Avoid Common Errors with Environmental Risks and Insurance

Pollution Exclusions in Insurance Program Designs

This is a primary cause of errors with environmental risks in the typical insurance program design. It is also the first hurdle to overcome in regard to properly dealing with environmental risks and effectively placing environmental insurance. The effects of pollution exclusions are routinely ignored by insurance professionals in the insurance programs of their customer base. It's a bit perplexing that exclusion f, Pollution, the longest exclusion in the commercial general liability (CGL) policy, is so often disregarded when agents and brokers are so good at utilizing workers compensation insurance and automobile liability coverage to fill the coverage gaps in general liability policies created by exclusions for these causes of loss. In addition, most standard property insurance policies have exclusions for pollution cleanup or significantly sublimit coverage for pollution-related losses, including mold, bacteria, and other contamination events.

A common misconception is the idea that pollution exclusions only apply to hazardous materials and waste or the traditional model of a pollution loss at an industrial site. A typical train of thought when considering whether a client has a pollution loss exposure or not is to ask if they handle any hazardous materials or substances. If they don't, then about half (in my experience teaching continuing education classes on this subject) the insurance brokers believe environmental insurance is unnecessary. If only it were that simple. Unfortunately, almost every business faces some kind of environmental loss exposure arising from a contamination-related loss.

For that reason, good commercial insurance designs require recognizing and understanding the broad-reaching effects of pollution exclusions. Since their beginning in 1970, pollution exclusions have never been limited to hazardous waste, chemicals, or other similar materials. In reality, pollution exclusions can apply to any loss involving irritants or contaminants because of their inclusion of these words in the standard definition of "pollutants." This definition often contains specific constituents as well; for example, smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste are also included, but these are merely suggestions for what could qualify as a pollutant in an insurance policy. In no way is the definition of "pollutants" restricted to just these materials.

Irritant and contaminant are really the operating terms within the definition of pollutants. Almost any substance can become an irritant or contaminant in the right environment or situation. To emphasize just how widespread the application of a pollution exclusion can be, I like to use the example of bacteria-contaminated sandwiches triggering the pollution exclusion and denying insurance coverage for a claim. Not surprisingly, this coverage denial was challenged by the policyholder, but the insurance company's decision that the proximate cause of the loss was contamination was upheld at the state appellate court level. I don't know about you, but to me, a sandwich is about as far away from hazardous waste as anything I can imagine.

With the irritant and contaminant idea in mind, it's important to note that case law greatly influences how pollution exclusions operate in terms of coverage determinations. Case law varies by state, and it often changes over time. What may be considered a pollutant in one state may not be in another, at least for the time being. This creates incredible uncertainty in coverage determinations. If you think you can predict the effects of a pollution exclusion pre-loss, that is only because you are confused. The external factors to the insurance policy make such predictions impossible. For example, in time-element-based pollution coverage givebacks, the exact timing of when the fish died could be the difference between coverage and an exclusion taking effect. The fish cannot be depended on to die on cue.

Pollution exclusions can trigger for essentially any type of risk and be applied to a wide array of contamination events. Despite this, I continue to see folks ignore pollution exclusions altogether or greatly underestimate their broad application. The only way to properly design an insurance program is to assume all environmental, pollution, and contamination losses will be excluded and to fill the resulting coverage gaps with the appropriate forms of environmental insurance. However, as we will see, people often attempt to complete this step with restrictive, ineffective extensions to general liability (GL) policies that act as endorsed exceptions to the pollution exclusion. That is a common mistake in practice.

GL Policy Coverage Givebacks That Look Like "Pollution Insurance"

A recurring mistake is givebacks to the pollution exclusion or "pollution coverage" extensions being passed off as legitimate environmental or pollution insurance on insurance certificates. The most common mistake is insurance professionals certifying a job site exception to a pollution exclusion on a GL policy as contractors environmental liability (CEL) coverage, perhaps better knowns as contractors pollution liability (CPL) insurance. Oftentimes, this mistake is made by insurance practitioners by no fault of their own; insurance company marketing folks developed job site, time-element exceptions to pollution exclusions on the GL policy and label the endorsements with titles as convincing as "Contractors Pollution Liability." Who would think to question that? Unfortunately, calling something CPL insurance doesn't make it so.

