Lexington Enters New Insurance Territory With Carbon Registry Product

As many businesses work to reduce their carbon footprints and go green, insurers are rushing to keep up with the world of alternative energy, climate change, green technology and green building by developing new products to support these businesses efforts.

One unique and newer area of the green movement is carbon credits, where a business finds ways to offset emissions or pollution put out by their company or construction project such as purchasing a credit from a carbon credit registry.

“There is a regional greenhouse gas initiative out there but it is mostly voluntary,” said Christian Andrews, underwriting manager, professional liability at Lexington Insurance Co. “Entities have to actually want to cap emissions or purchase emissions offsets.”

According to Andrews, there are about five or six carbon credit registries in the United States at this time and all of them are only a few years old. This can make investors or project developers nervous or hesitant because they want to make sure their carbon credits have validity and hold up should the company’s credits be questioned.

In response, Lexington launched a carbon registry insurance product in January called CarbonCover Registry, which provides professional liability insurance for the carbon registries. Lexington provides defense and indemnity coverage on a claims-made basis, and provides protection worldwide for claims brought in the United States.

Lexington established the carbon credit coverage to address the exposures carbon registries face from the services they provide. It was the first in Lexington’s new CarbonCover suite of products.

“If a registry doesn’t properly train verifiers, or releases a standard that isn’t properly validated, that is an area of potential liability,” says Andrews. “Also not properly tracking carbon credits could be a potential claim.”

Andrews says the carbon credit market has three key players: The first player is the project developer who generates a carbon offset project for which they hope credits can be issued; the second player is the verifier, an independent contractor or agency brought in by the project developer who measures how much carbon may be offset from a particular project, such as a forest sequestering CO2 from the atmosphere. They use standards established by the registry to quantify and verify this. The last player is the registry itself which establishes the standards for the verifiers to use, as well as trains the verifiers, oversees independent third party verifiers and issues and tracks credits.

Andrews says a registry can also be held liable indirectly if a verifier makes a mistake, and defense costs could be incurred by the registry even if it’s later determined they are not liable for the verifier’s acts. This puts added value on the product since the product would respond to these defense costs.

Educating the Market

Lexington was the first insurer to create coverage for carbon registries and has spent a lot of time since it introduced the product explaining what the coverage is and educating agents.

“When no one else is out there with a product, people question the value of the product,” says Andrews. “We have had a lot of conference calls and face-to-face meetings to explain the product. It is time consuming but important. There is much more education that goes into it [than other classes].”

However, Andrews says the demand was there before they developed the coverage and it was actually a carbon registry that brought up the need to the insurer. Since then, the demand and interest has only increased.

“This market is pretty unique and the coverage creates some validity for this market,” he said.

Andrews expects the carbon credit market will continue to grow, especially since businesses are very interested in doing more to become green and help their reputations. The growth of registries is not as certain, particularly if the government becomes involved, but Andrews said it could go either way.

“A lot of [what businesses get out of purchasing carbon credits] is PR,” he said. “They are striving to be carbon neutral and this is one way to get there. Then there is this other market where investors can purchase them so the motivation depends on the entity and individual.”

He says while the carbon registry market itself is pretty small, there are plenty of opportunities for agents in the carbon market because there are many verifiers out there and that will only grow. Agents that become experts now will benefit down the line.

“It’s a new market and there’s a lot of moving parts,” Andrews says. “It is a more sophisticated market in professional liability so insured’s need an agent that is well versed in the carbon market and understands who the players are. As this market evolves we will see a lot more focus on it from agents.”