Environmental Risk

Seven Questions for Richard Sheldon

Mold, emerging contaminants, and increasing claims complexity are all issues to watch in the area of environmental risk.
By: | May 9, 2017 • 4 min read

Willis Towers Watson’s Richard Sheldon has more than 30 years of experience in environmental consulting, insurance underwriting and brokerage. He joined WTW in 2004 and is now responsible for the management of the firm’s North American Environmental Practice Team. Here is his take on a number of environmental exposures facing insureds.

R&I: We hear a lot about mold, that it’s an ongoing — even growing — problem for commercial property owners. How are carriers responding to this issue? Are they changing coverage terms and in what way(s)? 

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RS: The market is at a crossroads for mold coverage currently and underwriting review for this coverage is certainly becoming more stringent. Insurers are looking at limitations such as “per door” mold deductibles for habitational and hospitality risks in particular; time element coverage designs are being contemplated; and increased deductibles are being applied overall for mold coverage.  Some markets will not cover wood frame construction at all. Some have considered limiting coverage to Acts of God, while others have said they will not cover Acts of God. Insureds need to be prepared for possible coverage changes at renewal, and to either seek alternatives, or to adjust their level of risk tolerance.

R&I: Are there new contaminants that are becoming an environmental problem for property owners? What are they and why are they coming to the fore now? 

RS: PFAS (Polyfluoroalkyl Substances) have been identified by the U.S. E.P.A. as an emerging contaminant. And this is leading to some “re-opener” claims for clean-up on facilities that used these chemicals in their processes or for firefighting. Lead in drinking water has certainly also been a concern for both clients and carriers since the crisis in Flint, Mich.

R&I: Given the drumbeat of talk about regulatory change in Washington, DC, how are clients reacting? What are the most pressing questions you’re getting from them about the liability landscape?

RS: At this point, companies are watching closely to see if and how this might materialize. But so far, we haven’t seen any reactions broadly from clients or the insurance marketplace — but this could certainly change. We are hearing a lot of chatter about what activities the various states (who in some cases are charged with administering environmental regulations) will take and speculation about adequate resources going forward. Regardless of where the regulation, enforcement or budget goes, underwriters are still going to want to see insureds demonstrate they are being responsible relative to their environmental exposures.

R&I: What do you hear from carriers given all this talk of regulatory change? What are they doing to prepare for this possible shift?  

RS: Carriers have not sent any significant messages to the marketplace yet on this topic. But we do know that many have been analyzing their books more rigorously, and in particular, more so since the exit by AIG from a major part of the environmental business. Any feelings by carriers that reductions in regulatory budget could lead to diminished enforcement may further increase this scrutiny, especially for higher-risk classes of business.

R&I: We hear that managing and reporting environmental claims is becoming increasingly complex. What factors are playing into this? 

RS: Both the frequency and severity of claims has increased, driven mostly by the remediation of mold and pre-existing contamination triggered during site development activities. Each environmental claim is unique and can take on a life of its own based on the circumstances surrounding it. As brokers, we spend a lot of time working with specialty underwriters to educate clients and risk managers on the various aspects of environmental coverage and how it will respond. In addition to risk transfer, many insureds are pursuing options to secure insurance capital to help finance potential environmental losses.

R&I: Given that managing and reporting environmental claims is more complex, what should insureds be doing to improve their processes? 

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RS: Timely notice is most critical. Insureds should have a robust risk management communication program to make sure that environmental claims are reported from the field to their risk manager as soon as possible. In addition, insureds should understand coverage terms relative to carrier consent for any remediation activities. Insureds should also understand what coverage they have for emergency response, and whether there are capacity and/or time restrictions for that coverage.

R&ILooking ahead a bit, what environmental risks do you see that are emerging, that might not be a problem for insureds now, but very well could be in five years? 

RS: New risks can always emerge that we can’t anticipate. However there are some issues on the horizon that could escalate — such as trace pharmaceuticals in water, e-waste, and oil and gas industry impacts from exploration and production. The biggest question for our market is how underwriters will respond to the ongoing and increasing frequency and severity of claims.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

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Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

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One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

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Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]