A User's Guide to Pollution Exclusions and Environmental Insurance
David Dybdahl | September 25, 2015
The need for environmental coverage in the property and liability insurance packages sold to commercial insurance buyers has expanded over a hundred fold in the past decade. The dramatic expansion in the underlying need for genuine environmental insurance coverage has been quietly driven by the ever-expanding effects of pollution exclusions on the commercial insurance coverage purchased by a wide range of businesses.
In this same time period, the number of insurance companies selling genuine environmental insurance has doubled. With the expansion in sellers, the price of the insurance coverage has decreased dramatically. For example, over the past 10 years, the minimum premium for a good quality contractor's environmental insurance policy has decreased by 85 percent to $1,500 for a $1 million policy limit today. The cost of mold/bacteria coverage on a pollution insurance policy sold to a contractor has decreased from 2 percent of revenues in 2004 to 1/10 of 1 percent of revenues today. That a 2,000 percent rate decrease!
Environmental impairment liability (EIL) insurance on commercial buildings—including coverage for fungus and full spectrum bacteria contamination—has seen rate decreases of 80 percent. Today, a hotel can purchase a high quality EIL policy with a $1 million policy limit for $3,500. Subject to a $3,500 minimum premium (as of this writing), apartments can be insured for $20 per door if the building has an effective water intrusion loss prevention plan. Farms can access low-end quality environmental insurance policies for as little as $1,000 for a $500,000 policy limit and high-end environmental coverage specifically designed for farms for as little as $3,500 for a $1 million policy limit.
Selling environmental insurance can be a good source of income for insurance producers. Two of the top 10 insurance producers in the Insurance Business America magazine Top Producer awards specialized exclusively in selling environmental insurance.
Confusion Surrounding "Hazardous Waste"
In spite of the dramatic increase in availability of environmental insurance at affordable prices and strong evidence that, when efficiency produced, environmental insurance is profitable for insurance agents and brokers, less than 1 percent of commercial insurance buyers are adequately insured for pollution or contamination loss events today. In my experience, the biggest reason that commercial insurance buyers are uninsured for environmental risks is their insurance agents and brokers are not able to explain to their client base the effects of pollution exclusions and the resulting need for environmental insurance in a convincing manner. The underlying causes of that situation is persistent beliefs in the insurance agent and brokerage community that pollution exclusions are limited to hazardous waste.
Unfortunately, those beliefs in the insurance sales force are not based on facts. Bacteria contaminated sandwiches can be subject to a pollution exclusion. A sandwich is about as far away from hazardous waste as you can get. Very few insurance producers truly understand the far-reaching effects of pollution exclusions. Therefore, their customer base remains uninsured for contamination loss events.
The insurance practitioners operating under the assumption that pollution exclusions only apply to hazardous waste could not be more off base. In fact, any commercial insurance buyer that has or handles the following will need specially modified environmental insurance to fill the coverage gaps created by exclusions for pollution/fungi/mold/bacteria/asbestos/silica/lead in property and liability insurance policies:
- Any material that can contaminate something
- Has something (property, people, or animals) that could be exposed to contamination
- Could have or could become associated with a water intrusion event within a building
- Owns or works at a waste treatment and disposal site
The recent outbreak of Legionnaires' disease in New York City in August 2015 is a good case in point on the wide-ranging effects of pollution exclusions. There are at least 12 fatalities associated with this outbreak. Legionaries' disease is caused by bacteria usually found in warm water. When the water becomes aerosolized and is breathed in by humans, the bacteria create pneumonia-like symptoms that are sometimes fatal. Losses associated with bacteria are specifically excluded by fungi and bacteria exclusions found in virtually all general liability and property insurance policies today. The fungi/bacteria exclusion endorsement commonly found in general liability policies today even eliminates the insurance company's obligation to defend the insured if a speck of any amount or type of bacteria is related to the loss "in any sequence" in the loss event.