While there are no insurance industry design standards for CPL insurance, and the policy forms vary from insurer to insurer, a genuine CPL policy has a few core elements that make it true CPL coverage. A legitimate CPL policy has an insuring agreement that says it will pay for claims for bodily injury, property damage, cleanup costs, and defense costs but only for losses arising from the emission or discharge of pollutants. The definition of bodily injury, property damage, and defense costs will closely resemble the definitions for those coverage parameters in a typical GL policy; however, a GL policy lacks an insuring agreement that responds to environmental, pollution, and contamination losses, and it does not reference cleanup costs. The takeaway here is that it is not okay to certify givebacks or coverage extensions to pollution exclusions on the GL policy as legitimate CPL coverage.

In another example, it's very common for folks to refer to time-element-based exceptions to pollution exclusions as environmental impairment liability (EIL) coverage or site pollution insurance. In some sense, it can be construed as a form of this type of pollution event "coverage," but in reality, it is much more restrictive and lacks the key elements of legitimate EIL or site pollution coverage. A time-element-based endorsed exception to pollution exclusions in a GL policy will not exclude coverage for bodily injury and property damage arising from a pollution release that begins and ends within a discrete time frame, usually measured in hours, and is discovered and reported to the insurance company within a set time, usually measured in days. As you may have guessed, any covered damages in the GL policy that arise from a pollution release or condition that lasts longer than the allotted time frame or a loss that is not reported to the insurer within the set time period will not qualify for coverage.

Similar to the issue with the job site pollution release exceptions for contractors GL policies, there is no insuring agreement in a time-element exception to a pollution exclusion that says it will pay for claims for bodily injury, property damage, cleanup costs, and defense costs resulting from a pollution condition on, at, under, or emanating from a covered location. In addition, since it is an extension or endorsement to the GL policy, there is no mention of cleanup costs. These are key components of true EIL or site pollution coverage. Therefore, referring to time-element-based exceptions to pollution exclusions on GL policies as actual environmental insurance is not OK. It is also not OK to refer to time-element pollution release and report coverage givebacks as "sudden and accidental pollution coverage" no matter what an insurance marketer has labeled the endorsement.

A coverage giveback to the pollution exclusion is simply an exclusion to an exclusion. It just seems nonsensical to be digging through the language of an exclusion looking for coverage; there's just something really wrong with that picture. This shaky coverage design of relying on exclusions to exclusions, sometimes running four levels deep in an insurance policy, explains why pollution exclusions are the most litigated words in the history of insurance. With over $2 billion of expert witness work involving litigated pollution damages under my belt, I don't see the court battles over pollution exclusions ending any time soon. Almost all of this coverage litigation could have been avoided if the proper form of environmental insurance had been purchased in the first place.

As mentioned, pollution exclusions have a much broader application than many people believe. True environmental or pollution insurance coverage is required to properly cover insureds for their environmental, pollution, and contamination loss exposures. Coverage givebacks to pollution exclusions and endorsed extensions to a GL policy for pollution-related claims should not be confused with environmental insurance. Attempting to pass them off as such is not good for the insurance buyer or the insurance practitioner.

Insurance Specifications for Environmental Coverage

Being an environmental insurance wholesale broker, my company is privy to a good amount of insurance specifications or requirements, particularly for environmental and pollution insurance. Some of these insurance specifications are good. They ask for the right type of policy or coverage, adequate or appropriate limits, and properly handle any additional coverage requirements such as additional insured coverage. However, a lot of the ones that we see are not so good. A standout in the not-so-good category is the environmental insurance specifications coming from lenders. The insurance requirements to address environmental risks in loan covenants can best be described as pitifully naive in my experience.

Too often, the insurance specification being required of an insured, such as a contractor or property owner, does not ask for the type of coverage that would actually indemnify the requestor for claims related to the insured's environmental loss exposures. For example, a landlord asking his manufacturing tenant for a CPL policy is illogical because the actual environmental loss exposure for the manufacturing tenant is a pollution or contamination incident on, at, under, or emanating from their location. Almost all CPL policies have an exclusion for a pollution incident at your owned or operated site or location; therefore, a CPL policy would not respond to a pollution or contamination incident at the manufacturer's location. So, the landlord, by asking for a CPL policy, isn't getting any protection or indemnification from his tenant in this arrangement for the risk he is taking on. What the landlord should be asking for is an EIL or site pollution policy because these are designed to provide coverage for pollution incidents on, at, under, or emanating from the insured's covered location(s).

