Environmental risks permeate virtually all public and private organizations. Because of universal exclusions in standard property and liability insurance policies for losses arising from contamination loss events are routinely ignored in insurance program designs, there are significant and usually needless insurance coverage gaps for environmental losses in the insurance programs of most insurance buyers. Informing customers on the effects of pollution exclusions is a key to avoiding potential professional errors and omissions (E&O) losses for insurance agents and brokers.
Almost all fortuitous environmental losses incurred today can be insured with modern environmental insurance. My operating assumption on the availability of environmental coverage is if the activity is legal, it's insurable at a price. There are over 100 different environmental insurance policies available for purchase today in the US commercial insurance marketplace. Minimum premiums for a contractors pollution liability policy are as low as $750 with environmental insurance policies covering a site including coverage for mold and bacteria-related losses costing as little as $1950. US-based insurance companies have been insuring the contractors working on containment operations of the Chernobyl nuclear disaster in the Ukraine for the past 20 years. Unless even the minimum premium is unaffordable or the customer is involved with activities riskier than the Chernobyl radiation containment operation, environmental insurance can be crafted to cover it.
The only reliable insurance for contamination-based losses is an environmental insurance policy.
In my opinion, all forms of pollution coverage givebacks are an insurance agent/broker E&O trap. Continuously available for over 30 years, environmental insurance has achieved what can best be described as dismal market penetration.
Nowhere is this more evident than in the commercial property sector. Because of the operation of fungi or bacteria sublimits and exclusions, less than 5 percent of commercial building is adequately insured for losses involving water intrusion that leads to the presence of fungi or bacteria. According to Zurich insurance company, 60 percent of all losses incurred under property insurance policies sold to commercial building involve water intrusion. There is a direct causation effect between water intrusion losses and fungi and bacteria growth in buildings. The combination of frequent water intrusion losses, which often involve fungus- and bacteria-related damages that are always excluded or sublimited on commercial buildings, is certain to create many surprised, disappointed, and needlessly uninsured customers.
Uninsured losses arising from various contaminants combined with the very poor market penetration of affordable environmental insurance products combine to create potential E&O claims for insurance agents and brokers.
Virtually all professional liability loss exposure for unintentionally uninsured contamination/pollution losses can be eliminated by following a simple four-step loss-control process. Unlike other insurance broker loss-control protocols, which add time and expense to implement, the natural outcome of this loss-control protocol is new environmental insurance business is produced.
Taking a proactive approach to enable the customer to decide to be uninsured for environmental hazards is the key to professional liability loss avoidance for insurance agents and brokers.
Environmental E&O Loss Prevention
The following are four main steps in this environmental E&O loss prevention approach.
- Inform the client about their environmental loss exposures.
- Point out the various pollution or contamination exclusions in the standard property and liability policies in their current insurance program and discuss the effect of the exclusions on the insurance coverage.
- Offer and recommend for purchase environmental insurance coverage to fill the highlighted coverage gaps.
- Confirm that the proposed environmental insurance policy provides the needed coverage.
Following these steps not only protects you as an insurance practitioner but also helps ensure that your clients are adequately covered for the environmental loss exposures they face.
1: Inform Client of Environmental or Contamination Loss Exposures
The reality is that because of the unique nature of environmental risks, most insurance practitioners will need the help of an experienced specialist in environmental risk management to implement step one in the loss-control process. Those individuals exist in the specialist wholesale brokerage business, the environmental practice groups of large insurance brokerage operations, and some insurance companies even offer assistance in this area. A word of caution here, access to insurance markets alone does not make someone a specialist in environmental risk management.
The environmental loss exposure is driven by both common law and environmental protection laws, whereas traditional liability insurance only involves common law. Complicating the risk management challenges, environmental risks can change over time with the introduction of new laws and new science. For example, a substance that was presumed harmless 20 years ago can suddenly be recognized as a carcinogen today. Or a change in science can change the detection capability of a known contaminant a thousandfold overnight simply because someone invented a new type of detection machine. Compare that to the fire hazard—no smoke detector can impact the risk of a fire by a thousandfold.
