Last Updated 6/23/2022

Issue: Environmental insurance (also known as pollution insurance or pollution coverage) provides coverage for loss or damages resulting from unexpected releases of pollutants typically excluded in general liability and property insurance policies. The losses or damages covered by environmental insurance usually arise in the form of claims against insureds for bodily injury, property damage, cleanup costs, and business interruption.

Standard general liability and property insurance policies exclude most losses connected to pollution with very few exceptions, such as from smoke from an out-of-control fire or fumes from a faulty heating or air-conditioning system.

Overview: According to market experts, the increase in the frequency and severity of environmental claims is expected to continue in 2021. The increase in claims could be partially driven by natural catastrophes, such as floods and earthquakes. Catastrophic events can damage infrastructure for transportation, mining, water and energy, elevating concerns of environmental risk exposure. Additionally, claims activity is increasing in many states due to the presence of perfluoroalkyl and polyfluoroalkyl substances (PFAS) in groundwater. According to the Environmental Protection Agency, exposure to the man-made chemical PFAS has been linked to adverse health effects.

Environmental insurance also provides coverage for risks connected to historic contamination or operational issues, such as mold, lead paint, asbestos, Legionella or indoor poor air quality. Environmental insurance policies are designed to protect mortgage lenders as well as real estate agents, managers and developers in the event the properties they handle are contaminated. Much of the claims activity in 2020 may have resulted from COVID-19, where virus or viral contamination was not excluded from the policy. Many insurers began explicitly excluding virus or reducing the sub-limits for viral contamination due the coronavirus pandemic.

A major concern in the market is a great number of insureds mistakenly believe they are covered for pollution releases under their general liability and property policies. However, these policies either restrict or exclude such coverage, leaving their policyholders exposed to potentially costly risks.

Litigation regarding coverage of environmental risks is often the result of misinterpretation of policies whose language about pollution points more to exclusion than coverage. Specialists argue that if there is not an explicit insuring agreement for losses caused by pollutants, the coverage is not true environmental insurance. Often, policyholders were not aware of their environmental loss exposures nor were they informed about environmental insurance coverage options.

Given that many agents and brokers also do not fully understand pollution exclusions in general liability policies, the principal constraint in the market for environmental insurance seems to be the product distribution channel. Agents have long been instructed with technically inaccurate information regarding pollution exclusions. Thus, if agents do not understand how policy exclusions work, they cannot inform and educate their clients about the need to buy environmental insurance.

The environmental insurance industry is entering a transformative time as the marketplace is reaching maturity after more than 25 years. The market for the environmental insurance market is estimated to be about $2 billion in annual premiums with double-digit growth, outpacing the annual growth rate of the general property and casualty marketplace. Like other segments of the insurance industry, the environmental insurance space is primed for the use of big data to drive new innovative solutions and develop targeted new products.

Status: The NAIC Property and Casualty (C) Committee serves as a forum for discussing issues and solutions related to environmental concerns and the development, suitability, and availability of related insurance products.