September 26, 2006
Environmental Impairment Liability
Insurance
Emerging Trends and Coverage Issues
J. Kevin Shane, ARM, CPCU, CSP
Denver
Overview

Using Environmental Insurance to Solve Business
Problems

Environmental Market and Product Update

Coverage Trends & Emerging Trends

Do Pollution Policies Pay Claims
Marsh
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Using Environmental Insurance to Solve Business
Problems:
Creative Solutions
Marsh
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Typical Calls From Attorneys...
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

Marsh
“My client is going through a merger. They want
insurance, but many of the 400 locations they are
acquiring don’t have any environmental information. Can
you get us quote by tomorrow?”
“My client is trying to settle litigation over cleanup, and is
looking for a way to insure property values of homeowners if claims arise in the future. Is there anything offthe-shelf?”
“My client is selling its property(ies) and wants to
dissolve. We’re looking for a way to back up reps and
warranties without using an escrow. Can environmental
insurance do that?”
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Typical Calls from Attorneys...
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
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“My client is buying a relatively old apartment building
and is concerned about asbestos and lead-based
paint. Oh, and what about mold?”
“My client is dissolving its company, but it has two ongoing cleanups, one of them for 30 years. How can we
wrap up these liabilities?”
“My client is getting an indemnity from the seller, but
we want more. Can you back it up?”
“My client wants to build high-end homes on a State
Superfund site. If I can’t talk him out of it…, can you
get us coverage for toxic tort and property damage
claims?”
Marsh
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Who Is Using Environmental Insurance?

REITS, Real Estate Firms, State Pension Funds
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Developers and Homebuilders
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Private Equity firms
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Technology Companies
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Public Entities, Cities, Transit Authorities, Port Authorities
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Oil Companies, Pulp & Paper companies, Chemical companies
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Utilities, Mining companies
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Manufacturers, Consumer Products companies,
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Aerospace manufacturers / Defense contractors
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The Department of Defense (Army -- $300M in 2003)
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Environmental Consulting Firms, Environmental Contractors
and General Contractors
Marsh
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Uses of Environmental Insurance

To facilitate transactions:
– Acquisition, divestiture, merger
– Single site, several sites

To facilitate redevelopments
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To provide a safety net for operations, part of EMS
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To address historical environmental liabilities, e.g.,
nonperforming assets, divested properties, Superfund
sites
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And yes, there are solutions to all of the questions
previously posed…
Marsh
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Market and Product Update:
Insurers and Coverage Types
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Environmental Insurance Market is Thriving:
$2.1B Industry Premiums

ACE Environmental
 Great competition among insurers
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AIG Environmental
 Different appetites for risk

Arch
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Chubb Environmental Solutions
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Liberty
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XL Environmental
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Zurich Environmental
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Several smaller players
 Varies from insurer-to-insurer
and day-to-day
 Quotes may vary greatly
 But often are surprisingly close
 Insurer capacity:
 Ranges from $25M to $50M
 Total market capacity:
 Upwards of $200M
Marsh
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Market and Product Update:
Insurers and Coverage Types
Parent Company
Affiliate Insurer
Admitted /
Non-Admitted
AM Best
Rating
ACE Environmental
Illinois Union Insurance Comp.
Non-Admitted
A+ / XV
AIG Environmental
American Int’l Specialty Lines
Ins. Comp.
Non-Admitted
A+ / XV
Chubb Environmental
Chubb Group of Ins. Comps.
Non-Admitted
A++ / XV
XL Environmental
Indian Harbor Insurance Comp.
Non-Admitted
A+ / XV
Zurich Environmental
Steadfast Insurance Comp.
Non-Admitted
A / XV
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Note that all insurers are “non-admitted” or provide coverage on a
surplus lines basis:
– Surplus lines fees/taxes are due with each placement
Does the insurer rating matter and in what situations?
Marsh
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Market and Product Update:
Does Insurer Rating Matter?
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Quick Answer:
– Quanta Insurance Company
– Kemper Insurance Company
– Reliance Insurance Company
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Marsh can only structure and place coverage with
insurers that meet or exceed a specific rating