On the other side of the risk management spectrum, insurance coverage for contamination caused losses is being stripped away faster than insurance producers can adapt to the changes in their recommendations and insurance coverage designs for their customer base. Coverage for losses associated with "pollutants" is constantly being restricted by new forms of "pollution" exclusions and by evolving insurance case law stripping coverage out of insurance policies on a state-by-state basis.
The legal environment for pollution losses is unique and unfamiliar to the vast majority of insurance practitioners. This explains why so many policyholders are needlessly uninsured for contamination risks today. Common law concepts related to environmental liability include negligence, trespass, and nuisance. Negligence is the failure to act as a reasonable and prudent person, a theory most of us in the insurance industry are very familiar with.
The use of trespass and nuisance as common law sources of recovery for damages incurred are common in environmental damage claims. Trespassing is when you or something you own, like a cow, enters someone's property without permission, whether you realize it or not. When it comes to environmental claims, this concept usually applies to a product or some kind of material viewed as belonging to you entering someone else's property. Nuisance is the unreasonable interference with another person's enjoyment of their property. Instead of you personally causing the disturbance, it might be runoff, odor, or contamination from your property disturbing someone on theirs.
Potential claims under common law principles often involve recoverable damages for bodily injury, property damage, loss of income, medical expenses, pain and suffering, or cleanup expenses. Modern pollution exclusions are particularly good at excluding losses arising from trespass and nuisance causes of action under common law.
Another source of environmental liability stems from legislation and environmental protection regulations. Environmental protection laws are funded under a "make the polluter pay" concept and these laws impose strict liability for environmental cleanup costs, damage to natural resources, and fines and penalties that can be more than $25,000 per day per violation. Since it is strict liability, negligence is not required to be responsible for these damages. The most noteworthy environmental protection laws include the Comprehensive Environmental Response Compensation and Liability Act (aka Superfund), which was put in place to clean up abandoned hazardous waste sites; the Resource Conservation and Recovery Act is a cradle-to-grave regulation of waste streams and underground storage tanks, and both the Clean Air Act and the Clean Water Act are regulatory protections that impose environmental liability.
There are more laws to protect the environment than the local, state, and federal tax code combined. Virtually all environmental insurance policies reference these laws to define coverage for cleanup costs, meaning you must have a basic knowledge of environmental protection laws to properly evaluate environmental insurance coverage. However, having a background in environmental protection laws is not always enough when it comes to evaluating environmental risk because environmental loss exposures extend past these laws. Mold and bacteria, for example, are not addressed in environmental protection laws.
In the face of unique risk drivers expanding the probability of incurring a pollution or contamination loss, insurance coverage for these losses is systematically being stripped away. Today, any loss arising from pollution/contamination/fungi/mold/bacteria/Category 3 water/lead/asbestos/silica/irritants is likely excluded from insurance coverage on both property and liability insurance policies.
Insurance producers should keep in mind the coverage givebacks within pollution exclusion are really exclusions to the pollution exclusion. Exclusions to a pollution exclusion based on a set of post-loss facts are not reliable sources of recoverable insurance. Exceptions to pollution exclusions force insurance buyers into a game of insurance coverage roulette. After a loss, the insured spins the wheel of potential insurance coverage and hopes for a good outcome. It's a really good idea to make sure the insurance buyer is aware of the shortcomings of the coverage givebacks contained within many pollution exclusions.
2: Discuss "Pollution" Exclusions and the Effect on Insurance Coverage
Perhaps the most common mistake insurance agents and brokers make when it comes to pollution exclusions is ignoring their effects all together; in other words, they do nothing about them. Part of the reason for this is the common misconception that pollution exclusions only apply to hazardous waste, which is not the case. The modern definition of a "pollutant" is "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste," where waste includes materials to be recycled, reconditioned, or reclaimed. Nowhere does it mention hazardous waste or materials; in fact, never in the history of pollution exclusions have they been limited to hazardous waste!
