Expert Commentary

Contractors Environmental Liability Insurance: Claims-Made versus Occurrence

Environmental insurance policies written on a claims-made and reported coverage basis get a bad rap for the wrong reasons. I actually prefer working with claims-made environmental insurance policies to occurrence-based policies for several reasons.


Environmental
July 2014

Here are three important reasons:

  1. When there is a claim involving pollution damages that have taken place over multiple policy periods, with a claims-made coverage trigger, it should be clear which policy will apply to the loss. Under a claims-made coverage trigger, the policy in force when a claim is first known to the insured and is reported to the insurance company is the policy that will apply to the loss.

    In contrast, if there is a series of occurrence-based policies insuring the risk over time, figuring out which policy might apply to a long-term pollution/contamination loss can be difficult or impossible to do. Under an occurrence-based policy, the timing of the actual damages during specific policy periods is as important to establish as the date of loss. If different insurance companies have issued occurrence policies over time, in the event of a long-term pollution/contamination event spanning multiple policy period years, the odds that all of the opposing claims adjusters will take an "it's not my job" coverage position in perfectly good faith are very high.

    When no one can tell for sure when a pollution event started and how long it has gone on, knowing which policy should apply to a loss is a big advantage for all of the stakeholders under claims-made insurance policies.

  2. With a claims-made insurance policy form, it is possible to immediately correct for defective insurance coverage purchased in prior years through the purchase of a new claims-made policy with the original retroactive date of the defective policy.

    With fungus/mold/bacteria and Category 3 water loss exposures all needing specially modified environmental insurance, fundamental coverage flaws for indoor environmental risks are prevalent in many of the environmental insurance policies sold today. For example, based on a sample of over 1,000 contractors environmental liability (CEL) insurance policies reviewed by the risk management consulting staff in my company, 60 percent of the CEL policies sold in 2013 contained fundamental and unnecessary coverage defects for environmental losses inside of buildings. All of the reviewed insurance policies had been sold to contractors that primarily worked inside buildings.

    The original CEL policies were never designed to be used to insure environmental loss exposures inside buildings. This coverage design deficiency manifests itself in the form of fundamental coverage defects like no effective coverage trigger for the cleanup of fungus/bacteria, for example.

    If the original retroactive date from the defective policy is maintained on the replacement policy, coverage mistakes made in the past can be erased through the purchase of a new claims-made policy. In contrast, a coverage defect on an occurrence-based policy cannot be easily erased.

  3. By pushing the retro date back in time with claims-made insurance, it is possible to insure prior periods where there was no environmental insurance in place. This is especially important since 2005 when the insurance companies started excluding losses associated with fungus/mold/bacteria and Category 3 water and did not tell the insurance agents and brokers what the effects of these new "pollution" exclusions on steroids would be. Therefore, the ability to go back in time to fix environmental coverage glitches on standard property and liability insurance coverages is an important feature of claims-made policy forms. I should point out that getting a retroactive date pushed back in time is a lot easier to do in pollution policies insuring specified sites than it is in contractors environmental insurances.

The Need To Specifically Address Completed Operations Coverage

It is dangerous to assume that occurrence-based CEL policies automatically provide completed operations coverage after the policy expires. They do not.

Occurrence or claims-made-based CEL coverage forms insure damages arising from pollution conditions taking place during the policy period or coverage period. There is no automatic coverage provision for completed operations in either type of policy form if the policy is not renewed or another provision is made to extend coverage for completed operations.

Completed operations can only be provided by:

  1. The continuous renewal of the CEL policy (the retro date cannot be advanced on a claims-made policy or the completed operations will be eliminated for the period of time between the original retro date and the renewal policy inception date)
  2. The purchase of a completed operations coverage extension on a CEL policy that will not be renewed. This coverage extension for completed operations coverage must be purchased on either an occurrence-based or claims-made policy form. Some high quality CEL policies sold to insure a specific project come with specific completed operations coverage endorsements for specified periods of time.
  3. Purchasing a CEL policy that has a policy term long enough to encompass the need to insure completed operations, normally 7 years after the project is completed in most states, will meet the statute of repose. Again, occurrence or claims-made-based coverage forms would need a policy period long enough to address the completed operations loss exposure period.

