Pollution exclusions have resulted in more litigated insurance claims than any policy language in the history of the insurance business. Insurance coverage litigation involving pollution claims is complex and expensive, and is also completely avoidable.
Coverage litigation arising from contamination claims can be avoided by simply doing the following.
Explaining to insurance buyers what contamination risks are
Making sure that buyers of commercial insurance understand what types of losses pollution exclusions exclude
Giving the insurance buyer the option to purchase real environmental insurance to fill the coverage gaps created by pollution exclusions
Based on the amount of coverage litigation over pollution exclusions, this three-step process is not happening very often in practice. The result is complex and expensive insurance coverage litigation for contamination losses.
In this article, I will elaborate on why there is so much coverage litigation over pollution exclusions and suggest a simple solution to the problem of unintentionally uninsured contamination losses.
Purchase True Environmental Insurance
The main reason for coverage litigation is insurance policies that pose as "environmental insurance" but are not true environmental insurance policies. The "environmental coverage" in the insurance policy that is at the heart of the coverage litigation is just a pollution exclusion in disguise. If there is not an insuring agreement for losses caused by pollutants, it is not a real environmental insurance policy.
In my experience with litigated environmental damage cases, there is a lot of back and forth on which part of the pollution exclusion does not apply to the pollution event at issue. The point being—why is anybody reading an exclusion looking for coverage? Fundamentally, that is the wrong part of an insurance policy to be looking for the coverage. Another observation in many litigated claims cases is that the disputed loss could have been insured on a primary basis with environmental insurance products that were readily available for purchase through thousands of insurance brokers at affordable prices prior to the loss event.
The primary cause of litigated insurance coverage is slightly more complicated than pollution exclusions in disguise, but it is a good way to think about the subject. The effects of pollution exclusions and exceptions to pollution exclusions are impossible to predict pre-loss. It would take a book to explain why this is the case, but for this commentary and in day-to-day practice, I follow this general rule of thumb: "If you think you can predict the effects of pollution exclusions pre-loss, that is only because you are confused."
This is because judges and courts in litigated insurance coverage cases can overrule custom and practice in the insurance business. In doing so, the effects of pollution exclusions become unpredictable in practice. It is not unusual for one substance to be considered a "pollutant" in one state and not in another state, or even for something to be deemed a "pollutant" in one scenario and then completely fine in a different situation. This unpredictability makes it professionally dangerous to rely on or refer to givebacks or modifications to pollution exclusions as "environmental" or "pollution" insurance.
For example, a general liability (GL) policy with a time element pollution release exception to the absolute pollution exclusion found in GL policies for the past 30 years is still just a GL policy. It is not an environmental insurance policy that has a set of insuring obligations and definitions of covered losses not found in GL policies.
Pollution Coverage Litigation Commonalities
The following are a few common denominators in the majority of litigated insurance coverage cases for environmental damages.
There is a loss involving contamination of some sort for which an insurance buyer seeks coverage.
There is a coverage glitch in the applicable insurance policies for contamination losses buried within the terms of a pollution exclusion, and coverage is denied for the contamination loss.
The insurance buyer is surprised by the absence of coverage for the contamination loss and, if they have the money do so after a loss, hires lawyers to argue the pollution exclusion should not apply to that particular pollution event.
True environmental insurance was available at a reasonable cost prior to the contamination loss, which would have filled the coverage voids currently in dispute.
The insured did not have the type of environmental insurance in place needed to properly cover the contamination loss and avoid coverage litigation.
Pollution losses always involve some kind of contamination that results in a combination of bodily injury, property damage, natural resource damage, or cleanup expenses. There are common beliefs in the insurance business that pollution exclusions only apply to industrial wastes.
Nothing could be further from the truth. Examples of nonindustrial pollution claims include mold in hotels, Category 3 water losses, nitrates from manure spreading and leaching into the groundwater people access for drinking water, asbestos particles being released into a home after a kitchen floor is ripped out, and the overuse of a carpet cleaning solution that creates such a pungent odor that an entire office building needs to be evacuated. The list goes on and on, but the main takeaway is that, if a loss involves contamination, there is a good chance the policy's pollution exclusion will be triggered.
