The Environmental Risks of Residential Construction
October 2002
Has the emergence of mold as an insurance
issue caused risk managers to lose sight of "other" environmental exposures
associated with residential work? Jeff Slivka provides a list of other risk
management concerns.
by Jeff Slivka, ARM
New Day
Underwriting Managers LLC
Over the past few years much has been said about residential contractors
and the environmental exposures associated with that type of construction. Recently,
however, most of that discussion has been centered on the hottest topic in virtually
every industry—mold. Yes, right now mold is a big issue, however, it appears
that we have lost sight of some of the "other" environmental exposures associated
with residential work. Therefore, I have written this article to act as a reminder
that mold is not the only culprit associated with environmental liability for
residential contractors, developers, and land owners.
Examples of Recent Claims
First, we’ll start with some real life examples that have occurred within
the residential construction arena over the past 5 years.
- Toxic Vapor Inhalation—A residential contractor
was reconditioning a tile floor in a building undergoing extensive renovations.
Several workers in the building filed bodily injury claims totaling $25,000
against the contractor. The workers had inhaled toxic vapors from the sealants
used in the reconditioning process.
- Costly Claim—A residential contractor
used solvent to remove paint from a residential structure and improperly
disposed of the materials on-site. A group of residents filed a $10 million
toxic vapor inhalation suit against the contractor, citing bodily injury,
trespass of pollutants, and adverse effects to their quality of life.
- Deadly Fumes—A residential contractor
disposed of sealants and solvents containing toluene in a covered, enclosed
dumpster after performing routine finish work. Acting like a confined space,
the dumpster trapped the toluene fumes. These fumes depleted the oxygen
levels in the dumpster. After climbing into the dumpster for unknown reasons,
two 10-year-old children were overcome by fumes and died. The contractor
faced a claim in excess of $2 million for inadequate disposal of the waste
toluene.
- That Sinking Feeling—A residential contractor
developed a subdivison. Small sinkholes began to appear in the development,
soon giving up all kinds of debris. Residents feared that the debris could
extend underneath some of the homes. Homeowners filed a lawsuit against
the contractor/developer. Because the contractor could not identify the
owner of the debris, they were forced to clean it up at a cost exceeding
$1 million.
- Raw Sewage Contaminates Wells—A residential
contractor was subject to defense costs exceeding $25,000, in addition to
property damage and bodily injury claims exceeding $400,000 from a residential
community. During sewage installation, a subcontractor improperly tied in
piping. This caused raw sewage to migrate into the underlying groundwater
and contaminate residential wells.
- Contaminated Soil—A residential contractor
unknowingly spread petroleum-contaminated soil across a project site during
fill operations for a housing project. The contractor was named in a lawsuit
for exacerbating the extent of contamination. After lengthy deliberations,
the contractor spent $250,000 in cleanup costs and his defense.
- Lead Poisoning—A contractor renovated
the interior of a residential house built in the 1950s. The renovation involved
paint removal from interior walls, window trim and door jambs. During the
course of renovation, the contractor used plastic barrier to seal the areas
he was working in. The homeowners continued to occupy the house during renovations.
Additionally, the wife was 6 months pregnant. Renovation was finished prior
to the birth of the baby; however, upon birth, the child tested positive
for blood lead poisoning. Upon investigating the source of the lead, the
couple sued the contractor for bodily injury as well as potential loss of
future wage potential (due to a possible decreased IQ level for the baby)
in the amount of $500,000.
Potential Environmental Liability Exposures for Residential Contractors
Residential construction firms are exposed to many environmental liabilities
due to their day-to-day operations. Specifically, they face the following risks
that are the focus of this discussion.
Operational Exposures
- Fumes, emissions and spills from chemicals applied during construction
(e.g., finishers, sealants, adhesives, solvents, curing compounds,
etc.)
