Silly Insurance Requirements Lead to Bogus Insurance Certificates

Look for Outdated Insurance Terminology

Other red flag words from the dinosaur age of insurance are broad form property damage (BFPD) and explosion, collapse, and underground (XCU) coverage; it was a thing once upon a time. Back in the day of the caveman, these were both sometimes needed coverage extension endorsements to a general liability insurance policy.

Both of these coverage extension endorsements became extinct in 1973 when the newly formed Insurance Services Offices, Inc. (ISO), rolled out its new flagship business general liability insurance policy under the name of commercial general liability (CGL) insurance. Today, the risks covered in the BFPD and XCU coverage extensions are already included in an off-the-shelf CGL insurance policy. This CGL insurance policy has been in use since 1986.

If you see a specification for BFPD or XCU coverage in an insurance specification, you will know two things about the drafter of that contract.

• They have not updated their insurance knowledge in 50 years; and
• They must not realize that it's virtually impossible to purchase these endorsements in their original forms today.

This also means it is impossible to meet the insurance specifications in the contract as written; that contract's insurance specifications need to be redrafted.

Unfortunately, in practice, a vendor of services is usually not in a position to force the redrafting of a standard procurement contract. The vendor is in a take-it-or-leave-it situation with the party hiring them. But there are some things that can be done on insurance certificates that will help avoid the breach-of-contract situation mentioned above.

How Does this Happen?

So, how has it come to pass that antique insurance requirements keep ending up in contracts? There are two parties that cause most of the problems. First, it's the lawyers. They blindly use templates in contracts that keep carrying outdated insurance requirements forward for decades.

There is no book or website where a lawyer can brush up on the latest trends in the customs and practices of the insurance business. Lawyers can write really bad insurance requirements because many do not know any better. If the lawyers writing contracts would ask a competent insurance practitioner for advice on the modern terminology used to describe the needed insurance coverages for their clients, then there would be fewer silly insurance requirements on the street.

But more to blame for silly insurance requirements than the lawyers drawing up contracts using decades-old templates are the insurance agents and brokers that allow and enable obsolete insurance requirements in their customer base to exist. Insurance agents and brokers have access to resources that will tell them, for example, that comprehensive general liability policies became extinct by 1990 when they were replaced by the ISO CGL policy.

The world will be a better place if insurance agents and brokers help their clients with insurance specifications in contracts. Risk management consultants offer writing insurance specifications as a service, and they do a good job at writing these. But it is not often that an insurance agent or broker offers to help their clients with insurance specifications. This can be explained by the insurance agents and brokers thinking the lawyers have the magic crystal ball needed to develop insurance specifications; lawyers do not have that crystal ball. More likely, judging from the bad insurance requirements that are out there, the lawyers have some stone tablets they are working off of. Insurance agents and brokers are in a better position than members of the legal profession to assist their clients with modern insurance requirements in contracts.

The Problematic Pollution Exclusion, Coverage, and Exceptions

Ignorance runs especially deep in insurance specifications when it comes to general liability insurance, pollution exclusions, and pollution coverage. As a result, there are a lot of silly insurance requirements in contracts for "pollution coverage." But the more common situation is that the insurance requirements skip completely over addressing the longest exclusion in a general liability insurance policy—the pollution exclusion.

Pollution exclusions are the most litigated words in the history of the insurance business. There is only coverage litigation when a buyer and seller of insurance are not on the same page as to what should be a covered claim. In order to avoid coverage litigation of pollution claims, a strong insurance requirement for environmental insurance is needed in contracts where there is a risk of a contamination event of some sort.

It's gotten better over the past 50 years: more and more contracts require "pollution insurance" in the insurance specifications section. But only one out of four of those requirements for "pollution insurance" is actually adequate—some are not at all accurate.

The operative word in a pollution exclusion is contamination. Many people in the insurance business and some misinformed judges seem to think pollution exclusions are limited to hazardous industrial waste; that is a mistake. If you trace the evolution of pollution exclusions back to their origin in 1971, pollution exclusions have never been limited to hazardous waste.