Confusion Surrounding What Is a "Pollutant"
In addition to the specific exclusion for losses related to fungi or bacteria, traditional definitions of excluded "pollutants" can apply the standard Insurance Services Office, Inc. (ISO), pollution exclusion to bacteria contaminates as well. This will depend on the state's precedence case law on the subject of whether bacteria is a "pollutant" or not. It can also depend on whether the insurance company creates its own precedence by denying a bacteria-related loss and being willing to go to court to let a judge figure out if bacteria is a "pollutant" or not.
Currently California, Minnesota, Wisconsin, and Indiana have solid case law establishing that bacteria is an excluded "pollutant" within the context of pollution exclusions. Because of the double jeopardy effect of fungi/bacteria and pollution exclusions in liability insurance policies, and the extremely poor market penetration of environmental insurance, it is extremely unlikely that any of the potentially responsible parties associated with creating the legionella bacteria release in the Bronx will have any insurance coverage at all to cover the liability associated with an outbreak of legionnaires disease.
Problems with Mold/Bacteria Exclusions
Most insurance producers and buyers have no idea that mold/bacteria exclusions in effect can make water intrusion losses in buildings an excluded cause of loss. Because of these exclusions, every school, commercial building, hotel, condominium, and apartment building needs a specially modified EIL insurance policy to fill the resulting coverage gaps. Less than 1 percent of these buildings have functional environmental insurance in place today.
The Farm Exposure
In another example of a completely underserved insurance market, hundreds of thousands of farms are woefully underinsured for contamination risks today. This complete dearth in environmental insurance protection flies in the face of rapidly expanding potential liability for contaminating aquifers through common farming practices. One environmental damage case in Des Moines, Iowa, involves $100 million in damages resulting from common farming practices. The vast majority of farms are totally uninsured for environmental damage's today.
Although farms have traditionally been sold agricultural chemical or crop overspray coverage in farm package insurance policies, these limited exceptions to the pollution exclusion in the farm insurance package are not and never have been genuine environmental insurance. These common exceptions to pollution exclusions do not eliminate the need for genuine environmental insurance on farms.
This fact became clearly evident in a December 30, 2105, litigated insurance coverage case before the Wisconsin Supreme Court. The case involved the contamination of a neighbor's well with bacteria from cow manure and the resulting bodily injury and property damage. The court determined that bacteria contamination was an excluded "pollutant" in the farm package insurance policy. In the opinion by one state supreme court justice, the coverage extensions on the farm policy for agricultural chemicals amounted to "useless insurance." The same Justice questioned how it could possibly be that insurance agents would leave their clients with such an obvious gap in insurance coverage for farming operations that must apply manure to land as part of the core business of dairy farming.
Summarizing the Problem
In a long career of training insurance agents and brokers on the subject of environmental risk management and insurance, I have an unusually good understanding of how it came to be that tens of thousands of farms in Wisconsin alone ended up with "useless insurance" and why it is highly unlikely that there is a single dollar of insurance coverage for the Legionnaires' disease-related deaths in New York City this year. The bottom line is that insurance agents and brokers simply do not understand pollution exclusions and therefore routinely do not recommend environmental insurance to their customer base. It should be noted that, for the past 30 years, it has been nearly impossible for insurance agents and brokers to access training venues on environmental risks and insurance. There would be fewer fundamental insurance coverage defects for environmental risks if insurance agents/brokers operated under the assumption that pollution exclusions usually apply to contamination loss events and advised their customers accordingly.
Another reason that so many insurance buyers are not adequately insured for pollution losses is the inherent complexity in environmental insurance policies. Even when insurance agents/brokers do attempt to fill the coverage gaps created by pollution/fungus/mold/bacteria/lead/asbestos/silica exclusions with environmental insurance, fundamental coverage flaws are very common. This is especially true when an environmental insurance policy that was originally designed for outdoor use is sold to a customer that needs coverage for indoor environmental loss exposures, such as mold and bacteria.
