Contractors pollution liability (CPL) is a contractor-based policy, offered on
a claims-made or occurrence basis, that provides third-party coverage for
bodily injury, property damage, defense, cleanup, and related defense costs as
a result of pollution conditions (sudden/accidental or gradual) arising from
contracting operations performed by or on behalf of the contractor.
Today, most CPL policies include a separate first-party coverage to minimize
the insured's liability or impact on the environment. This coverage is
usually referred to as emergency response cost coverage but will vary by
insurer. CPL is available to any type of contractor performing operations or
conducting work. From environmental or remedial contractors to general and
specialty trades, CPL has become a viable financing option for environmental
loss providing insurance for large or even catastrophic loss scenarios at a
reasonable premium.
Policies can be offered on a project or blanket program basis. Project
policies provide coverage for all operations performed by the insured during
the construction period and can include "tail" coverage (extended
reporting period (ERP) for claims made policies and completed operations for
occurrence policies) to address the statutes of repose in many states or other
contractual requirements. Usually, a maximum term of 12–13 years is offered.
Additionally, wrap-up programs can be implemented to afford coverage for all
contractors regardless of activity undertaken (environmental or
nonenvironmental) on a specific project. A blanket program provides coverage on
an annual basis for all defined covered operations taking place during the
policy term.
Marketplace
In 2017, CPL comprised approximately 20–25 percent of the entire
environmental insurance marketplace, which remains somewhere from $1.5 billion
to $2 billion in premium. There are approximately 40 insurers offering various
forms of CPL coverage. Some insurers have forms specific to nonenvironmental
contractors such as general contractors and specialty trades and other forms
specific to environmental contractors. It is estimated that these 40 insurers
offer 50–60 different products (each insurer most likely has a claims made form
and an occurrence form) all on unique company forms—vastly different
endorsements, definitions, exclusions, etc. This lends to the difficulty for
many insurance professionals with understanding the marketplace and, more
importantly, coverage intent, although much education provided in the past 10
years has made the process of properly securing such coverage less daunting
than in the past.
Several markets offer online CPL programs. These platforms offer a lower
premium and reduced retention for smaller companies (usually under $25 million
in annual revenue). Access to these programs requires completion of qualifying
documentation. Once completed and favorably reviewed, an applicant
(broker/producer) will receive access to the system via a password entry point.
The broker/producer can access the system on an insured's behalf and answer
the application questions. Once the application is completed, the system—if the
risk is acceptable—will provide limits and terms. The policy can be purchased
and bound through the system. The limitation of these systems is the relatively
low revenue threshold, single form coverage, and the need to satisfy all
questions favorably. Any negative answer often negates the whole transaction.
These platforms are efficient and provide simple access to basic programs;
however, they may not provide the scope of coverage that is desired, and no
customization of coverage is provided.
Market appetite remains strong with the core risk classes such as the
following.
- General contractors
- Trade contractors
- Artisans or specialty trades (including environmental remediation/service
firms)
Each market has its own tolerance for higher risk activity such as
residential or habitational (because of the exposure to microbial matter),
underground activity (because of the exposure to preexisting environmental
hazards that are either human-related or naturally occurring), or
environmental work.
Often, there is confusion on the part of the general contractors or owners
determining what types of construction activities or operations upon which they
should require CPL insurance in contracts. Below is a bit of a guideline that
can be used to assist in determining which services or activities are high,
medium, and low hazard. Of course, every activity may create environmental
liability, but when business decisions need to be made, this chart may
help.
High |
Medium |
Low |
- Site/dirt work (excavation, paving, landscaping, and
digging)
- Drilling or any subsurface work
- Moisture protection (roofing, sealants, and siding)
- Mechanical, electrical, and plumbing
- Environmental services/work
- Demolition
- Any building envelope work
|
- Drywall
- Doors and windows (doors, frames, hardware, glass, and
glazing)
- Curtain wall
- Concrete
|
- Wood and plastic (carpentry, millwork, and vanity tops)
- Structural steel
- Masonry
- Flooring
- Painting
- Electrical
- Specialties (markerboards, toilets/accessories, and lockers)
- Furnishings
- Equipment (kitchen, theater, library, and athletic)
- Conveying systems
|
Insurance Application:
High hazard—Always
require $1,000,000 minimum in CPL insurance (inclusive of mold/bacteria
coverage). No exceptions. Minimum completed operations period—5 years.
Medium Hazard—Always require $1,000,000 minimum CPL
insurance requirement. Minimum completed operations period—2 years. If
cannot or will not evidence CPL insurance, require environmental
indemnity.