To predict the potential scope of a pollution exclusion, it helps to focus on the word "contaminant." "Contaminant" is the operative word in a pollution exclusion, and all the rest are just descriptors of what a "pollutant" may be. If there is a loss exposure to contamination from any source, such as a food-grade product, there is a need for environmental insurance in an insurance requirement in a contract or loan covenant.

Specifying environmental insurance in a contract will require the knowledge of an environmental insurance specialist who has a broad spectrum of training in property and liability insurance coverages because nobody knows for certain what "pollution insurance" may mean. There are over a hundred different "pollution insurance" policies available for sale. A good insurance specification to cover losses from contamination will need to narrow down the field of which types of "pollution insurance" are required.

Another thing that contract drafters and the issuers of certificates of insurance need to keep in mind is that exceptions to pollution exclusions in a general liability insurance policy do not fulfill a requirement for "pollution insurance." Real pollution insurance has an insuring agreement triggered by the release of the escape of a pollutant. A real pollution insurance policy also covers cleanup costs that are specifically in the insurance agreement. Exceptions to pollution exclusions do not transform a general liability insurance policy into a pollution insurance policy; it is still a general liability policy with any coverage for a pollution event being provided by an exclusion to an exclusion. Exclusions do not replace insuring agreements.

Beware of Bogus Insurance Certificates

Insurance specifications that require the procurement of an insurance policy form that does not exist can lead to the issuance of bogus insurance certificates; bogus is a feel-good word for fraudulent. But the F-word rarely gets used in insurance agents' professional errors and omission (E&O) lawsuits because most insurance agents' E&O policies exclude fraudulent acts. Avoiding the issuing of bogus or fraudulent insurance certificates is a really good idea for insurance agents and brokers.

That can easily be done by making sure the holder of the insurance certificate is made well aware of the deviations from the insurance required in the contract and the certificate of insurance. Take, for example, the difference between the comprehensive general liability insurance policy and the commercial general liability insurance policy.

The Federal Acquisition Regulation written in 1997 require contractors working on Superfund sites for the US Environmental Protection Agency to procure general liability insurance of a comprehensive type. What is wrong with that picture? Is this a requirement for a comprehensive general liability insurance policy or something else?

It makes a difference, and this is a perfect example of a silly insurance requirement. Everybody in the commercial insurance business knows that by 1990 it was impossible to purchase a comprehensive general liability insurance policy. Where were the insurance geeks when the Federal Acquisition Regulations were written? Almost 25 years later, everyone in the Superfund contractor space is dealing with a nebulous insurance requirement.

The comprehensive general liability policy had a pollution exclusion that had an exception for sudden and accidental releases of defined contaminants. Decades of coverage litigation, mostly over Superfund-type claims, established that sudden and accidental pollution releases did not mean "the really darn quick" releases of pollutants. Basically, it boils down to, if getting sued for a pollution event was an accident, the comprehensive general liability policy often paid the costs of cleaning up Superfund sites. As a result of insurance coverage litigation, comprehensive general liability insurance policies ended up paying for claims arising from pollution that took place over decades. A far cry from pretty darn quick pollution events. That is why, in 1986, ISO introduced the CGL insurance policy, which expanded the pollution exclusion from a couple of column inches in the old comprehensive policy to a full-page exclusion in the new CGL policy; the newer CGL policy makes no mention of sudden and accidental pollution events.

It is simple to close the coverage gaps for pollution-related losses on a property or liability insurance policy today. One of the over a hundred environmental insurance policies available today is certain to fit the bill. Those policies are highly underutilized and are not usually specified in the insurance requirements in contracts or loan covenants.

Conclusion

Silly insurance requirements lead to bogus insurance certificates, and bogus certificates of insurance can easily be avoided by eliminating outdated insurance specifications and disclosing deviations from the required insurance in the contract in supporting documentation. There is no reason for anyone to specify insurance coverage forms that are impossible to procure. Stay vigilant!