A simple case is point is fire and water damage restoration contractors. There are about 23,000 of these firms in the United States. The most common form of fungi/bacteria exclusion endorsement contained in the general liability insurance policies sold to these firms eliminates all of the general liability coverage at the job site where the insured is cleaning up a speck of any type of mold or bacteria. Typically, about 1 out of 5 projects in this class of business require the contractor to clean up or assess either mold or bacteria (in the form of Category 3 water). At least 20,000 of the firms in the fire and water restoration business currently are sold general liability policies that contain this fundamental insurance coverage design flaw in their insurance program.
The fundamental coverage gap for excluded job sites on the general liability insurance policy cannot be corrected for through the purchase of a contractors environmental liability (CEL) insurance policy. The pollution coverage only applies to losses caused by pollution release or escape. The CEL policy is incapable of correcting a job site exclusion on the general liability policy created by the fungi/bacteria exclusion endorsement. For example, a fire at a mold remediation job would be an excluded cause of loss if the job site itself is excluded, and the CEL policy would not apply to a fire loss unless there was a resulting escape of "pollutants."
There is an insurance coverage solution in the environmental insurance market place for restoration contractors in the form of combined general liability (GL) and CPL insurance policies. Of the over 140 different environmental insurance policies available in the marketplace today, only 4 custom-designed combined GL/CPL insurance policies do a good job in insuring the liability insurance needs of a fire and water damage restoration contractor today. Which explains why more than 9 out of 10 fire and water restoration firms go to work every day with fundamentally defective GL insurance coverage.
Insurance agents and brokers are well advised to find qualified specialist help in environmental risk management and insurance before proposing any environmental insurance coverage to a customer. The need for specialist help will become apparent later in this article when I discuss the common coverage flaws in environmental insurance placements.
The "Field Guide to Pollution Exclusions and Environmental Insurance" below is intended to be used as a tool by insurance agents/brokers to address the environmental insurance coverage needs in their customer base. Although this field guide is not comprehensive in any way, it will help most insurance agents/brokers navigate through a very complex insurance coverage arena.
Insurance Agents/Brokers Field Guide to Pollution Exclusions and Environmental Insurance
Warning pollution exclusions and environmental insurance vary a great deal in practice.
This is a very basic summary of an extremely complex subject.
Do not rely on this summary as the sole guideline on the effects of pollution exclusions or in the process of selecting environmental insurances.
Insurance agents and brokers should seek out qualified expertise in environmental risk management to evaluate the insurance coverage needs of clients, to evaluate the effects of pollution exclusions in both property and liability insurance policies, and to match an environmental insurance policy to the needs of the individual insurance buyer.
Pollution Exclusions in Liability Insurances
General Liability Insurance
Exclusion f. Pollution (effectively applies to broad spectrum "contaminates.")
Commonly referred to as the absolute pollution exclusion, it applies to damages caused by pollution releases which arise from the premises/operations of the insured and to cleanup costs. This exclusion does not contain the word "absolute" and does not absolutely exclude all pollution-related claims under a general liability policy.
For losses arising from premise/operations there are varying exceptions to the exclusion for:
- Losses arising from the HVAC system within a building
- Losses from a contractor's ongoing operations (if the building owner is an additional insured)
- Losses from a hostile fire
Also excluded causes of loss are:
- Pollution arising from waste sites (which would include sewage treatment plants)
- All losses associated with waste streams and waste disposal or processing
- Pollutants brought to a job site by a contractor, with exceptions for:
- Fuels and lubricants used in mobile equipment
- The release of gasses or fumes in buildings arising from the insured contractor's operations
- Losses from a hostile fire
- Pollution losses associated with performing cleanup operations or assessing the effects of pollutants.
Separately excluded will be:
- Any request by a governmental entity that the insured clean up pollutants (This part of the pollution exclusion f. stands on its own and can override the exceptions to the exclusion mentioned above)
There is an exception to this part of the exclusion specifically for "property damage"the insured would have been responsible for in the absence of the governmental involvement. Significantly, this exception does not apply to the other coverage grants in a general liability insurance policy.
