Sealing the Deal.

Environmental insurance is chalking up greater premium volume as it eases the development of potentially polluted sites.

Environmental insurance is becoming a key to unlocking the business opportunities sprouting from the redevelopment of 450,000 "brownfield" sites, abandoned industrial properties whose potential pollution liabilities long kept them idle.

Other markets are proving to be fertile ground for the growth of environmental insurance, too. In mergers and acquisitions and real-estate transactions, environmental insurance smooths negotiations by transferring potential environmental liabilities or by limiting cleanup costs for contaminated sites. Increasingly, secured creditor environmental policies are becoming a more common method of protecting investors in securities that are backed by pools of commercial mortgages.

The lure of profits in this evolving market is attracting new players at the same time that advances in underwriting are enabling insurers to craft more flexible products to cover the risks.

"Insurance companies now have the technical skills and experience with transactions to underwrite the risks," said Rodney Taylor, the managing director of the Willis environmental practice, based in New York. Taylor estimated that environmental insurance generates about $1 billion in annual premium industrywide.

The market for environmental insurance ranges from multimillion-dollar deals between Fortune 500 corporations to transactions involving small and midsize businesses. Environmental insurance was a piece of a massive insurance package that Willis put together to cover risks associated with the ongoing stabilization of the Chernobyl nuclear plant in the Ukraine. RSA Surplus Lines, a division of Royal & SunAlliance, wrote a remediation cost-containment policy to facilitate the sale of a gas station between members of a family.

Market Potential

Insurers have found a ripe market for environmental insurance in 1,700 U.S. military installations currently being cleaned up and closed under the federal government's base realignment and closures process. Willis is working on a deal to convert a military base into an amusement park. The transaction involves private business and government entities, including the General Services Administration, the U.S. Army, remediation contractors and developers. Given the complexity of the transaction, the policy must be custom-tailored.

"Three to five years ago, we couldn't have done the deal. We couldn't have structured protection because we didn't have adequate limits. Underwriters would not have been able to provide protection for these large-scale projects" Taylor said. During remediation, a developer can purchase products like pollution liability; cleanup cost-cap protection, which covers cost overruns in a cleanup; or contractors pollution-liability policies, which protect environmental contractors against claims for third-party bodily injury, property damage or cleanup costs.

One of the companies most active in insuring the redevelopment of military bases is ECS Underwriting Inc., Exton, Pa., which was acquired by Bermuda-based XL Capital Ltd. last year. In November, ECS said it wrote a program for the redevelopment of the 1,100-acre former Orlando Naval Training Center in Orlando, Fla. The base is expected to be transformed into a "town center," complete with a medical center, shopping, housing and, eventually, an elementary school and several public recreation areas.

The coverage protects the site's developer, Orlando NTC Partners, the city of Orlando and any future owner of the property from potential environmental and financial liability during and following the redevelopment of the property. The policy covers any unknown contamination that might be discovered after the U.S. Navy's cleanup of the property and any additional remediation costs that might arise as a result of future changes in environmental regulations or cleanup standards.

In addition to the Orlando site, ECS wrote coverage for Lowry Air Force Base in Denver; Kelly Air Force Base in San Antonio; the Naval Ship Yard in Philadelphia; Fort Sheridan in Highland Park, Ill.; the David Taylor Research Center in Annapolis, Md.; Watertown Arsenal in Watertown, Mass.; and the Glenview Naval Air Station in Glenview, Ill.

The custom approach to designing these policies is a departure from the earlier generation of environmental insurance products. Policies developed in the 1980s and prevalent through 1995 were expensive and provided limited coverage.

Products designed to meet the requirements of specific development plans are increasingly recognized by attorneys as important risk-reducing components, Taylor said.

That's translated into growth for insurers and brokers. Last year, Willis' environmental practice grew 34% over 1998. "We've never grown less than 25%," Taylor said.

Two years ago, Miller & Associates, a national environmental insurance broker in Scottsdale, Ariz., initiated environmental insurance coverage for 250 properties. Within a year, it had written coverage for 2,000 properties. "In 1999, we did just under 4,000 properties and expect to triple that number this year," Vice President Bill Havard said.

In response to growing interest in environmental insurance, Duff & Phelps Credit Rating Co., Chicago, released a report in December that defined what kinds of secured creditor environmental insurance policies it considered acceptable in its ratings of commercial mortgage-backed securities. The policies ensure that investors receive full payment for any loan that defaults and has an environmental condition. "More and more, CMBS originators are considering using environmental insurance," the report stated, typically in place of environmental site assessments.

Because of the growing use of these policies for commercial mortgage-backed securities, Duff & Phelps urged insurance companies to develop base policies for the capital markets. "Issuers and rating agencies alike are frustrated by the time it takes to negotiate each of these policies," the report said.