Traditional Policies Don't Help
With that triggering of the pollution exclusion, coverage for bodily injury and property damage resulting from the contamination that the insurance buyer is being held legally responsible for is nonexistent; the policy provides no coverage at all, including the duty to defend. This was recently affirmed in a pollution case involving manure from dairy in New York State.
The language of pollution exclusions can vary but follow a relatively similar pattern in that they exclude coverage for "bodily injury" or "property damage" arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of "pollutants." Exclusion f.—Pollution found in the Insurance Services Office, Inc., commercial general liability form spans well over a page of the policy form and, as explained earlier, has various givebacks and modifications. Multiple readings will leave even the most seasoned insurance policy enthusiast reeling.
Given its length and complexity, the specific aspect that applies to deny coverage for a particular contamination cannot be predicted until the loss actually occurs. The safe bet would be to buy insurance coverage designed to appropriately fill this gap in coverage created by the exclusion, much like businesses buy auto insurance to fix the void created by the aircraft, auto, or watercraft exclusion.
Real environmental insurance has been continuously available since 1980 in the US marketplace. Based on the loss experience of the pioneering insurance companies selling environment insurance, the premiums were way too cheap, so much so that some of those insurance companies had to stop selling the coverage line. However, it's clear by the amount of coverage litigation over pollution exclusions purchasing cheap environmental insurance that, relative to the losses paid, this is not the route many insurance buyers take because there continues to be insurance coverage litigation over environmental damage claims and the meaning of pollution exclusions.
Why the Problem Persists
A few questions arise regarding why there is so much insurance coverage litigation for environmental damage claims when there seems to be a relatively simple solution—get the appropriate insurance coverage in place. Could it be that most insurance buyers are taking the chance that one of the givebacks in the pollution exclusion will apply to whatever environmental damage claim they have? My thought is no because many times insurance buyers are surprised when they learn that their policies do not cover a claim resulting from some type of contamination event that they experience.
That begs the question of why didn't they know that their standard liability or property policy is not designed to provide coverage for environmental damage claims? In reading the background on the litigated pollution coverage matters, it sounds like the insurance buyers were never made aware of their environmental loss exposures, nor were they told that they do not have coverage for them, and they were not provided with environmental insurance coverage options that would cover them for these loss exposures.
So, it seems that insurance buyers are not getting the information on pollution risks and the need for environment insurance from their insurance brokers and agents professionals. However, we can't necessarily put the blame on these folks. The educational venues for insurance agents make it almost impossible to truly understand the ramifications pollution exclusions have on coverage for many insurance buyers. Bring up the topic of pollution exclusions in any continuing education (CE) class, insurance designation class, or similar venue, and it would not surprise me if the conversation focuses on how these exclusions apply only to hazardous materials and waste. It is a sad misconception that plagues the insurance industry and creates an environment ripe for errors and omissions (E&O) claims. It also fuels a robust industry of insurance coverage litigators.
Also confusing to insurance agents and brokers—and, therefore, their customer base—is marketing hype by insurance companies calling things "pollution" coverage when in fact all the coverage is sitting within an unpredictable pollution exclusion.
The first driver creating the exposure for E&O claims against agents and brokers is that insurance buyers are not made aware of their environmental and pollution loss exposures. One solution to this is the education of insurance professionals, but there is a lot of apathy in the insurance distribution channel on environmental risks. There are continuing education CE courses in the industry that focus on the subject of pollution exclusions and available environmental insurance products. I teach one myself, titled "Unbelievable Fun with Pollution Exclusions." The class gets reviews in the low 90s, which is real good for a CE class, but we cannot get agents and brokers in the door. A webcast made available at nominal cost to over 100,000 insurance agents produced 100 attendees.
