Expert Commentary

Common Myths about Contractors Environmental Insurance

There are persistent myths surrounding completed operations coverage and extended discovery clauses in the environmental insurance policies sold to contractors.

June 2014

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

  1. the pollution event actually takes place and

  2. 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.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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