Separate exclusions for specific materials and constituents such as fungus (mold), bacteria, silica, and lead have become popular and are variations on total pollution exclusions. However, the operative word in the definition of a "pollutant" is contaminant. By including this term, pollution exclusions in standard property and liability insurance policies can come into play on a wide variety of losses. Any material or substance that could contaminate something or anything that could become contaminated is likely to be subject to a pollution exclusion. It's important to sit down with clients and discuss their potential environmental/contamination loss exposures indoors and outdoors.
Insureds should be made aware of the unpredictability of pollution exclusions being triggered prior to a loss. In coverage litigation, state courts can give meaning to the pollution exclusion through case law; this outcome is unpredictable and can change over time. I like to say that if you think you know how a pollution exclusion will apply pre-loss, that is only because you are confused.
An insurance agent- or broker-alleged professional E&O on pollution-related claims begins with an unexpectedly denied contamination loss. Coverage litigation ensues because the insurance coverage did not meet the expectation of the client. Informing the insurance buyer on the expected effect of pollution exclusions on their identified environmental loss exposures should avoid most coverage litigation and potential broker professional liability allegations.
3: Offer Environmental Insurance Coverage To Fill Coverage Gaps
Environmental insurance is designed to fill the coverage gaps on standard property and liability insurance policies created by pollution exclusions. A genuine environmental insurance policy specifically insures claims for bodily injury, property damage, defense costs, and cleanup costs under an insuring agreement triggered by a pollution release.
Exceptions to a pollution exclusion should not be confused with genuine environmental insurance. The common exceptions to pollution exclusions found in general liability policies are missing both an insuring agreement for contamination events and a cleanup cost coverage grant. Relying on time-element exceptions to pollution exclusions is insurance coverage roulette for insurance buyers because the coverage, or lack thereof, is determined by a random set of facts after the loss that must fit within narrow requirements.
Certifying exceptions to pollution exclusions as "environmental insurance coverage" creates substantial E&O loss exposure for insurance agents and brokers.
There are basically two main types of environmental insurance products available today: site-specific environmental impairment liability and contractors environmental liability.
There are hundreds of variations on these basic coverage forms and combined insurance package policies that include general liability and professional liability, but these are the core environmental insurance product offerings that will be used by most policyholders.
After informing the insurance buyer about their environmental/contamination loss exposures, you should go on record recommending the purchase of environment insurance to fill the coverage gaps in the current insurance program. A voluntarily uninsured customer has a very difficult time prevailing in a professional liability claim against their insurance agent or broker.
4: Confirm the Proposed Environmental Policy Provides Needed Coverage
The increasing variability of the policy forms and offerings in the environmental insurance marketplace, as well as the expanding number of contaminants being excluded by pollution exclusions, have made it even more important to confirm that the environmental insurance policy being provided covers the insured for the risks they face. It is possible in the environmental insurance market to sell a policy that ends up excluding most of what the insurance buyer does for a living when a policy that actually costs less provides full coverage.
Environmental insurance policies were originally designed for outdoor use on high hazard level industrial insurance buyers. Most environmental insurance policies actually work for the purpose for which they were designed. However, using a policy to insure a risk that it was not designed to cover does not work very well. For example, off-the-shelf environmental insurance policies usually do not provide adequate coverage for losses related to indoor air quality.
Today, more than 80 percent of the environmental insurance policies sold to insure commercial properties contain material coverage flaws for loses arising from fungi and bacteria. Combining that reality with the fact that 95 percent of commercial properties are not insured at all under any type of environmental insurance policy leads to many needlessly uninsured water losses and disappointed insurance buyers looking to their insurance agent and broker for possible loss-cost recoveries. That combination of circumstances makes indoor environmental risks on clean commercial properties the number one source of potential broker professional liability claims today.
Only a few environmental insurance policies have been adapted to specifically address indoor loss exposures arising from water intrusion events. The necessary modifications to the policy for indoor environmental risks will include coverage for all types of fungi or bacteria as "pollutants" and amendments to the definition of cleanup costs to address losses inside a building.