This leads us to where we are today, with less than one out of a hundred commercial buildings being insured under an environmental impairment liability (EIL) policy and mold claims being the number one source of claims under environmental insurance policies. Which begs the question: where did the mold claims go on the 99 percent of buildings that did not have EIL insurance in place? That situation is a direct cause of insurance agent apathy toward education. The mold coverage that is needed costs about 15 percent of the property premium; the needed EIL coverage is cheap.
The second driver to coverage litigation and potential E&O claims for agents and brokers is that insurance buyers were not presented adequate coverage options to cover their environmental and pollution loss exposures. Primarily, this is because these exposures were not realized (going back to the previous paragraph), but it could also be that insurance agents were unaware such coverage even existed. The environmental insurance marketplace started out small, but, over the past few decades, it has grown incredibly. There are now over a hundred different policy forms, all unique, making it vital to understand what you're doing when working in this market.
Important Things To Know
The following are a few little-known but important facts about environmental insurance that insurance agents, brokers, and buyers need to pay attention to.
Most environmental insurance policies are written on a claims-made basis, which is a very good thing for insurance buyers. With insurance written on a claims-made basis, it is possible to wipe out decades worth of insurance coverage defects through the purchase of insurance coverage today. For example, this week in my insurance brokerage operation, we proposed an EIL insurance policy on 18 insured locations to a first-time buyer of the coverage. The proposed policy did not have a retroactive date. If the insurance buyer decides to purchase the proposed insurance, the EIL insurance policy would be wiping out the coverage defects for contamination losses back to the beginning of time. Claims made against the insured arising from contamination losses will be covered under this environmental insurance policy purchased in 2017.
Environmental insurance gets a bad rap that it is overly expensive. This is a fundamentally flawed assumption. AIG, who basically invented EIL insurance on a commercial basis starting in 1980, left the pollution legal liability marketplace completely in February 2016. My guess is AIG did not decide to exit the site pollution coverage line because it was a cash cow for them. Sources near the AIG book of business estimate that the premiums charged for environmental insurance for more than 15 years were about one-third what they needed to be for AIG to make an underwriting profit in the product line. If that is the case, it is not the environmental insurance that is expensive; it is the covered losses under environmental insurance policies that can be expensive. If one-third is the right number, and there is no reason to believe it is not, the insurance premiums over time for environmental insurance have, on average, actually been very cheap.
The environmental insurance marketplace gets a bad rap for being selective and not taking on many risks. I am not sure where this thinking originates. The environmental insurance marketplace is capable of insuring substantial risk. Since 1986, environmental insurance underwriters have been doing a great job in doing so. As a single point of reference to show that the environmental insurance marketplace will insure substantial risks, in 1998, I helped arrange the environmental insurance for the Western contractors working to contain the Chernobyl nuclear disaster in the Ukraine. That project was insured in the environmental insurance marketplace. One possible but improbable cause of loss arising from the contractors' operations at Chernobyl would have been contaminating the sole drinking water supply for the city of Kiev. I cannot think of any legal activity in the United States that would be riskier to insure. Last year, the policy on contractor's operations at Chernobyl renewed. Clearly, environmental insurance underwriters have insured substantial risks for decades.
Environmental insurance has been in continuous supply since 1980. Over time, coverage and capacity have expanded. Today, there are over 40 suppliers of various forms of genuine environmental insurance. The minimum premiums for a contractor's environmental liability insurance policy can be as low as $750 for a $250,000 limit of liability or $1,000 for a policy with a $1 million limit of liability. In another example of affordable insurance, hotels can purchase genuine environmental insurance covering wrongful death claims from Legionnaire's disease and a wide range of other forms of contamination-driven losses, including business interruption and extra expense insurance, for as little as $3,500 per year on a multiyear policy term.
The environmental insurance marketplace is in a state of oversupply, yet less than 1 percent of the potential market for environmental insurance products has been penetrated to date. That translates to 99 percent of commercial insurance buyers that are, on average, inadequately insured for contamination risks. And that situation fuels a cottage industry of pollution insurance coverage litigators.
There is no reason for the current status quo. The classes to learn about environment loss exposures are available. Environmental insurance is available at a low cost relative to the paid claims. The major constraint is apathy in the distribution channel.
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