I could go on and on about the ridiculous insurance specifications we see in our office, but by far the worst case is one that we see all of the time, and it is the request for sudden and accidental (S&A) pollution coverage. Why is it so absurd? The reason is that S&A pollution coverage is essentially a myth and hasn't been available for purchase for decades. As we'll just scratch the surface of this topic here, I encourage you to check out an article that I wrote on the sudden and accidental pollution coverage myth for a more in-depth conversation of this issue. The short story is that, in 1970, insurance companies introduced a brand-new exclusion to the comprehensive general liability (the precursor to the CGL) policy that eliminated coverage for claims arising from the emission or discharge of pollutants. However, this exclusion provided an exception—if the pollution release was "sudden and accidental," the pollution exclusion would not apply to the resulting bodily injury or property damage.

Prior to the introduction of this new pollution exclusion, CGL policies were totally silent on losses arising from the emission or discharge of pollutants, but that didn't stop insurance company marketing folks from promoting this exception or giveback to the new exclusion as "sudden and accidental pollution coverage." The authors of this new pollution exclusion never called it "sudden and accidental pollution coverage"; in fact, the authors introduced this standardized pollution exclusion endorsement for the CGL policy as "the contamination or pollution exclusion" in the 1971 volume of Fire, Casualty, & Surety Bulletin. So, how did a new exclusion get introduced as a brand new form of "coverage"? It seems the insurance marketers won on that one.

What followed in the years after the introduction of this pollution exclusion was an onslaught of litigation over the meaning of "sudden." In other words, what constituted a "sudden" pollution release or incident? Did it mean "pretty darn quick"? Was it restrictive to the release or escape itself, or did that apply also to the discovery? Eventually, the courts stopped trying to define "sudden" and instead upheld that "accidental" meant "unexpected and unintended." By doing so, policyholders could find coverage for pollution releases that took place over an extended period of time under GL policies so long as the claim resulted from pollution and the claim, not the pollution itself, was unexpected and unintended.

To escape these claims once and for all, insurance companies revised the pollution exclusion and released a more extensive update in 1986. This revamp did not include a sudden and accidental exception. Therefore, when someone asks for S&A pollution coverage, they are asking for something that hasn't been available since before 1986. Unless you are able to procure a comprehensive general liability policy with the original 1970s version of the pollution exclusion, you cannot truly provide S&A pollution coverage. What the requestor is probably looking for is time-element pollution coverage.

Basically, know what you're asking for when requesting environmental or pollution insurance coverage. Don't rely on someone else's insurance specifications to get it right because a lot of them don't. If you have questions or concerns on writing an insurance specification or attempting to comply with one, reach out to an experienced environmental insurance specialist. My previous article, "Rational CPL Insurance Specifications," may be a helpful guide.

Environmental Insurance Policy Forms Not Fit for Indoor Use

Perhaps one of the most frustrating aspects of environmental insurance is its inconsistency across the market. While each line of coverage, such as EIL and CPL, has its core components, they can vary widely from insurer to insurer and even from risk to risk. The reason for this is almost all environmental and pollution insurance policies are written in the excess and surplus lines market. This relatively unregulated, nonadmitted market allows for incredible diversification. Insurers and insurance professionals who work with them have the freedom to customize policies to their liking; they can add or remove lines of coverage, change the coverage through definitions, and essentially broaden or restrict coverage as they see fit. However, this freedom comes at a price—not all policies are created equal or are designed to work for every type of risk. Some environmental insurance policies are not fit for the purpose for which they are being used.

The biggest mistake I see in actual insurance placements is inadequate coverage for indoor air quality loss exposures on many environmental insurance policies. The reason for this is a mix of the inconsistency of policy forms across the marketplace and the expansion of excluded indoor environmental, pollution, and contamination loss exposures. Something to always keep in mind is the core environmental insurance policy forms were all designed originally for outdoor use. Ignoring this fact in the sale of environmental insurance policies creates many unanticipated coverage gaps.