- Heating, ventilation, air conditioning (HVAC) construction or
maintenance errors, causing release of airborne bacteria, mold,
or carbon monoxide build-up, in addition to mold resulting from
water intrusion or moisture encapsulation
- Incidental exposure from asbestos-containing building materials
- Disturbance of naturally-occurring asbestos
- Disturbance of lead-containing paint
- Lubricant oils and other fluids from field equipment
- Release of oils/fuels as a result of vandalism
- Disturbance of preexisting contamination during site preparation/excavation
work (e.g., residual lead or petroleum contamination from fuels)
- Spills and releases from application of asphalt
- Releases from mobile fuel tanks
- Impacting underground utility lines and other underground structures
(and associated loss of business exposure)
- Fluid discharge from large equipment
Owned Premises Exposures
(e.g., batch plants, maintenance shops, quarries, newly acquired
properties, etc.)
- Leaking underground/aboveground storage tanks
- Residual contamination from minor spills of oils, fuels, lubricants,
etc., and poor housekeeping
- Surface contamination from fuels and lubricants stored improperly
(without secondary containment)
- Improper disposal of waste materials (e.g., sealants, finishers,
etc.)
- Unidentified, preexisting contamination from past owners of
premises in addition to mold growth in buildings
Transportation Exposures
- Inadvertent transport and subsequent disposal of unknown contaminated
soil
- Spills of asphaltic cement during transport
- Resulting pollution from collisions with various structures
(e.g., pole-mounted transformers, aboveground tanks, etc.)
- Fuel/oil spills/leaks from vandalism
Disposal Exposures
- Inappropriate disposal of hazardous waste materials or other
products
- Misdelivery of unidentified contaminated fill
- Retroactive liability under Superfund for past disposal practices
(i.e., construction debris in a landfill that is now on the Superfund
list)
Note: This list is not a comprehensive
inventory of every environmental exposure found at with such organizations,
but an indication of the exposures that are often encountered.
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Environmental Liability Insurance
More and more, residential construction firms and developers are contemplating
the purchase of environmental liability insurance. The environmental liability
insurance market today is a $1.5 billion annual premium industry which as grown
over 20 percent for the past 5 years. Leading environmental insurers in the
United States include AIG, Kemper, ECS/XL Capital, Zurich, Gulf, and Chubb.
These insurers, and a few others, are providing significant environmental coverage
at cost-effective rates. Specifically, contractors pollution liability (CPL)
coverage has expanded to the point that occurrence forms are now available.
The CPL form is the basic coverage for contractors performing operations at
third-party sites. It provides coverage for third-party bodily injury, property
damage, and clean up costs. CPL coverage is available at limits up to $100 million
or more.
Numerous contractors have used various CPL policies to insure risks that
they have because of their exposures. A few recent examples include the following.
- A residential contractor is concerned about the increased attention
"toxic" mold has been receiving over the several months. They pursue CPL
coverage and find it available for such work and exposures. The contractor
ends up purchasing a claims-made CPL policy for $5,000,000 per loss/$5,000,000
aggregate limit of liability. The coverage, albeit claims made, provides
coverage for mold claims up to the maximum limit of liability. In this case,
mold awareness and prevention programs developed by the contractor proved
to be a key element in insurance companies finding them to be an acceptable
risk.
- A contractor concerned with simple asset protection looks to the environmental
insurance marketplace to determine what type of risk transfer options are
available. The contractor is a general contractor on residential construction
projects. The contractor, faced with earlier environmental claims, found
out the hard way that its general liability excluded pollution type claims.
A CPL occurrence form was purchased for $10,000,000 per loss/$10,000,000
aggregate limits and not only provided coverage for operations, but for
transportation and disposal liability as well.
Conclusion
The one thing that we all have to keep in mind is that even though environmental
liability insurance is a good way to finance a loss, it is always best to manage
the exposure prior to loss. A highly publicized environmental disaster can have
a catastrophic impact on an organization reputation, and eventual bottom line
destruction. While the insurance may eventually pay for the loss, provided proper
limits of insurance were purchased, nothing will pay to restore an organization’s
reputation.
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