Short-term policies
– Not as big a concern
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Long-term policies
– Insurer rating should be a serious consideration
– An occurrence-based policy is long-term - CPL
Marsh
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Pollution Legal Liability
Covers “Unknowns” and Certain “Knowns”

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PLL Covers Scheduled “Insured Sites”
Provides the following “standard” coverages:
– Cleanup costs (onsite and offsite)
– Toxic tort liability (3rd party BI and PD / onsite and offsite)
– Defense expenses
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Pollution Conditions Covered:
– New
– Pre-Existing > Unknown and Known/Insurable Conditions
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Numerous other PLL coverage types are available
Coverage term:
– Preexisting Pollution Conditions: Up to 10 years
– New Pollution Conditions: Up to 5 years
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Regulatory re-openers
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Natural resources damage claims
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Pollution Legal Liability:
Covers Scheduled Locations
Insured owns and/or operates
from each of the fixed sites
which are scheduled locations
Insured Site #2
Insured Site #1
Insured Site #3
Marsh
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Contractors Pollution Liability:
Covers Project Sites
Insured Contractor performs work at
each of the project sites, which are
typically covered on a “blanket” basis
Project Site #2
Project Site #1
Project Site #3
New Project #4
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New Project #5
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Remediation Stop Loss:
Covers Scheduled Projects

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Policy used to manage finance risks associated with
remediation cost overruns
Policy pays for costs in excess of estimates contained
in the underwritten remedial plan (RAP)
RAP cost estimates might be exceeded because:
–
–
–
–
–
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Greater amount of volume to be excavated
GW must be treated as opposed to monitored
Change in applicable regulations
Change in lead agency’s perception of project
Ineffective RAP . . .
Does not cover bodily injury/property damage claims
Does not cover defense costs
Marsh
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Options/Programs:
Remediation Stop Loss

Remediation Stop Loss (RSL) coverage introduced in
the mid 90s
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Poor Overall Loss Experience
– UWers review agency-approved RAP, associated costs and
–
–
–
–
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regulatory standards
Retentions: ~25 - 50% of expected remediation
Policy limits: typically 100% to 200% of est remediation costs
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Sound reasoning behind this . . .
Policy can cover a single project or multiple projects
Policy terms usually run up to 10 years, but typically follow
expected project length
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Treating Environmental Exposures/Losses
Pollution Legal Liability
Onsite
Remediation Stop Loss
Known/Uninsurable
Condition
Offsite
Known/Insurable
Condition
Unknown/Current
Condition
Insured Property
Marsh
Limit of Liability /
Risk Transfer Layer
Deductible or
“Buffer”
Future
Condition
1) Transfer
historical &
future
environmental
exposures
Known
Remediation Costs
2) Cap remediation
expenses actually
incurred
3) Accelerate funding
of known
remediation expenses
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Insurability of “Known” Conditions
New Condition?
Covered by Pollution Legal
Liability Policy
(Cannot be excluded as it
does not yet exist.)
Unlikely to Cause Loss:
Covered by Pollution Legal
Liability Policy
Has Caused / Likely to Cause Loss:
Cannot be covered by Pollution Legal
Liability Policy
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Preexisting Condition?
Known
Condition?
Unknown
Condition?
Covered by Pollution
Legal Liability Policy
(What is not known
to exist cannot be
excluded)
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Analogy: Can Property Insurance be
Placed on this Building???
Marsh
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Summary of Recent Placements
Coverage
Type
Exposure
Description
Limits
SIR
Policy
Term
Term
Premium
PLL
Construction of townhome on
remediated land
$5M
$100K
10 Years
$120K
PLL
Large lot of land with significant
contamination; future use is
high-density housing
$15M
$100K
10 Years
$420K
PLL
Divestment of 500 acre property
with product pipelines
$5M
$100K
5 Years
$165K
PLL
Purchase of PLL to use as sales
marketing tool
$10M
$250K
10 Years
$240K
PLL
Mining Operation; ongoing ops;
S&A only
$100M
$1M
1 Year
$4M
PLL
Operating O&G plant
$10M
$100K
5 Years
$75K
PLL
Purchase of policy to support
purchase and redev of
contaminated site – 2 acres
$5M
$100K
10 Years
$96K
PLL
Purchase of policy to support
purchase and redev of
contaminated site – 45 acres
$5M
$100K
10 Years
$120K
PLL
Purchase of policy to support
purchase and redev of
contaminated site – 500 acres
$10M
$100K
10 Years
$180K
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Coverage Trends & Emerging Issues
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Emerging Issues and Coverage Trends
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Market Is Quite Stable at This Time
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PLL Policy Terms Getting Shorter:
– Preexisting Pollution Conditions: 10 Years
– New Pollution Conditions: 1 – 5 Years (depending on insurer)
– Also True for RSL and Finite Structures Placements
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New Policies & Underwriting Approaches
– ACE has a new PPL (PLL) policy – “PPL II”
– XL now provides coverage via two policies
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Very Limited Market for:
– Remediation Stop Loss
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Very strict underwriting guidelines
– Secured Creditor / Lender Liability
Marsh
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Emerging Issues and Coverage Trends
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Natural Resources Damages
– Growing concern / Not covered in all PLL policies
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Vapor Intrusion
– Growing concern / Currently covered in most PLL policies
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Asbestos Exposures
– More stringent underwriting
– Used to be able to readily obtain coverage for remediation of
soil/GW (as opposed to abatement) but that is more difficult
today
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Redefining “Bodily Injury”
– Some insurers are redefining to require physical
manifestation as a component of an emotional distress claim
Marsh
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Emerging Issues and Coverage Trends
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Capital Improvements Exclusions:
– More underwriters are trying to include these exclusions
– Eliminate coverage for any pollution condition discovered as
part of a redevelopment