Exclusion f. Pollution in a commercial general liability (CGL) insurance policy does not contain the word "absolute," does not exclude pollution losses arising from products and completed operations or a loss that falls within the exceptions to the exclusion listed above. Therefore, the "absolute" pollution exclusion" is not "absolute."
Warning: depending on any of the limited exceptions to pollution exclusions is a very unreliable way to insure against contamination loss events. Doing so puts insurance buyers in a game of insurance roulette where the insurance coverage outcome cannot be determined until after the loss event. Will one of the exceptions to an exclusion commonly referred to in the insurance business as an "absolute exclusion" apply to the loss or not?
Total Pollution Exclusion Endorsement
Introduced in 1986 as an underwriting tool to expand the absolute exclusion, this endorsement eliminates the general liability (GL) coverage for pollution losses arising from the products and completed operations of the insured. The endorsement also eliminates the coverage give backs in Exclusion f. Pollution referred to above.
It is common to find a hostile fire exception to the total pollution exclusion. In any case, even the "total" pollution exclusion is not total.
Sudden and Accidental Pollution Insurance ("Time Element" Pollution Coverage)
Sudden and accidental pollution coverage causes a great deal of confusion in insurance user groups. These coverage extensions are not really "pollution" insurance because they do not have an insuring agreement for pollution events, and they are not restricted to pretty darn quick (sudden) pollution events either. No wonder people get confused; no part of this description of a coverage extension to the GL policy is technically accurate.
A general liability insurance policy with a sudden and accidental exception to the pollution exclusion is still just a GL insurance policy with an exception to what is usually a total pollution exclusion. Unnecessary confusion is created by referring to an insurance policy that only addresses pollution losses in the exclusion section of the policy as "pollution insurance."
The term "sudden and accidental" pollution traces its roots back to 1971 and predates the development of genuine environmental insurance policies in 1980. In 1971, Insurance Services Office, Inc. (ISO), created a full pollution exclusion endorsement for the GL insurance policy. In the original pollution exclusion wording there was an exception to the exclusion for pollution releases that were sudden and accidental. In 1973, a pollution exclusion was added to the comprehensive general liability insurance policy which was introduced in that year. This policy form was used until 1986 when the "absolute" pollution exclusion was added to the commercial general liability insurance policy.
Decades of insurance coverage litigation over the undefined word "sudden" in the ISO 1971 to 1986 comprehensive general liability insurance policy lead the insurance companies to create "time element" pollution coverage. Much of the legal maneuvering on the sudden and accidental exception to the 1971 pollution exclusion centered on this question: Does the word "sudden" mean pretty darn quick in a general liability insurance policy? It turns out that nobody really knows the answer to that question.
Today sudden and accidental coverage is really a "time element" exception to a total pollution exclusion in a general liability insurance policy. Under a time element exception to the pollution exclusion, if a pollution event begins and ends within a certain timeframe, usually measured in hours, and the loss is reported to the insurance company, usually within a certain number of days, the pollution exclusion in the general liability insurance policy will not apply to bodily injury or property damage to the loss event. For GL coverage to apply under time element definitions, a pollution loss event does not need to be pretty darn quick or sudden.
Time element coverage extensions to the general liability insurance policy are not genuine environmental insurance for the same reason a GL insurance policy with an exception to a professional liability exclusion is not "professional liability" insurance. Genuine professional liability insurance policies have an insuring agreement for professional liability.
Likewise, genuine environmental insurance policies have insuring agreements for losses arising from pollutants. Genuine environmental insurance policies will also cover cleanup expenses in the insuring agreement.
Contractors' Job Site Pollution Coverage
In essence, this endorsement provides a time element exception to a total pollution exclusion endorsement in the general liability insurance policies commonly sold to contractors. Although these coverage extensions do vary in scope, it is common for the coverage extensions to specifically exclude losses arising from asbestos and lead, and they usually do not apply to completed operations. A general liability policy with this endorsement is not contractors' environmental impairment or contractors' pollution liability insurance due of the absence of insuring agreements for environmental losses in a general liability insurance policy.
