Rational CPL Insurance Specifications

Major Differences from Standard Insurance Lines

While requiring CPL insurance is a good idea when virtually any contaminant can trigger a pollution exclusion, depending on the case law in individual states, simply adding a sentence requiring "pollution insurance" to an insurance specification is almost certain to lead to more insurance coverage gap surprises. There are major differences between pollution insurance policies and the standardized lines of insurance, such as workers compensation, automobile liability, and commercial general liability insurance, found in insurance specifications. Environmental insurance differs from these traditional insurance coverages in these ways:

There are no common insurance industry standards for environmental insurance policies.

Insurance commissioners do not regulate the policy forms or rates charged.

It is entirely possible to buy a pollution insurance policy that excludes everything the insurance buyer does for a living.

Pollution insurance policies are being used today to insure pollutants in places that the original CPL policy designs were never designed to cover.

Due to the absence of training venues for environmental insurance, the fundamental coverage defect rate on environmental insurance placements can be over 90 percent in some classes of business.

For these reasons, it is necessary to be very specific when requiring any form of environmental insurance in a contract.

Standard Specifications

The "Standard General Condition Contract" of the engineers contains this specification for CPL insurance:

Contractor's pollution liability insurance: Contractor shall purchase and maintain a policy covering third-party injury and property damage claims, including clean-up costs, as a result of pollution conditions arising from the Contractor's operations and completed operations. This insurance shall be maintained for no less than three years after final completion.

For its brevity, this is a great CPL specification. It even addresses completed operations loss exposures!

The Evolution of CPL Insurance

CPL insurance is intended to fill the gap in liability insurance created by the pollution exclusions in the general liability policy. Pollution exclusions have been around for 40 years and are continuously expanding in scope.

In 1986, when the first CPL policy was created, the driving need for pollution insurance on contractors was to insure the government contractors that were working to clean up Superfund hazardous waste sites for the US Environmental Protection Agency. At the time, there was only one pollution exclusion on the general liability policy to be concerned about, and all of the work of the remedial action contractors was performed outside. Damage to the contractor's job site was excluded by necessity, and no one on the CPL policy design team ever thought that water damage could be excluded by pollution exclusions. I know this because I was on that team. The original CPL policy design was not at all well suited for indoor environmental loss exposures.

CPL insurance has been available and continuously evolving since 1986. So why would the engineers start requiring CPL insurance in 2013? What changed?

The answer is likely a combination of things. It has never been a rational risk management strategy to ignore the very existence of the longest exclusion on the general liability policy. Plus, insurance companies kept expanding the things they wanted to exclude as "contaminants." For example, by excluding bacteria in the fungi exclusion endorsement, in effect, all losses and the work sites associated with a Category 3 water loss were excluded under both liability and property insurance policies. There are lots of losses arising from Category 3 water, which includes all water in a drainpipe after the trap and all water that comes into contact with soil, and even water-soaked carpeting after a few days becomes Category 3 water. After decades of insurance coverage disappointments due to pollution exclusions, it was time to quit pretending that pollution exclusions only applied to hazardous waste remediation contractors—which had never been the case.

The original CPL policies were never intended to be used for what they are used for today. Separate exclusions for mold, fungi, bacteria, asbestos, silica, and lead are all variations of "pollution" exclusions. Each of these newly excluded "pollutants" needs to be accounted for in a CPL policy. Some of these modern environmental coverage elements may not be addressed in a CPL originally designed for a Superfund contactor.

Rational Insurance Specifications for Contractors Environmental Liability

Maintaining the insurance coverages below are a material part of our decision to engage the services of the contractor. The contractor shall, at its sole expense, purchase and maintain insurance as outlined below.

I. Minimum Scope of Insurance for Contractor
- A. Contractors environmental liability or an equivalent coverage part within the general liability policy. (Job site pollution coverage extensions to general liability policies will not fulfill this requirement.)
  
  This policy shall provide coverage for:
  - 1. bodily injury, sickness, disease, sustained by any person, including death;
  - 2. property damage, including physical injury to or destruction of tangible property including the resulting loss of use thereof;
  - 3. cleanup costs, and the loss of use of tangible property that has not been physically injured or destroyed including diminution of value and natural resources damages;
  - 4. defense costs, including costs, charges, and expenses incurred in the investigation, adjustment, or defense of claims;
  - 5. contractual liability coverage, e.g., coverage for liability assumed by the named insured under a written contract or agreement;
  - 6. the full scope of the named insured's operations as described within the scope of work for this contract; and
  - 7. claims arising from owned and nonowned disposal sites utilized in the performance of this contract.
- This coverage can be provided on either a claims-made or an occurrence-based policy form.
  
  The policy must insure contractual liability, be primary and noncontributory, and name the site owner or general contractor as an additional insured.
  
  The policy must insure loss arising from pollutants including but not limited to fungus, bacteria, asbestos, lead, silica, and contaminated drywall.
  
  The CPL policy may not contain separate restrictions for:
  - 1. insured versus insured actions (however, exclusions for claims made between insureds within the same economic family are acceptable),
  - 2. completed operations in any coverage part of the policy for either the insured or the additional insured certificate holder,
  - 3. damage to property that cannot be used or is less useful because of the operations of the insured,
  - 4. work performed by subcontractors, or
  - 5. drywall.
  Completed operations on the CPL coverage shall be maintained through the purchase of renewal policies to protect the insured and additional insured for at least 2 years after the property owner accepts the project or this contract is terminated. The purchase of an extended discovery period or an extended reporting period on a claims-made policy or the purchase of occurrence based contractors environmental insurance will not be sufficient to meet the terms of this provision.
  
  If the CPL coverage is provided on a claims-made basis, coverage will at least be retroactive to the earlier of the date of this contract or the commencement of contractor services in relation to the work, and the policy will offer an extended discovery clause of at least 3 years in addition to 2 years of completed operations coverage.
  
  Waiver of Subrogation. Contractor waives all rights against owner and its agents, officers, directors, and employees for recovery of damages to the extent these damages are covered by the business auto liability or commercial umbrella liability insurance obtained by contractor pursuant to this agreement or under any applicable auto physical damage coverage.
II. Minimum Limits of Insurance for Contractor

Contractor shall maintain limits no less than:
- A. Contractors environmental liability: $1,000,000 per loss; $2,000,000 aggregate
- B. Use of commercial general liability (CGL)/CPL package policies; if a package policy is utilized, the following limits will apply: $3,000,000 per loss; $3,000,000 in aggregate
III. Acceptability of Insurers

Unless otherwise agreed to in writing by owner, insurance is to be placed with insurers that have a Best's Insurance Reports rating of no less than "A" and a financial size of no less than Class "VII."
IV. Additional Insureds

The following parties shall be named as additional insureds on the contractors environmental liability for liability arising from the project work.
- A. Site owner or general contractor
The CGL and CPL coverage for these additional insureds shall be on a primary and noncontributory basis. The additional insured endorsement on the CGL policies shall be provided under Insurance Services Office, Inc., form CG 20 10 for ongoing operations and CG 20 37 07 04 completed operations and their equivalent on the CPL policy.
V. Additional Insurance Requirements

Any and all deductibles or other forms of retention are the responsibility of the contractor. All deductibles or other forms of retention are subject to the approval of owner. Contractor will disclose to the owner in writing the amounts of any deductibles or self-insured retentions on the insurance required under this contract.

The addition of a requirement for CPL insurance in the "Standard General Conditions of the Construction Contract" is a risk management breakthrough. It was never rational to ignore the existence of pollution exclusions in insurance policies when setting the insurance requirements of vendors. Lenders should take a lesson from the engineers.