Below, I will try to dispel some of these myths.
The Occurrence Coverage = Completed Operations Myth
There is a common belief in the insurance business that
occurrence-based environmental insurance policies sold to
contractors provide better completed operations coverage than
claims-made insurance policies do. That belief is a myth.
Occurrence-based contractors environmental liability (CEL)
policies really have no advantage over claims-made policies on
the topic of completed operations. Actually, an occurrence-based
CEL policy is simply a claims-made policy form with a prepaid
extended reporting period (ERP) of unlimited duration.
Both types of CEL coverage forms require that coverage be in
force when
the pollution event
actually takes place and
- there are damages for
bodily injury, property damage, and cleanup costs as a result of
that pollution event.
With the continuous renewal of a CEL policy, both occurrence and
claims-made policy forms automatically provide completed
operations coverage for the insured. The key to the completed
operations coverage beyond the policy term is the renewal of the
coverage or the specific purchase of a completed operations
coverage extension to the policy. It does not matter if the
coverage is written on an occurrence or claims-made basis.
There is one exception to the automatic completed operations
coverage on renewal rule. If the retroactive date on a
claims-made policy is advanced, coverage for claims arising from
pollution events taking place prior to the new retro date will
be eliminated in subsequent renewals of the coverage. The
potential advancement of the retro date on a claims-made policy
is commonly stated as one of the big advantages of
occurrence-based policy forms. In practice, that perceived
advantage turns out to be mythical.
Once an occurrence-based policy is in effect, future renewals of
the CEL insurance cannot effect the coverage on the firm
provided by the policy for that policy term. That turns out to
be a double-edged sword. Sometimes, being able to fix past
coverage glitches with the insurance purchased in future years
is important. This is especially true at the current fundamental
coverage defect rates in the CEL policies sold to insure indoor
environmental risks today.
Advancing a retroactive date on the renewal of an environmental
insurance policy has not happened to one of my clients in 34
years of selling the coverage line. From that experience, in my
opinion, the potential of having a retroactive date advance
under a claims-made policy and therefore losing the completed
operations coverage on the insured is not a material concern.
The Myth of Completed Operations = ERPs
The discussion of completed operations coverage and ERPs in CEL
insurance gets confusing fast. It is especially confusing if you
think these very different coverage elements are the same thing.
They are not. Completed operations coverage applies to a
pollution event and the resulting damages that take place after
the initial work of the contractor is completed. A loss from
completed operations can be incurred during the policy period or
in the future.
In contrast, extended discovery clauses or ERPs (essentially the
same thing) simply give the insured more time to report an
otherwise covered loss that took place during the coverage
period of the insurance policy.
For example, assume a pipe that is installed in 2012 begins
leaking in 2014 and causes a mold loss, which is discovered in
2015. This is an example of a loss arising from completed
operations.
ERPs only give additional time to report an otherwise covered
loss under the policy. An ERP in the above example would do no
good if the 2012 liability insurance policy was written for only
a 1-year term and was not renewed. A 12-month policy term is a
typical scenario in project CEL policies. A loss resulting from
a leak beginning in 2014 would not be insured under the expired
2012 policy, unless the 2012 policy had been endorsed to
specifically address completed operations for an extended time
frame. It does not matter if the 1-year policy duration
project-specific CEL policy was written on a claims-made or on
an occurrence-coverage basis. In the above scenario, the
pollution event happened after the policy had expired. There is
no coverage for the loss, and the exercise of an ERP is moot.
In practice, we do not see many completed operation endorsements
sold on project policies. They seem to be overlooked by
insurance practitioners. I suspect this is due to confusion over
the mythical completed operations coverage commonly perceived to
be automatically provided under occurrence-based CEL policies.
When a CEL Policy Is Not Renewed
If a CEL policy cannot be renewed, the last policy purchased
must have a special provision for completed operations coverage
added to it by endorsement. It does not matter if the CEL policy
was written on an occurrence or claims-made coverage basis;
completed operations must be addressed before the current policy
expires.
Buying the ERP on a claims-made policy is not the same as buying
completed operations coverage.
The one clear advantage of an occurrence-based policy form over
a claims-made policy form is that the occurrence-based policy
comes off the shelf with an automatic, prepaid ERP of unlimited
duration. This is a nice feature if it actually mattered in
practice.
There is actually little need for an ERP if the completed
operations loss exposures of the insured over time are addressed
appropriately. For example, if a plumber purchases a CEL policy
to install a drain pipe (all water in a drain pipe is Cat 3
water because of the bacteria the water contains) and, as part
of that project-specific CEL policy, purchases 7 years of
completed operations coverage for losses arising from the pipe,
why would the insureds (including the additional insureds) need
another 3 years of ERP at the end of 7 years of coverage after
the completion of the job? Seems like insurance overkill to me.
Adequate completed operations coverage effectively neutralizes
the need for the purchase of an ERP on a claims-made policy.
Most Project CEL Policies = Flawed Completed Operations
Coverage
At our wholesale brokerage operations, 75 percent of the
inquiries for a new CEL insurance policy on a contractor come
from insurance agents/brokers seeking to insure a specific
project under an occurrence-based policy with a 12-month policy
term. Usually, the motivation behind the CEL inquiry is that the
contractor has run into the insurance requirements of an
enlightened general contractor or property owner that has
recognized what pollution exclusions are all about in the
insurance provided by its vendors. The motivator for insuring
only a single project is to minimize the insurance costs of the
contractor.
What the inquirer has not recognized in its request for a 1-year
CEL policy term on the project is that there will be no
completed operation coverage for the insured parties at the end
of the 12-month policy term. In almost all cases, by the time we
stretch out the coverage term to 8 years to deal with the
completed operations loss exposure, the contractor could insure
its entire firm for a year for less money than insurance premium
on the single job. We end up binding very few project CEL
policies for this reason. In most cases, a contractor is far
better off insuring the entire firm for environmental losses
over insuring a specific project.
Unfortunately, confusion over the mythical automatic completed
operations coverage provided under occurrence-based CEL policies
and the lack of understanding about the operation of ERPs in
claims-made insurance policies have led to an overwhelming
number of contract insurance specifications requiring
occurrence-based CEL policies. Actually, claims-made
environmental insurance policies offer the buyer more
flexibility than occurrence-based policies. Unfortunately, the
weight given to insurance mythology has overproduced an
overwhelming number of occurrence-based CEL placements with
glitchy coverage for indoor air risks on a lot of them.