Certificate of Insurance Considerations with General Liability Coverage Extensions
Endorsements that amend the effects of pollution exclusions in general liability insurance policies do not fulfill a contractual insurance requirement for environmental insurance in contracts or loan covenants. Pollution coverage extensions to general liability insurance are usually missing at least one of these essential elements in genuine environmental impairment insurance.
- An insuring agreement for pollution losses
- Coverage for asbestos and lead as pollutants
- Coverage for ongoing and completed operations
- Coverage for gradual pollution events
- A dedicated limit of liability for the environmental coverage
Farm Package Policies
These policies usually contain pollution exclusions that apply to property and liability losses arising from farming operations. Exceptions to the pollution exclusion for losses arising from agricultural chemicals or crop overspray are common coverage extensions in farm package insurance policies. The coverage extensions are sometimes errantly referred to as pollution insurance, even though there are no insuring agreements for the release or escape of pollutants. This is another example of how confusing things get when insurance jargon is used that is fundamentally inaccurate in the coverage the jargon is referring to.
Exceptions to the pollution exclusions in the general liability coverage provided in farm package insurance policies should not be confused with genuine "environmental insurance."
Automobile Liability Insurance Policies
These insurance policies contain a broad spectrum exclusion for pollution losses arising from cargo. There is an exception to the exclusion if the pollutants escape from the operating fluids of the vehicle.
Property Insurance Policies
Special Perils Coverage Form (Formerly All Risk)
This form contains a broad form pollution exclusion. It may have a token sublimit for pollution cleanup of covered property if the pollution was a result of an otherwise covered cause of loss.
Defined Perils Coverage Form
Pollution is not a covered peril; therefore, a pollution exclusion is technically not needed. It is common to find pollution cleanup sublimits which will apply if the pollution was a result of an otherwise covered cause of loss.
Property Insurance Summary
To have insurance coverage for pollution/contamination losses under property insurance, policies there first has to be a covered cause of loss event. Receiving a letter from the government demanding the cleanup of something is not a covered cause of loss under a property insurance policy. Pollution exclusions and sublimits also effect extra expense, loss of rents, and business interruption coverages. Gaps in property insurance coverage created by pollution exclusions can be insured under a high quality environmental impairment liability insurance policy.
Professional Liability Insurance Policies
It is common to find exclusions for losses "related to" or even associated with contamination events in a professional liability insurance policy. A professional malpractice claim made by a customer against an insurance agent/broker for a uninsured mold loss can be excluded by a "mold-related" loss exclusion in an insurance agents professional liability insurance. Accountants who misrepresent the financial condition of a company as a result of undisclosed environmental costs or in a discussion of a firm's pollution insurance in a financial report could have a similar problem with a "pollution-related" loss exclusion on the accountant's professional liability insurance policy.
New Generation Pollution Exclusions
It is now common to find exclusions for specified pollutants in property and liability commercial insurance policies. These are some of the more common specific contaminates exclusions.
Fungus/Bacteria Exclusions
In practice, these are referred to as mold exclusions, but they apply equally to contamination caused by amount of any kind by fungi or bacteria. These exclusions in both liability and property insurance policies usually contain an anti-concurrent causation clause that eliminates proximate cause of loss arguments to get around the exclusion to find coverage.
Asbestos/Silica/Lead Exclusions
Exclusions for asbestos, silica, and lead, as separately defined excluded cause of loss in endorsements, are essentially "total pollution" exclusions in GL policies for these specific sources of contaminates.
Miscellaneous Exclusions
Some causes of loss may be excluded under both a pollution exclusion and a new generation specified contaminate exclusion. For example, a claim arising from Legionnaires' disease will be excluded under a fungi/bacteria exclusion and under the traditional pollution exclusion in both property and liability insurance policies in any state where bacteria has been determined by case law to be a "pollutant."
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