From the September 2010 issue of Treasury & Risk magazine

Pollution Coverage Alert

When Hurricanes Katrina and Rita battered the U.S. Gulf Coast in 2005, many companies that were devastated by the resulting flooding and dislocation of whole populations learned a lesson: You need to insure not just against storm damage, but to cover income lost because of a storm. With the northern rim of the Gulf of Mexico hosting some 26,000 active oil rigs, you might think that companies, particularly those that depend upon the Gulf's rich waters or beaches for their business, would have protected themselves against a pollution disaster. After all, California had its big Santa Barbara oil rig blowout in 1969 and Alaska suffered the Exxon Valdez spill in 1989. So it doesn't take much imagination to contemplate a big spill in the Gulf.

Astonishingly though, companies have largely passed on buying environmental pollution coverage, not just along the Gulf Coast, but across the United States. Ironically such insurance may never have been so cheap. According to industry sources, policies that just a decade or so ago would have cost a company $100,000, today can be had for as little as $2,500--chump change for even smaller companies. The cost reflects the lack of demand, as well as the overall softness in insurance prices.

Yet Aon Risk Services estimates that 80% of risk managers only recommend pollution insurance if regulators mandate the coverage. "Very few companies, even those with contingent business interruption insurance, have a pollution rider," says Robert Hartwig, president of the Insurance Information Institute.

"Typically, if you're a risk manager, you ask, 'What's going to make me lose income?'" says Gordon Adams, chair of membership and chapter services at the Risk and Insurance Management Society (RIMS). A veteran risk manager at such companies as Occidental Petroleum and Global Marine, he adds, "And if you were a hotel company in Mississippi, or a food processor in Louisiana, who'd have thought you could have a spill like what happened to BP?"

Now, Adams says, risk managers may be thinking again.

Chris Smy, global environmental practice leader at insurance brokerage Marsh, says that it might be an excellent time to buy coverage. There is a "vibrant market" at the moment, Smy says, with a lot of underwriters chasing a limited number of buyers. "Depending on the risks, you can sometimes buy pollution insurance for as far out as 10 years," he says, "so you could be able to lock in some good premiums."

That might be smart. "I can't predict when the market will change," says Smy, "but I think it's a safe bet that the price of coverage will go up."


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