Mold Coverage Grants and Restrictions
– PLL Policies > available on a greater basis than in the past
– CPL Policies > available depending on operations performed
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Negatives Aside, Market As a Whole Is Large And Competitive
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Do Pollution Policies Pay Claims?
... And Words to the Wise
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Are We Seeing Claims? Are They Being Paid?
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Short answer: Yes (to both)
Environmental insurers don’t want the reputation of
being unwilling to pay claims
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How many claims?
– Insurers deem this information confidential and refuse
to share
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Recent history: Some significant losses
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Carrier retrenchment in:
– Remediation stop loss policies
– Lenders policies
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Claims You May Not Have Heard About –
Redevelopment

Redevelopment on former aerospace manufacturer
“…the policy that keeps on paying…”
– Mixed use, residential, condos
– 10-yr PLL policy placed providing $20M limits
– More contamination found than anticipated; hotspots of
VOCs, TPH, methane…AND
– During construction, contractor’s that was dragging
equipment damaged buried petroleum pipeline
– $5M claimed; $2M paid to date
– Other claims…other settlements…more to come
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Claims You May Not Have Heard About –
Redevelopment

Excavating and Moving Landfill
– Several closed landfills had to be moved
– Combination Stop Loss/PLL policy placed for 10 yrs
providing $20M limits
– Excavation went well…until an unexpected
contaminant was found that required special handling
and disposal
– Claim is partially paid and expected to reach nearly
$10M
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Claims You May Not Have Heard About –
Real Estate Transaction

Insurance Needed to Make Transaction Possible
– Strip mall containing a dry cleaner was to be sold and
–
–
–
–
–
–
–
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insurance was placed to support the transaction
A PLL policy was procured providing a 5 yr term and $5M
limits
Underwriter asked the specific question:
“Is any additional engineering planned at the site?”
The answer: “No.”
Within one week after close the buyer installed additional
monitoring wells
PCE was discovered at actionable levels
When NFA was obtained over $800K was paid
Suffice it to say there was a big fight over certain
representations
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Claims You May Not Have Heard About –
Redevelopment

