Last Updated 7/25/2024 

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 arises 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 see an increaseexpected to continue in 20241. 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. 

Moreover, the industry is bracing for significant litigation and cleanup costs associated with environmental factors. Estimates suggest that carriers could face up to $200 billion in litigation claims and an additional $400 billion in clean-up costs in 2024, related to emerging perils such as PFAs and microplastics. Such estimates highlight the increasing financial impact of environmental issues on the insurance industry. 

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 the virus or reducing the sub-limits for viral contamination due the coronavirus pandemic. 

A major concern in the market is that 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. The pollution exclusion is standard in many commercial general liability policies, and unless there is a specific provision that includes coverage for pollution-related losses, policyholders may not have the protection they assume they have. 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. 

The primary limitation in the environmental insurance market appears to be the distribution channel, as many agents and brokers lack a comprehensive understanding of pollution exclusions in general liability policies. 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. Comprehensive training and resources are needed for agents and brokers to ensure they fully understand all aspects of pollution risk and the corresponding insurance solutions. By improving their knowledge of pollution exclusions and environmental policies, agents can better serve their clients and ensure that they are adequately informed about their risks and insurance options. 

The environmental insurance industry is undergoing a significant transformation, having matured after more than 25 years of development. As of 2021, it has reached an annual premium of approximately $2 billion and has experienced double-digit growth, surpassing the growth rate of the broader property and casualty insurance marketThe 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. The integration of big data analytics can help insurers better understand environmental risks. This can lead to more accurately priced premiums, improved risk management, and the creation of coverage solutions that are more closely aligned with the emerging needs of businesses and the environment.  

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. 

The Catastrophe Modeling Center of Excellence (COE), part of the NAIC’s Center for Insurance Policy and Research (CIPR), provides state insurance regulators with  technical training, expertise, and research on catastrophe models. These models simulate thousands of plausible catastrophic event scenarios are essential for assessing the risk of loss Catastrophe models are available for many types of risks and can help quantify the financial impact of potential future disasters, including casualties, liability, cyber attacks, terrorism, and infectious diseases like pandemics as well as climate and weather risks.