of this is certainly acceptable, there is a point where the standard market cannot adequately address the coverage needs of the environmental insured. Agents and brokers need to be careful about identifying, and not crossing, this line.
The reasons for writing business in the standard market over the E&S market are well known. Regulatory review of rates and forms, coupled with the security of a State Guaranty Fund provide a great deal of protection for the insured and agent alike. In a marketplace challenged by as much uncertainty as the insurance industry faces today, this difference cannot be overlooked. For many agencies, placement outside of the admitted market is not even considered except for the most challenging risks.
The security represented by the admitted market unfortunately carries inherent weaknesses for some insureds. While the review and approval process for forms and rates confirms that coverage is adequate and rates are fair, it also limits a carrier to using those forms and charging those rates. While in many cases this is fine, in others where the exposure is complex it may be severely limiting. Often this is the case when dealing with environmental policies. Additionally, it can easily lead to insureds with slightly complicated operations simply being declined outright.
E&S carriers, on the other hand, have the ability to craft coverage specifically for their client, and charge rates that make them comfortable assuming the level of risk required. Insureds are then given the option of purchasing that coverage, or choosing not to. This makes the consumer the ultimate arbiter of whether a rate is acceptable, or fair, or not.
That still leaves two components of the situation unresolved. The first is the security of the company offering the coverage. Being an admitted carrier does not necessarily mean that a company is a particularly strong one. It does however mean that a state’s regulators are reviewing the company carefully. With E&S carriers the only regulatory body doing the review is the home State of the company. In this situation it is crucial for the agent to select an E&S carrier that is well rated. There are many excellent insurance carriers functioning on an E&S basis that are closely related to their admitted counterparts.
The final unresolved issue is perhaps the most critical of all: Coverage. If the state is not approving forms, how can the agent know he or she is selecting the best possible coverage for the client? Or even acceptable coverage? This of course varies by line of business, but a few principals remain constant. The first is that the agent needs to recognize and accept responsibility for reviewing and understanding the forms being offered. The next step is to be sure the agent is working with carriers who have a good reputation in the segment of the industry in question. The final important step is to get multiple sets of terms to review. By doing this, and comparing one to the other, an agent can begin to understand not only what the carrier is offering, but what is available to the client in the wider marketplace.
One of the real strengths of the E&S market is that once agents develop this understanding, they can then go to the carriers they are working with and try to improve the coverage being offered. Because of the flexibility inherent in the E&S market, carriers can decide where to expand coverage, as well as where to reduce it. Utilizing a large array of standard endorsements along with the ability to manuscript others, E&S carriers can fine tune coverage to be exactly what the agent and insured want.
The value of the general E&S market’s flexibility can be seen clearly when working with environmental products. While there are a several admitted programs offering environmental policies, the vast majority of the sizeable pollution marketplace is written by E&S carriers.
As with most situations, the most consistent types of coverages are often offered by admitted carriers. A clear example of this is coverage for Underground Storage Tanks. This type of insurance coverage is an option for those tank owners and operators wishing to comply with the EPA financial responsibility requirements. The policies must be written in a very precise way to provide compliance with the governing regulations. What we end up with are policies that are very similar, with a few coverage differences, much like admitted market commercial property coverage. There is little or no need for manuscripting endorsements, so the admitted approach works wonderfully. If something unique does come up, most admitted carriers have an E&S company relationship who would take over the account.
Unlike storage tanks, the majority of site specific pollution policies are written in the E&S market, generally for good reason. Take the example of an oil refinery seeking both on and off site cleanup coverage, as well as BI & PD. The insured and his agent have gotten together, assessed the overall exposures, and decided the risk they most want to transfer is the one arising from the storage of fuel. The refinery has several million gallons of above ground fuel stored, and a catastrophic release could be financially crippling. They are not concerned about the possible presence of asbestos containing materials in their old buildings. Many carriers are willing to assume the risk of the fuel spillage, but not necessarily, given the information available, the asbestos in place. E&S carriers can craft coverage that addresses exactly what the insured wants to address. An admitted market may wish to do the same, but be prevented from doing so by the forms they have filed. This will often lead to a declination.
A similar limitation in the same scenario comes from filed rates. A carrier who has filed rates, credits, and debits may be unable to charge what is necessary to bear a certain risk. In the previous example, an older site with significant storage may fall outside of the rating parameters approved. The carrier is forced to either write for far less than the risk should bear, or again, decline.
Beyond just basic acceptability and pricing, E&S carriers have the tools to significantly modify and enhance the insured’s coverage. A site specific pollution policy can often be written with coverage for non owned disposal sites, natural resources damages, diminution of value, phantom tanks, and more. Standard carriers rarely are equipped to offer such a wide range of enhancements.
Contractors’ coverages suffer from limitations as well. Many standard companies writing contractors currently provide some form of Contractors Pollution Liability (CPL) coverage for the job site. However, the breadth of that coverage varies widely. Some are limited to sudden and accidental spills, such as a drum of lubricating fluid being knocked over. Others only cover pollutants on the surface of the soil. Some require the contractor to be on the site when the accident occurs. Still others only provide coverage for specified pollutants. For contractors wishing to transfer their environmental exposures more completely, there are limited admitted markets, and many of those suffer from the same flexibility issues.
E&S carriers are often willing to provide full sudden and gradual coverage to contractors, including such enhancements as loading and unloading, off site transportation, limited premises storage of waste, extended completed operations, and more. In addition, carriers can craft unique endorsements for specific project requirements that may come up during the policy term.
In addition to the more standard environmental coverages outlined above, E&S carriers are able to write coverage for a wider range of risks. Transportation Pollution Liability, or over the road pollution, is available to provide pollution for the transportation of materials, whether they be fuels, chemicals, or wastes. Carriers write coverage for asbestos and lead in place, as well as for the cleanup or associated BI & PD relating to toxic mold.
While the security offered by admitted carriers is very important, the overall effectiveness of an insurance program is equally as important. In today’s environmental market, there are well over twenty A.M. Best “A” rated or better carriers offering these coverages. Often these are sister companies to well known admitted carriers. Finding the right balance between insured, carrier, coverage, and cost is crucial.
Agents can access this coverage in several ways. For agents and brokers equipped to handle Excess and Surplus lines taxes themselves, one approach is to go to large, nationally recognized environmental insurance companies. These companies are well known and many agents will already have appointments with them.
Another is to seek out smaller, lesser known but still well rated carriers. These are found through Web searches, review of print publications, and by word of mouth. Many of these carriers, while less advertised, still have excellent track records of writing environmental insurance.
Still another approach is to go to a generalist wholesaler to see what they have to offer. Many wholesale brokers can access a number of products. In those situations, assessing the strength of the carrier offering coverage, and the adequacy of the coverage being offered, are crucial. It is important to talk with the broker and gauge their level of expertise before relying on them. Ultimately it is up to the agent to be comfortable that the product being offered is appropriate for their client.
The final option is to work with a specialty broker. There are several national brokers who focus exclusively on environmental coverages. They can typically bring agents proposals from a number of high quality markets, several of whom are only available to the wholesale marketplace. Many of these brokers have a great deal of product knowledge to share with their agents, adding real value to the process. They can help the agent understand the intricate coverages being offered, as well as any enhancements that are available for the specific exposure.
While the admitted market provides many very important benefits to agents and their clients, the highly complex coverage required by many environmental risks often makes the Excess & Surplus marketplace the better choice. As long as the agent uses care and diligence in exploring this segment of the market, they can find high quality, effective coverage for their client
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