History proves that there is a pattern of mistakes made by insurance buyers that lead to unnecessarily uninsured environmental loss. With a few simple corrections, the majority of uninsured environment losses over the past 20 years could have been insured, often at bargain-basement prices.
The most common mistakes made in commercial insurance buying decisions regarding pollution/contamination risks are the following.
Ninety-five percent of commercial insurance buyers are needlessly uninsured or severely underinsured for any loss caused by, or in some cases even associated with, pollution or contamination. This situation has persisted for decades in the face of an oversupply of environmental insurance.
The pricing for pollution insurance coverage has been so low, on average, for so long, that the leading supplier of environmental impairment liability insurance for fixed sites for over 30 years found it necessary to abandon the business line entirely in 2016. History shows that environmental insurance was not expensive relative to the losses that are paid on average.
Oversupply has created a buyer's market for environmental insurance for over 20 years. In an oversupplied market, which would naturally lead to a low price, how can it possibly be that 95 percent of insurance buyers today are not adequately insured for their environmental loss exposures? Why has historically underpriced environmental insurance been shunned by so many commercial insurance buyers?
Here are my observations gained from 35 years in practice.
Environmental losses have a long history of being expensive for any size organization. Why would anyone choose to be uninsured for pollution/contamination losses? It turns out that many insurance buyers did not actually choose to be uninsured for pollution or contamination losses, they just did not understand how pollution exclusions work.
To help sort the current technically uninsured loss exposures out, it is important for insurance buyers to focus in on the contamination hazard instead of "pollution" events. The operative word in the typical pollution exclusion is "contaminant," which has appeared in the most commonly used definition of what a "pollutant" is since 1970. In my experience, the word "pollutant" tends to get people thinking too much about only hazardous waste, which leads to false assumptions on the effects of pollution/contamination exclusions in commercial insurance programs. The false assumptions lead to poor decisions on environmental coverage.
While pollution exclusions have been used for over 40 years, they keep changing. Over the past 15 years, insurance companies have added a host of new exclusions for specified contaminants. These specifically excluded contaminants include the gasses from welding rods, asbestos, lead, silica, fungus, mold, bacteria, and, by default, Category 3 water because of the bacteria that water contains.
The common exclusions for these specified contaminants are essentially pollution exclusion on steroids. Some of these exclusions in liability insurance policies contain "anti-concurrent causation" language straight out of the flood exclusions in property insurance policies. An anticoncurrent causation clause within a specified contaminant exclusion eliminates coverage if the contaminated becomes involved in any sequence to the loss event.
There is a persistent perception with insurance buyers that somehow pollution exclusions are limited to hazardous waste. Pollution exclusions have never been limited to hazardous waste. In practice, pollution exclusions have been used to deny coverage for claims arising from contaminated sandwiches. To develop effective strategies to insure environmental risks, the focus needs to be on the contamination hazard and not be limited to hazardous waste. Few insurance practitioners do this.
Many significant environmental loss exposures have no hazardous waste or materials involved with them at all. For example, a condominium or hotel will be adversely affected by exclusions in its property and liability insurance policies for losses involving a speck of any type or amount of fungi/mold/bacteria. A specially crafted environmental insurance policy designed to fill the contamination coverage gaps will cover first-party losses, including restoration cost, loss of rents, and extra expenses in addition to covering potential third-party liability and defense costs.
Without environmental insurance, these property owners have significant gaps in insurance coverage for a very common cause of loss in apartments, condominiums, and hotels—water intrusion. More than 95 percent of condominiums and hotels have significant coverage gaps for contamination claims in their property and liability insurance programs today for no real reason. For less than 10 percent of the property premium subject to a minimum premium of $3,500 per year, most of these properties could be properly insured today. On large property schedules of apartments, premiums are commonly around $10 a door.
The pollution exclusion in the general liability (GL) insurance policy is the longest exclusion in the policy form. After years of uninterrupted use, it would be reasonable to think the stakeholders in commercial insurance would have adapted to the existence of pollution/contamination exclusions by now. However, this is rarely the case.
Very few insurance specifications in procurement contracts and loan covenants even reflect the existence of pollution exclusions. In my experience, many of the lawyers drawing up the insurance specifications in contracts must be relying on insurance specifications that are decades old. Thirty years ago, no one was paying attention to pollution/contamination exclusions. But things changed a few decades ago in the insurance business, and the professional drafters of contracts apparently did not catch on.
For example, any time I see an insurance specification in a contract requiring broad form property damage coverage in a GL policy, I can tell no one at the firm requiring the GL coverage from a vendor has upgraded their insurance specifications. Since 1986, the Insurance Services Office, Inc., commercial general liability policy automatically includes broad form property damage liability in its standard form. There is no need to specify a coverage extension for what has been automatically included in GL insurance policies for more than 30 years.
Not surprisingly, a 30-year-old insurance specification would not have corrected for the evolution of pollution exclusions over the last 30 years either. Antique insurance specifications, especially in loan covenants, explains a lot about why the vast majority of commercial buildings, condos, hotels, plumbers, and 2 million farmers are needlessly uninsured for pollution/contamination losses in the normal course of their day-to-day operations.
With this background, what should insurance buyers do to avoid the common mistakes that lead to uninsured contamination losses?
The environmental insurance market is the solution to the most common mistakes made by insurance buyers on environmental/pollution/contamination risks. Ignoring the effects of pollution exclusions and the environmental insurance market over decades is the root cause of needlessly uninsured and litigated environmental damage and contamination claims today. Environmental insurance has been available in an oversupplied marketplace since 1986. It is time to pay attention to the effects of pollution exclusions and environmental insurance; the practices of the past 30 years are not working. There is no rational reason for so many pollution/contamination loss exposures to be uninsured today.
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