CPL insurance is a coverage many readers are probably familiar with. What you may not be aware of is that significant modifications are necessary to many CPL-based policy forms for them to properly insure indoor environmental loss exposures. For example, fire and water damage restoration contractors working to dry out a home after a water loss can cause further damage to the home if they do a poor drying job. In this scenario, the claim for property damage and cleanup costs to remedy the problem could be denied under many CPL policies due to exclusions for damage to the job site. Why is that?

It basically boils down to the fact that CPL insurance is being used to insure risks it was not originally designed to cover. CPL was originally created to insure contractors working for the US Environmental Protection Agency (EPA) to clean up Superfund hazardous waste sites. The sites were already terribly contaminated, so the CPL policies excluded cleaning up the site itself. How do I know this? I led the EPA taskforce of insurance professionals who developed the first CPL policy in 1986 for this very work. When we were drafting this policy, we never imagined it would someday be used to insure folks working with water pipes in a kitchen or to insure claims for mold or bacteria in the built environment or to cover losses from disturbing asbestos or lead paint indoors. Fortunately, there are CPL policies out there that work for indoor loss exposures, and they usually don't cost much more than the ones that are fundamentally flawed in their coverage for indoor cleanup expenses. Being able to tell the difference offers an incredible competitive advantage for insurance professionals.

Not surprisingly, I also witness similar issues on EIL and site pollution policies. It's not uncommon to find a site pollution policy that doesn't provide coverage for the core environmental loss exposures faced by the risk. As an example, most off-the-shelf policies do not provide coverage for mold or full-spectrum bacteria loss exposures that all commercial buildings have.

In 2005, the US insurance market slipped fungi and bacteria sublimits and exclusions into virtually all forms of property and liability insurance policies. When they did this, many losses involving water intrusion in commercial buildings became technically excluded or severely sublimited "pollution" losses. This is because both fungi (mold) and bacteria are omnipresent—they are always present in the environment. These new sublimits and exclusions are written to click in when even a speck of any type of mold or bacteria are involved in a loss; therefore, water essentially became a source of excluded pollution claims because it causes mold growth on drywall in 72 hours or the water itself had bacteria in it.  

This creates a bit of a situation. Water intrusion events make up a solid chunk of commercial property insurance claims. It's reported that 60 percent of all losses under property insurance policies involve water intrusion in a structure. That is pretty significant. To add fuel to the fire, the standard property insurance policy has a $10,000 sublimit for mold or bacteria-related losses; most liability insurance policies may just exclude it altogether. Compare that to the average mold remediation job for a commercial building costing $250,000. That leaves quite a gap in coverage.

With all of this in mind, modified environmental and pollution insurance policies are needed to properly cover businesses for their indoor environmental loss exposures because most off-the-shelf policies are insufficient. The original CPL policy did not consider contractors working in the built environment, and most site pollution policies are designed to cover the classic industrial contamination claims, so they don't take into consideration the indoor air quality loss exposures that every commercial building and everybody working on those building face.

As I mentioned, almost all pollution policies are written in the surplus lines market, so there is considerable variability in the forms, endorsements, and overall coverage. This grants the ability to modify coverage to fit the need of the client. However, this also means that every policy is a bit different and must be reviewed to ensure it provides coverage for the environmental loss exposures faced by the insured.

The Frequency and Severity of Environmental and Pollution Losses

The last common mistake I will bring up is people's aptitude to greatly misjudge the likelihood and the significance of environmental, pollution, and contamination losses. This particular mistake incorporates a bit of each of the errors already discussed because people underestimate the effects of pollution exclusions and, in course, then utilize inadequate insurance "coverage" for contamination-related losses. In practice, in my experience, insurance buyers will routinely underestimate their environmental loss exposure by 10 to 14 times.

Let's start with the traditional, stereotypical pollution loss that comes to mind for most people when they hear the word pollution loss: soil and groundwater contamination. The EPA or the state is involved with most, if not all, soil and groundwater contamination remediation and cleanup efforts in some capacity. Whenever the EPA gets involved, you can expect things to get expensive.

