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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 Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]