Large redevelopment - former chemical mfg. facility
– Policy was structured with certain known conditions not
excluded
– A PLL policy was procured providing a 5 yr term and
$5M limits including “Soft Costs Coverage”
– During the redevelopment higher than expected levels
of contamination were encountered
– When NFA was obtained over $1.5M had been paid
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Claims You May Not Have Heard About –
Plume Containment Project

Large industrial area with significant contamination
– Migrating contaminants threatened to shut down more
public drinking water wells
– Responsible parties agreed to EPA settlement, but only
if Stop Loss/PLL coverage could be obtained
– A policy was procured providing a 15 yr term and
$100M limits
– Treatment train worked well on bench scale, but has
largely failed to date
– Too early to tell what the loss will be, but is expected to
be in the $10Ms
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Do All Claims Get Settled Promptly?
Claims Drawing National Attention

“LA Schools in a Legal Mess With Insurer”
-- Los Angeles Times
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“AIG Unit Denies $100 M Pollution Claim”
-- BusinessInsurance.com
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“Insurance Firm Files Suit Against the Cards”
-- St. Louis Post Dispatch
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Note also that some claims are appropriately declined
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Preventing Claim Disputes
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Preventing Claims Disputes
Words to the Wise & Other Good Things to Know

Know Your Deal
– You have a lot more leverage with the underwriter before the deal is
bound than after
– Plans to flip properties
– Implications of a very large portfolio – divestiture
– Any Additional Insureds? Mortgagees?

Eliminate Policy Administration
– No reporting of specific events
– Auto Removal of exclusion when Insured receives NFA
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Known/Undisclosed Environmental Conditions
– Has full disclosure been made
– In a merger, is knowledge of “seller” imputed to “buyer” if key
employees remain the same?
– What if entire workforce comes with the acquisition

Buyer and Seller on Same Policy?
– Have you considered the Insured vs. Insured Exclusion?
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Preventing Claims Disputes
Words to the Wise & Other Good Things to Know

Cancellation Condition
– Most are quite restrictive but can usually be amended
– Include: limits on cancellation, “cure” language, applicability only to
specific locations

Material Change in Use
– Write directly into the policy a broadly worded description of the
future intended use of the property

Material Misrepresentation
– What happens with the policy: deny claim or void policy?

Choice of Law, Venue, and Jurisdiction
– These almost always stipulate New York
– Can almost always amend to more favorable jurisdiction or “silent”

Types of Insureds and Impact on Coverage
– First Named Insured
– Named Insured
– Additional Insured
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Preventing Claims Disputes
Words to the Wise & Other Good Things to Know

Reporting Requirements
– Reporting of claims
– Providing project update reports (stop loss policies)
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Subrogation Rights
– Recovering Your SIR > does the recovery fund your SIR?

Other Insurance Condition
– Is it primary?
– Do you want it primary?

Divested Property Exclusion
– It is essential that the exclusion not void historical coverage for
divested properties

Assignment Condition vs. Additional Insureds
Policy Terms
– Claims made
– Pollution incident
– Disclosure issues
Marsh– Deductible/SIR
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Other Good Things to Know
Environmental Risk Mgmt Consultants & Brokers
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Marsh is a risk management consultant and broker:
– Not to be confused with the “insurer”
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Similarly, Marsh is a risk management consultant and broker:
– Not to be confused with an “agent”
– Marsh represents the insured, not the insurer

Use an experienced risk management consultant/broker:
– General insurance experience
– Technical environmental experience
– 75 professionals worldwide: engineers, geologists, attorneys,
consultants, MBAs
– Must know the difference between a “ppm” and a “ppb”
– Have ability to argue in preserving coverage

Limit the exclusion of “known” pollution conditions

Limit application of exclusions
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Continuing Legal Education

Would a CLE program tailored to this topic beneficial and of
interest either to:
– Obtain necessary CLE credits
– Learn more about how EIL insurance is being used

Created a five-section program in CA
– Was approved by CA Bar Assoc for CLE credits
– One hour per section / Sections can be taken in any
combination

Have not pursued such a program as yet in CO

If interested, feel free to contact me:
– Dir: 303 308 4596
– Email: [email protected]
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Environmental Impairment Liability Insurance Emerging