Note that none of these options includes the purchases of an extended reporting period (ERP) for completed operations. All the ERP provision would do if it were purchased is allow the insured more time to report a loss that was otherwise a covered loss under the policy.

Occurrence-Based Policies Feature Free ERPs

An occurrence-based CEL policy comes off the shelf with an unlimited duration ERP that is automatically built into the policy form. In contrast to a free ERP on occurrence-based policies, claims-made policies charge additional premium for an ERP, sometimes up to 300 percent of the premium on the expiring policy. Plus, claims-made policies limit the duration of the ERP to only a few years. Potentially having to pay a lot of money for a limited duration ERP at some point in the future could be a big difference between claims-made and occurrence-based CEL policies.

However, in practice, there is little reason to exercise ERP provisions unless the insured knows claims are headed its way at the end of the coverage period. If the insured knows there is a need for the ERP option to be exercised, paying up to 300 percent of the premium originally paid for the policy to buy the ERP option will seem cheap at the time. For that reason, I do not think potential ERP charges are onerous. I should also add that, in 34 years in the environmental insurance business, I have never had to exercise an ERP in the face of impending claims.

Switching from Claims-Made to Occurrence-Based Coverage Formats

If a policyholder desires to switch from a claims-made policy to an occurrence-based policy, something has to be done with the claims-made policy to address the need for an extended time to report incurred but not reported losses under the expiring claims-made policy.

There are two ways to do this:

  1. Exercise the ERP provision on the expiring claims-made policy.
  2. Purchase what is commonly referred as a "nose" endorsement on the occurrence-based policy, which, in effect, moves the effective date of the occurrence-based policy back in time. If there is a nose endorsement on the occurrence-based policy, there is no need to pay for the ERP on the expiring claims-made policy.

In reverse—switching from occurrence-based coverage to claims-made coverage—there is no need to do anything with the occurrence-based policy; it already had the unlimited ERP built into the policy form.

However, the claims-made policy should not exclude new pollution events arising from the prior operations of the contractor, or there will be a coverage gap in the transition. The occurrence policy covers only insured losses arising from pollution events taking place during its policy period. If the claims-made policy only insures losses from new work the contractor is performing during the policy term, there is a coverage gap for completed operations in the transition from occurrence-based coverage to a claims-made policy form.

The Reality on Claims-Made versus Occurrence CEL Policies

Occurrence and claims-made-based CEL policies are more similar than most practitioners realize. Both types of coverage triggers require the continuous renewal of the insurance to have seamless coverage for completed operations beyond the policy term.

The perceived advantages of occurrence-based CEL policies are largely mythical in practice. The potential disadvantages of claims-made CEL policies are rare in practice.

Claims-made CEL policies have these clear advantages:

  1. The fundamental coverage defects for indoor environmental risks in most of the CEL policies being sold today can be immediately corrected for in subsequent renewals of those policies.
  2. In the event of a loss with damages happening over multiple policy periods, it will be abundantly clear which policy should apply to the loss when the claim is actually made.

Conclusion

Unfortunately, confusion over the mythical automatic completed operations coverage provided under occurrence-based CEL policies has led to an overwhelming number of contract insurance specifications requiring occurrence-based CEL policies. The authors of those insurance specifications should have addressed the need for completed operations coverage instead of occurrence versus claims-made and ERPs.

The sale of glitchy occurrence-based CEL policies is not a hopeless potential professional errors and omissions situation for the agents and brokers who sold the insurance policies. Subsequent renewals of occurrence-based CEL policies with the right coverages over time will eventually help to erase the coverage problems with past placements. In this case, the inability to exactly pinpoint the date of loss under occurrence-based policies is a good thing for the insured parties and their insurance agents/brokers.
 


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