OPPORTUNITIES IN CONTRACTORS POLLUTION LIABILITY
Protect your clients and your E&O exposure
By David Dybdahl, CPCU
Contractors pollution liability (CPL) coverage is designed to fill the gaps created by contamination exclusions in general liability policies. Selling CPL is a good way to add value to your contractor customer base, write new business, and reduce your agency’s professional liability loss exposures from unintentionally uninsured losses associated with pollution and contamination claims.
Unfortunately, after 30 years of continuous availability, the placement error rate in CPL insurance is still accelerating. Today most contractors are severely underserved with respect to their CPL exposures. As in other underserved sectors, CPL offers producers exceptional new business opportunities.
Many common coverage gaps in CPL programs exist because CPL is being used to insure risks it was not originally designed to cover.
How is it possible that agents have more clients with uninsured environmental risks today than they did 20 years ago? The answer is that carriers have slipped a host of new exclusions for losses associated with contamination events into property and liability policies, and nobody told producers that the rules of the game had changed. The result is unintentionally uninsured clients and pollution coverage gaps running throughout entire insurance programs.
The good news is that quality CPL policies are available that cover contractors for the environmental and pollution exposures they face. These policies usually don’t cost any more than a glitchy CPL policy, and minimum premiums start as low as $1,000.
Pollution coverage gaps and the availability of affordable, quality CPL policies give you an excellent opportunity to create effective insurance programs for contractors that cover losses arising from pollution, fungi, bacteria, lead, asbestos, silica, and other contamination events. Here are some guidelines you may find helpful:
- Don’t confuse a GL policy with CPL insurance.
- Pay attention to fungi and/or bacteria exclusions.
- Recognize that the base CPL policy form is not designed for indoor use.
Don’t confuse a GL policy with CPL insurance. Based on a survey of producers who attend my continuing education classes on pollution exclusions and environmental insurance, about a third routinely certify job site exceptions to pollution exclusions on the GL policy as CPL insurance. Exacerbating the problem is the fact that some carriers place job site time element exceptions to the pollution exclusion in the GL policy and label the endorsement “contractors pollution liability.”
Although there are no industry standards for CPL insurance and policy forms vary by carrier, the insuring agreement of a true CPL policy states that it will pay claims for bodily injury, property damage, cleanup costs and defense costs, but only for losses that arise from the emission or discharge of pollutants. The definitions of bodily injury, property damage and defense costs track closely with the definitions for those coverage parameters in a typical GL policy, but what a GL policy is missing is an insuring agreement for pollution losses and a reference to covering cleanup costs. Without those two coverage elements, it is not okay to certify exceptions to pollution exclusions in the GL policy as CPL insurance.
Pay attention to exclusions for fungi and/or bacteria. Another common problem is driven by fungi and bacteria exclusions commonly endorsed onto contractors GL policies since 2004. These exclusions can eliminate coverage under the GL if a loss involves even the threatened existence of any amount or kind of fungi or bacteria. In addition to excluding losses associated with exposure to fungi or bacteria, this common ISO-based exclusion endorsement eliminates any loss that arises from the job site where an insured may be cleaning up fungi or bacteria. The typical GL policy fungi or bacteria exclusion is essentially a total pollution exclusion on steroids. These exclusions technically bar coverage for many common water intrusion losses by classifying them as “pollution” losses. The need for environmental insurance increased dramatically with the introduction of fungi and bacteria exclusions; little has been done to address resulting coverage gaps.
To appreciate the significance of these exclusions, it helps to know some facts about fungi and bacteria losses, with particular emphasis on their prevalence. Mold is a kind of fungus, and it was a hot topic in the media in the early 2000s with the toxic mold insurance crisis and the Chinese drywall scandal. In most cases moisture on drywall at room temperature will lead to mold growth within 72 hours. Almost every general or trade contractor who works in buildings has a mold exposure; it doesn’t take much to turn a project into a moldy mess.
Many more mold remediation contractors are in business today than in 2002. Nine out of ten firms are sold liability packages that do not meet the insurance specifications of their customers. Specialized environmental insurance packages have been developed specifically for this class of business.
Many agents and brokers didn’t realize that, in addition to excluding mold, carriers slipped in bacteria exclusions at the same time. Category 3 water exclusions are commonplace and include all water in a drainpipe after the trap, all water that comes in contact with soil, all water in a wet sprinkler system, and all the water in a sewer system. So a plumber who shows up to repair a clogged toilet or a restoration contractor who responds to a flooded basement caused by a backed-up drain are technically taking on Category 3 water jobs. Often contractors don’t even realize a job or project involves Category 3 water, but many are exposed to it routinely when performing common water intrusion jobs. Significant coverage gaps exist in the GL and CPL policies that often are sold to contractors who work with Category 3 water.
In part because of a lack of training for claims adjusters, the majority of smaller losses that involve fungi or bacteria are paid as ensuing damage from water loss, but not always. For example, when it comes to wrongful death claims from a Legionnaires’ disease outbreak, adjusters always pull the trigger on the fungi or bacteria exclusion. Don’t gamble on getting an inexperienced or uninformed adjuster to get a contractor’s fungi or bacteria losses paid as an ensuing loss from water damage.
Recognize that the base CPL policy form is not designed for indoor use. Many common coverage gaps in CPL programs exist because CPL is being used to insure risks it was not originally designed to cover. In particular, the error rate is high on placements of CPL for contractors who work in the built environment. CPL initially was created to insure contractors who work for the U.S. Environmental Protection Agency to clean up Superfund hazardous waste sites. The original draft never contemplated covering claims that arise from mold and bacteria in buildings.
Significant modifications to the CPL policy form are needed to insure indoor environmental loss exposures. A fire and water damage restoration contractor who is drying out a house after a water loss can cause further damage by doing a poor job. A claim for property damage and cleanup costs could be denied under the “damage to your work” exclusion commonly contained in CPL policies. CPL policies that cover indoor loss exposure exist and usually do not cost significantly more than other CPL policies. Knowing the difference can create a competitive advantage for informed producers.
Coverage glitches associated with contamination losses in a contractor’s insurance program are easy to fix today with customized environmental insurance policies. Exceptions to pollution exclusions are not reliable sources of insurance recovery in the event of a contamination-related loss. Complicating matters for producers is the common carrier practice of creating the illusion of coverage in the form of exceptions to pollution exclusions on GL policies. Fungi or bacteria exclusions deserve special mention because the proximate cause of both sources of loss is water in the built environment. By arranging a customized CPL policy for every form of contracting risk, agents can protect contractor clients from being forced into a game of insurance coverage roulette for any loss that is caused by contamination.
If any part of this discussion was news to you, you should seek assistance from a specialist in environmental insurance to fill your clients’ coverage gaps for contamination losses.
The author
David Dybdahl, CPCU, ARM, MBA, is president of American Risk Management Resources Network, LLC. He is a wholesale broker who specializes in the design and placement of environmental insurance policies. His material on environmental insurance has appeared in more than 20 insurance textbooks, and he has served as an expert witness and consultant in over $1.9 billion in litigated environmental insurance coverage cases. He can be reached at dybdahl@armr.net or (608) 836-9590.
