Pollution claims are on the rise. In response, businesses need to be better informed about their environmental risk exposure. This is especially true for contractors and commercial property owners.
- Contractors may engage in activities that unintentionally release pollutants during construction.
- Commercial property, property being developed and other landowners’ property may be a source of ground or air pollution.
Excavation, laying pipeline, rehabbing or restoring property, or disposing of waste can all release pollutants and create liability.
Types of environmental liability insurance
There are two main types of environmental insurance: contractors pollution liability (CPL) and pollution legal liability (PLL). These policies provide coverage for loss, personal injuries or damages resulting from pollutants. Such coverages are typically excluded from general liability and property insurance policies.
Contractors pollution liability
CPL is designed to protect contractors who are on a job site and may release pollutants during their work. Examples include surface water contamination, chemical spills, inappropriate disposal of hazardous materials, asbestos exposure, and mold and bacteria caused by poorly installed HVAC systems.
Pollution legal liability
PLL covers environmental liability risks faced by those who own or lease property for ongoing operations. Coverage is available for apartment buildings, hotels, factories, hospitals, energy companies and other businesses. PLL policies may cover new and existing pollution.
Both CPL and PLL provide first- and third-party liability coverage. That is, the owner of the policy is covered against losses and damages, and so are third parties who may sustain bodily injury or property damage from the pollution. These policies should also help pay legal defenses and pollution cleanup costs. If you find a policy that doesn’t cover these costs, look for one that does.
Environmental liability insurance requires experience
If you’re in the market for environmental insurance, be sure to retain the services of an insurance agent or broker who specializes in pollution liability coverage. Environmental insurance can be complex and difficult to understand, and not every agent has experience with these policies.
Start by familiarizing yourself with the basics of environmental liability so you can make an informed buying decision.
Commercial general liability (CGL) doesn’t cover pollution liability
The National Association of Insurance Commissioners (NAIC) reports that many insureds mistakenly believe they are covered for pollution under their general liability and property policies. In reality, these types of policies either limit or completely exclude coverage for pollution, according to NAIC.
CERCLA or Superfund Act
The reason your general liability policy won’t help you with pollution claims has to do with changes in environmental law. After the passage of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA or the Superfund Act), many companies looked to their CGL policies to pay for environmental cleanups they were held responsible for under the new law.
Most CGL policies already had pollution exclusions but still covered “sudden and accidental” instances of pollution. Due to unforeseen losses, the insurance industry further tightened the wording in CGL policies, excluding almost all pollution.
Today, the main exceptions to the standard CGL exclusions are smoke from an out-of-control fire or fumes from a faulty heating or air-conditioning system, according to the Insurance Information Institute. Outside of that, general liability policies restrict pollution.
Pollution coverage is available, but the market can be confusing
There is no standard environmental insurance form. That means policies can be very different, even within the same industry. The language varies and so do the exclusions. Much of the CPL and PLL coverage is written in the excess and surplus lines market. Your insurance professional can advise you on the financial stability of the insurer.
The NAIC cautions that agents and brokers don’t always understand pollution exclusions, so make sure your insurance advisor is experienced in this market. Seek legal advice from a law firm specializing in environmental law.
What to look for in a policy
Here are some considerations when choosing a CPL or PLL policy:
- Claims-made vs. occurrence. A claims-made policy will pay claims made during the policy’s reporting period. You can usually add an extended reporting period (ERP or tail) to offset some of the unknown future liabilities. An occurrence policy will pay claims if the pollution incident occurred while the policy was active, even if the policy is no longer active at the time the claim is made.
- Cleanup and business interruption. Check if your policy covers the cost of cleaning up spills and contamination, business interruptions (while correcting a hazard or cleaning up afterward) and your legal expenses. It should also help cover the cost of removing contaminated materials and restoring damaged property.
- Covered pollutants. Policies vary in their definition of covered pollutants and events. Make sure your policy covers a broad range of pollutants. For contractors, examples include lead-based paint, asbestos, contaminated fill dirt, spilled fuel, epoxy sealant, wood strippers, solvents, caulk, welding fumes, roofing tar, and bacteria and mold.
- Pollution endorsements. You may be able to add pollution as an endorsement to another policy. For example, architects, engineers, remediation contractors, hazard cleanup specialists and testing labs can usually add an endorsement to extend their errors and omissions coverage.
- Premises pollution liability. Another type of liability coverage available to landowners is premises pollution liability. This coverage protects the insured when there are existing pollutants on the property that could be a liability. An example might be an underground fuel storage tank leaking into the soil.
- Required coverage. Project owners often require contractors to have pollution liability coverage. You should be able to purchase coverage for the duration of the project or on a blanket program basis. Be sure to extend your coverage to meet any prolonged periods (tail provisions) required in your contract. Pollution liability coverage is often included in construction wrap-up policies, which should cover most contractors on a project.
- NOHS claims. Many claims in recent years have involved naturally occurring hazardous substances (NOHS). For example, a contractor excavates soil and uses it as fill at other job sites. Later, the soil is found to have traces of actinolite, which contains asbestos. This could result in an NOHS claim.
The Society of Environmental Insurance Professionals (SEIP) estimates that only 2% of insurance buyers have the environmental liability insurance they need to cover their risk exposure.
Be proactive about your liability
Talk to an environmental insurance specialist about the type of activities your business is involved in. Be clear on the exclusions of all environmental liability policies. Have your lawyer read the insurance policy before you sign or contact a lawyer who specializes in environmental law. A pollution claim and the resulting cleanup could devastate your business, and insurance premiums are modest compared to the cost of not being protected when you need it.