New Faces

While the old guard of environmental insurance--American International Group, ECS and Zurich Insurance Group--handle the majority of the business, newcomers are entering the market. Kemper Insurance Cos. entered the market about two years ago and grew quickly. When Royal & SunAlliance discovered how profitable the line could be, it brought in Deanna Sidoli from AIG Environmental a year ago to head up the operations that sell directly to wholesale brokers. "The pure loss ratio in environmental insurance was in single digits, and the 10-year pure loss ratio was 11 as opposed to the industry's 105," Sidoli said of AIG's results.

A well-controlled regulatory environment, careful underwriting and the advantage of in-house engineering helped produce those results. In-house expertise adds an element of trust to the sometimes scary world of environmental insurance underwriting, she said.

RSA is writing coverage for real-estate transactions. "Buyers and sellers don't want to be exposed to past contamination site issues," Sidoli said. RSA coverage includes pollution-liability coverage, real-estate transactions, secured creditor and remediation cost containment.

Seneca Insurance Co., New York, opened its environmental insurance unit in 1998. The addition was part of the property/casualty expansion into specialty lines that already included inland marine and boiler and machinery. Seneca targets the middle and small commercial markets, offering coverage with $5 million limits. "A growing area for us is contractors pollution-liability insurance that covers contractors in a remediation and consulting activities," said Robert Blaunstein, vice president of environmental management at Seneca.

Changing Products

The ability of brokers and underwriters to tailor the policies to fit a specific transaction or liability make them more attractive to potential buyers, said Susan Neuman, president of the Environmental Insurance Agency.

In a recent example, Neuman was working with an electrical generation firm that wanted the buyer of its property to indemnify it for unknown pollution. In the sales agreement, radioactive materials were listed as possibly present on the property, but the buyer's environmental insurance policy had a radioactive matter exclusion. The insurer allowed the exclusion to be modified to cover low-level radiation, helping the deal go through.

Other changes in policy features have increased the use of environmental insurance. Policies now may have a single trigger rather than a double trigger, and cost-cap and the pollution-liability policies will cover known pollution. In the past, insurers only covered third-party damages or off-site cleanup, but now they will cover business interruption, transportation and on-site cleanup costs.

"The new policies have impact. They can put contaminated properties transactions together by settling disputes about whether the seller or buyer should be responsible for existing contamination," Neuman said.

In a recent example, a family in Hawaii didn't want-to sell a property, formerly a power plant, for fear it might be held liable for future problems that might result from contamination on the site. The Environmental Insurance Agency offered pollution-liability and cleanup cost-cap policies to ease the sale to a community development group, which wanted to redevelop the property into a business incubator.

Specialized insurance brokers see many more opportunities in the 500,000 to 750,000 real-estate transactions annually. "The trigger for these deals include if operators have known environmental exposures not covered under a general-liability policy," Havard said.

Environmental insurance products also are being used to settle Superfund litigation as well as lawsuits over insurance coverage of environmental claims.

The Environmental Insurance Agency currently is using cost-cap and pollution-liability policies to settle two large Superfund actions and an environmental coverage dispute involving multiple insurers and multiple sites, Neuman said.

Mergers and Acquisitions

Environmental insurance is playing a part in merger-and-acquisition activities, Taylor said. Brokers such as Miller & Associates and Willis are seeing opportunities flow from huge companies such as Exxon Mobil Corp. and Pepsico and in the energy and railroad industries.

The balance sheets of oil, gas, chemical and heavy manufacturing companies are cluttered with contaminated surplus properties. In the frenzied environment of mergers and acquisitions, chief financial officers are taking a harder look at their holdings of idle polluted property and sometimes are opting to sell them. "It doesn't make sense to hold on to the property, and selling can add to shareholder value,' Taylor said. For these transactions, brokers such as Willis write policies for environmental risk and cleanup.

"In three years, the environmental insurance market will be driven by real-estate transactions in using more advanced forms of today's products," Taylor said.

The recent merger of Exxon and Mobil is likely to boost environmental insurance sales. To meet antitrust requirements, Exxon Mobil Corp. is selling more than 1,700 stations and stores in the Mid-Atlantic and Northeast regions to Tosco Corp. an independent refiner. Environmental coverage will be needed to complete the real-estate transactions.

Similarly, opportunities for environmental insurance blossomed when Pepsico spun off its line of fast-food restaurants, including Taco Bell, Pizza Hut and KFC. As part of a refranchising strategy, the new company, Tricon Global Restaurants Inc., sold more than 500 restaurants to the business that ran the franchises. Lenders often required secured creditor environmental policies that provide them with ongoing coverage for loans secured by properties that might have environmental conditions.

Miller & Associates also sees future growth for its environmental insurance by teaming with banks. The broker is touting coverage that spreads the risk in real-estate deals between the borrower and the lender. "The co-coverage gets special pricing and has only been taking hold in about the last year and a half," Havard said.

The broker is setting up customized programs with national banks to offer borrower environmental insurance policies to commercial accounts. Havard sees the initiative as an excellent way to create more opportunities for insurers by getting directly in front of the customer in the bank.

"We see our business easily tripling with this alliance," he said.