CCC: Insurance on Life Support

By Jeffery Hubbard

Just like a newborn child, the concept of an insurance tool to help mitigate the risk of cost overruns associated with site remediation held so much promise. Not just for the environmental insurance carriers in the form of profits, but for real estate developers in the form of being able to develop “choice” properties without remediation cost overruns sinking the project.

Unfortunately, as with children, wrong choices are sometimes made and tough lessons learned through experience. The underwriting experience with remediation stop loss or clean-up cost cap (CCC) insurance has been no different.

Now, as insurance professionals, remediation professionals, developers and industry, we stand at the bedside of a critically ill insurance product and ask, “How did this happen? Will it pull through? What will the product’s future be?”

How Did This Happen?

Small projects do not equate to small risks. In underwriting a small ($1–3 million) cleanup project, insurance carriers came to the quick conclusion that doubling an anticipated small soil volume was easy to do and occurred very quickly in the cleanup process, so there was minimal opportunity to mitigate the loss. Based upon this lesson, the market’s willingness to underwrite and provide coverage for small cleanups (particularly dig and haul jobs) at a cost-effective level has evaporated.

No matter what size the project, soil volumes are virtually impossible to predict beyond a 65% certainty. Under-writers and their engineers now want to see contingencies in the remediation estimate for additional soil volumes. If there isn’t one in the estimates, there will be when the underwriters and engineers finish their analysis.

Know the details and intricacies of the project, including the historical information. Underwriters and their engineers are no longer comfortable with broad statements like “we did a pilot test and the technology worked well.” Underwriters now want the details of the remediation plans and any pilot test to determine the validity of the plan and the supporting science behind it if new technology is being employed.

Know your insured, their contractor and their goals. Underwriters have always struggled with the moral hazard of underwriting remediation stop loss coverage. In a utopia, everyone would be altruistic and working for the good of mankind and our planet. But the reality is that people are sometimes driven by profit or a desire not to have to pay for their own sins.

Underwriters are now keenly aware of this risk and seem to be focused more on creating and supporting business relationships where the business interests of all parties are intertwined. This is best personified by the TRC/AIG Exit Strategy partnership and ESC/Quanta Liability Transfer partnership.

Winning is not everything. When Kemper entered the environmental impairment liability (EIL) marketplace and had decided to make a splash by doing large, risky CCC deals, the established markets would often take a win-at-any-cost approach. The EIL markets are now more willing to let what they perceive as bad deals walk away or go to a competitor. Winning a dollar to pay back two is no longer an acceptable outcome, although arguably, it never was.

Will CCC Pull Through?

Remediation stop loss coverage has an intrinsic value in the real estate development, brownfield redevelopment and pension trust investment arenas. This value will save the product.

This assumption, however, is based on the fundamentals of good underwriting and market discipline. Losses have eroded the premium base most EIL markets had from the remediation stop loss writings, so there is no longer a “margin of error” for a win-at any-cost approach or losses due to moral hazard.

As noted by Reynolds Renshaw of Quanta U.S. Holdings, “We believe the CCC market is correcting itself based on technical merits. Losses and ineffectiveness have eliminated the poorly run and ill-conceived programs. The market should continue to expect changes (reduced policy availability or restricted terms and conditions) if incomplete site characterization or improperly engineered solutions are submitted.”

The CCC policy will survive, but investigations will need to be complete, remediation work plans will need to be well conceived and supported by science, and insurance submissions will need to be thorough and well organized to successfully obtain this coverage.

What Will the Future Bring?

Cleanup cost cap policies written in the future will require that all parties to the contract have their interests aligned to get commercially cost effective terms. Remediation contractors and real estate developers will need to develop relationships with the insurance carriers willing to write CCC policies, as the insurance carriers will be looking to spread risk over multiple brownfield sites.

Quanta U.S. Holdings states, “Aligning the interests of contractor, named insured and insurance provider is a cornerstone of Quanta’s program. If the contract language incentivizes any party otherwise, the policy is in jeopardy.”

In instances where there is not a spread of risk or a relationship with the insurance markets, clients can expect to have terms no longer than 10 years and little willingness to amend the basic policy forms. In addition, some markets will push to impose larger retentions and/or co-insurance provisions until they have developed a positive loss ratio with a client.

Jeffrey Hubbard is senior vice president, environmental, at Jardine Lloyd Thompson LLC in Dallas.