A Wall Street Journal article (6/6/96) summarized the environmental service industry as follows: "These are lean times for an industry that was supposed to get fat cleaning up the environment." Significant changes within the industry continue, which has created the need for new insurance products and services. The Environmental Service Business Unit often anticipates industry change and responds with enhanced products, new programs and improved risk management services.

Industry changes translate into different motives among the various environmental services firms for purchasing insurance. Additionally, loss control and risk management needs are shaped by the size of the firm and the scope of services it offers. Brokers who are educated in the implications of today's trends and who anticipate needs will be better prepared to serve their environmental clients.

Mergers and Acquisitions

Increasingly, many medium-size regional consulting/contracting firms are realizing that they cannot operate efficiently in the changing marketplace and are often prime targets for acquisition. Consolidation is creating international firms with revenues up to a billion dollars. These firms are actively soliciting opportunities abroad along with focusing on the many large contracts that are being bid by the Department of Defense and Department of Energy.

As companies merge, often the integration of two totally different insurance programs into one program can present many difficulties for the risk manager, insurance broker and underwriter. First, one must determine the insurance coverages each of the firms currently has in place. For environmental service firms, this normally goes beyond the standard commercial property and casualty coverages to include pollution and/or professional liability coverage. Since many of these coverage forms are drafted by the individual insurer, no two forms are exactly alike. Therefore, these policies must be reviewed carefully to determine that no coverage is lost in the transition. Also, it is not uncommon for one company to have a claims-made casualty program while another has an occurrence program. When moving from a claims-made to an occurrence program, it is important to make sure the carrier provides innovative solutions to prevent coverage gaps.

Additionally, as firms merge and grow larger their insurance buying motivations often change as they realize the need for greater asset protection. Large firms are often looking for innovative risk management solutions to assist in handling both environmental and nonenvironmental loss exposures. Based on their size, many of these firms are taking substantial retentions — from $150,000 to over $1 million — and are looking to purchase limits of liability in excess of $100 million. In addition, we have seen some firms attempt to manuscript their own forms that combine many lines of coverage under one coverage form and a large limit of liability.

Mid-market firms that continue to survive in this changing marketplace are looking for standardized commercial insurance programs to address their loss exposures. Since these exposures can be either operational, environmental or professional in nature, mid-market firms continue to look for an insurer that can provide General Liability, Auto, Workers’ Compensation, Property and Inland Marine — in addition to professional liability and pollution coverage. It is also very important that they work with an underwriter who has the technical knowledge to understand their business and to further assist them in managing their risks and preventing claims.

Aside from the few hundred large and medium-size environmental firms, the marketplace is heavily concentrated with many firms generating less than $3 million in annual revenues. These smaller firms have different needs and buying motivations. They tend to be more niche-oriented and seek cost-effective coverages to address the liabilities arising from their operations and to meet the contractual requirements of their clients. These firms are predominately purchasing the combined insurance programs offered by insurers today.

Sole Source Delivery And Privatization

As few as five years ago, you could identify pure environmental firms. However, this is no longer the case. The clientele for environmental contractors and consultants is increasingly expecting "sole source delivery" from these firms. Sole Source Delivery encompasses a wide range of services from identification and analysis, remediation, design/build, operation and maintenance, to oversight — including the retention of subcontractors and subconsultants. As a result, environmental consultants/contractors are assuming project management roles...and facing new liabilities.

Municipal governments have recently become very interested in the concept of sole source delivery as they turn to the private industry to help solve the problem of old and obsolete water and wastewater treatment systems. Some analysts predict that over the next 20 years, up to $150 billion will be spent on replacing or updating aging water and wastewater systems. Unfortunately, very few municipal governments have the tax dollars to spend on these upgrades and therefore are turning to private industry for assistance. Many of the contracts being bid require the environmental service firm to assist in the financing of the project. These firms are allowed to earn their profit on the job under a Build, Own, Operate, Transfer (BOOT) agreement. Under these contracts, the environmental service firm actually gets into the business of operating a water or wastewater treatment plant for a period of time.

As environmental service firms continue to take on more liability under sole source delivery and BOOT contracts, it is critical that the insured and their broker review their existing insurance program to determine adequacy of their current coverage. Many environmental consultants who previously purchased only professional liability coverage will now need to explore expanded general liability and hands-on pollution liability protection that may arise from their job site activities. In fact, many pollution and professional policies may exclude coverage if the insured has an ownership or equity interest in the job site. The insured should be sure that their insurer has the ability to make the appropriate amendments to the policy form in the event they enter into a BOOT agreement.

As these firms move into a contracting or operational role, many of their clients will require surety coverage in order to be considered for the job. This places a tremendous burden on the insured to firm up their balance sheet in order to meet the surety underwriter’s requirements. The burden to meet such requirements is a factor contributing to the many acquisitions we have seen in the industry, with more firms continuing to unite in order to improve their capital positions. Environmental service firms that are able to work with an insurer that has both insurance and surety capabilities are often in a better position to pursue these jobs for an important reason — these underwriters occasionally will look beyond the balance sheet when making a surety decision due to their greater understanding of the overall industry.

Globalization

Many environmental firms are beginning to look abroad for new business opportunities. Many industry sources predict that firms doing business abroad will continue to see double digit growth rates for the next few years. Expansion abroad creates many new challenges as firms learn to deal with different cultures, governments and legal systems. Claims against US companies doing business abroad can be expensive and complex.

As environmental service firms continue to send their employees abroad to perform work, it is necessary to determine whether the existing insurance program will follow the employee abroad. Many insurers providing pollution or professional liability coverage have the ability to provide worldwide coverage under these policies. However, there may be some limitations concerning where the suit must be brought against the insured and/or the extent of defense protection that may be provided. In addition, work performed by employees in foreign countries may require special general liability and workers’ compensation protection. Insurers with global resources of their own are often in a better position to address the unique loss exposures presented by work performed abroad.

Owner Controlled Wrap-Up Programs

From the project ownership perspective, an increasing trend is for the owners of the sites to comprehensively address the liabilities arising from an environmental job. Increasingly, owners are turning to an insurance carrier to develop programs that can address the liability they face as owners , as well as extend coverage to the contractors and consultants who actually perform work at the site. By obtaining Owner Controlled Wrap-Up Programs, the owner is able to address their liability and that of the contractors/consultants working on the site without relying on individual insurance certificates. Wrap-ups can address professional liability, pollution and casualty loss exposures. The benefits include:

• dedicated limits for the project owner and all contractors/consultants
• terms/conditions negotiated specific to project and associated exposures
• tailored to specific needs
• owner control of cost, duration and breadth of project
  • claims handling and dispute resolution processes developed specifically for the organizational structure of the project.

In many cases the owner and contractors/consultants may realize a cost benefit by purchasing a Wrap-Up program since economies of scales are often recognized by purchasing one insurance program based on the entire contract cost and giving one insurer control of all the loss control and claims handling responsibilities. This is in contrast to each contractor or consultant providing their own insurance.