In a study from 2011, researchers gathered data on EPA expenditures for cleanups that were completed between 2001 and 2006; these data reflect EPA funds spent on assessment, cleanup, payroll, and travel. The median level of EPA spending was $338,000 and ranged between $0 and $52 million. ¹ It was noted that these expenditures do not represent the full direct cost of remediation and removal activities because they do not include costs to potentially responsible parties, state agencies, or other federal agencies, nor potential ecological or health impacts from cleanup actions.

A common misconception is that folks think "Well, I don't do any manufacturing with or work with hazardous chemicals or materials, so I don't have any exposure for this kind of thing. Therefore, I don't need environmental insurance." The truth is the EPA considers anyone who held any economic interest in a contaminated site, before or after contamination, a potentially responsible party, and they can be held liable for part or all of the cleanup. Perhaps you were the lessor of a property that now requires a cleanup effort; odds are you're on the hook with the EPA even though you may have not had anything to do with the contamination itself. Maybe the site that you now operate your business on, unbeknownst to you, is polluted, and you receive a notice from the EPA that you are a potentially responsible party. At the very least, you will be burdened with the task of arguing your case as to why you should not be held responsible for the cleanup and remediation costs, which can be extensive and costly. A well-designed environmental insurance policy can provide coverage for this kind of thing, and with the expansion of the marketplace over the last 40 years, these policies are widely available and surprisingly inexpensive.

I would argue that no business or organization is immune to environmental or contamination losses. The ever-increasing application of pollution exclusions has shown that almost any material or substance can be a "pollutant" in the right situation. EPA data show just how costly these losses can become. Many small- and medium-sized businesses would not be able to foot the bill for a full-blown remediation cleanup job. In addition, it's not just businesses and insurance professionals that underestimate environmental and pollution loss exposure, insurance companies do it as well. Take the example of a well-known provider of pollution liability coverage who just in the last few years pulled an entire product line out of the marketplace due to a crippling loss ratio.

Then there are the contamination loss exposures that most people don't even think about as environmental or pollution. Mold and bacteria are huge environmental loss exposures for any business that operates in the built environment. Many insurance companies began adding fungi or bacteria exclusions to their standard liability and property policies in the mid-2000s during the toxic mold scare; these exclusions are essentially pollution exclusions specifically for fungi (mold) and bacteria that either completely eliminate coverage for losses involving these constituents or severely sublimit them. As reported above, the average mold remediation job for a commercial building is $250,000, not far off from the median EPA expenditures. This has made a hotel just as good of a prospect for environmental insurance as a municipal landfill.

Just as you shouldn't underestimate your client's environmental, pollution, and contamination loss exposures, you shouldn't undervalue the need for legitimate environmental or pollution insurance coverage. Earlier we went over why extensions and givebacks on a GL policy are insufficient to cover these loss exposures. Give as much weight to consideration of the right coverage as you would to the risk at hand. There are environmental insurance products available for almost every risk that will cover them for their contamination loss exposures.

Conclusion

This all derives from the introduction of the pollution exclusion on GL insurance policies and insurance companies' reluctance to cover contamination-related losses. Why do some people continue to ignore this exclusion, the longest and least understood exclusion in the GL policy? I'm not sure that there is a simple answer to that question. However, it's clear that doing so is no longer acceptable, and attention should be given to environmental, pollution, and contamination loss exposures and how to properly cover them. To do so means operating in the environmental insurance world.

The world of environmental risk and insurance can be treacherous at times. With varying policy forms and endorsements, changing definitions, and expanding applications of pollution exclusions, it can be easy to make a mistake when evaluating risks and placing coverage. I've highlighted some of the tricky areas I come across on a regular basis in the hopes you can recognize and avoid errors in them in the future. I leave you with one final piece of advice: find and utilize an environmental insurance specialist and resource to help navigate this niche insurance market to ensure you are putting your right foot forward not only for your client's sake but also your business. Few commercial insurance buyers are insured for their contamination risks. And of those that are, by my estimation about half the policies being purchased contain material and avoidable coverage defects mostly from using environmental insurance coverage forms for purposes they were never contemplated to cover.