Low Hazard—Always request $1,000,000 CPL, but waive if
need be.
|
Capacity
During 2017, the capacity available for CPL continued to exceed $400
million, with the most any one insurer can offer remaining at $50 million. The
major insurers continue to have access to the reinsurance marketplace for
facultative capacity above the $50 million.
A question that is often asked of brokers by their clients is what limits
should be purchased when considering CPL coverage. The matrix presented in
Table 1 provides a guideline for discussion with the contractors. The variables
that needed to be considered are the types of structures, geography, experience
level, and risk appetite.
Table 1: Guidelines for Purchase of CPL Coverage
Annual Revenue |
Limits Purchased |
$0–$10 million |
$1,000,000 each loss/aggregate |
$10 million–$25 million |
$2,000,000 each loss/aggregate |
$25 million–$50 million |
$2,000,000–$5,000,000 each loss/aggregate |
$50 million–$100 million |
$5,000,000 each loss/aggregate |
$100 million–$250 million |
$5,000,000–$10,000,000 each loss/aggregate |
$250 million–$500 million |
$10,000,000–$25,000,000 each loss/aggregate |
$500 million–$1 billion |
$25,000,000 each loss/aggregate |
Above $1 billion |
$25,000,000 each loss/aggregate or higher |
Medium- to larger-sized contractors typically take higher retentions,
$100,000 each loss or $250,000 each loss to offset the cost of the higher
limits. This tracks with the logic in purchasing CPL, which is a catastrophic
coverage, and to insure for the claim that will have the potential to threaten
the existence of the organization.
Retentions
Retentions continue to start at $5,000. CPL insurers offer both self-insured
retentions and deductibles. Typically, deductibles have to be negotiated prior
to policy inception. The size of the actual retention will depend on the
insurer and the financial strength of the insured.
Premiums
Typical minimum premiums begin around $5,000 for the $1 million per loss/$1
million aggregate limit of liability. However, there are programs that can be
purchased for as low as $2,500, albeit, these programs may not have all the
coverage parts needed or offered in the marketplace today, but they may be
sound programs from a simple liability standpoint.
Buying Motivators
The buying motivators for CPL typically fall into three categories:
contractual requirement, asset protection, and loss events.
Contractual requirements have always been and continue to be the primary
driver for an entity looking into the purchase of a CPL program. Contractual
requirements can appear in virtually any contract. Often these requirements are
generic and unclear and are drafted as part of a standard insurance package.
This language should be carefully reviewed to determine true intent of
requested coverage. Contractual requirements should address the following basic
items.
- Clearly request a contractor-based program (in other words, pollution
arising out of the work to be performed)
- Blanket versus project policy (Is a dedicated limit required?)
- Define limits, retention, policy term, and any other unique needs
- Define the scope of coverage—job site activities, disposal liability,
transportation, etc.
In the past, it was common to see CPL requirements negotiated out of the
contract regardless of the type of project or work. However, many owners and
general contractors will not waive these requirements like before. In fact,
there is a trend for owners and general contractors to require higher limits
than what was required in the past.
More contractors are buying CPL today as basic asset protection. Of course,
the number of buyers is proportional to the size of the firm. In other words,
the larger the firm, the more likely they are to buy CPL to protect against
environmental liability. As with any program, if this is the buying motivator,
the scope of coverage should be the driver of the program. Even experienced
insurance brokers often have limited expertise with regard to the granular
issues of finer aspects of environmental liability and related insurance
coverages. Brokers routinely discuss this coverage in general terms with their
clients; however, the focus should be to assess the overall need and research
the market to procure the optimal solution for the company's exposures. For
current purchasers of environmental insurance, the challenge is to maintain
continuity in the optimal program. The environmental marketplace is very
dynamic and changes quickly in comparison to the standard commercial general
liability (CGL) and workers compensation markets. Once the appropriate coverage
is purchased, the daily business activity must be monitored so that it is
concurrent with the current insurance program. Often market appetite changes
during the policy term, and such changes must be negotiated upon program
renewal. Failure to stay on top of these market changes may result in an
inadequate program.
Loss events or potential loss events serve as a motivator to purchase any
insurance and are an especially good driver for environmental insurance. Most
environmental coverages provide catastrophic coverage for infrequent but
significant claims. The inherent value of an environmental program lies in
having insured a catastrophic event and the legal defense provided by the
policy. Providing coverage for defense costs alone may save a company involved
in an environmental claim from financial ruin. Virtually all CGL polices
contain an absolute pollution exclusion and claims may be excluded or denied,
leaving the firm to face an uninsured loss. An example of the type of loss
event that has affected the insurance world over the past 10–15 years is mold
or fungus liability. Many organizations in the construction industry have been
exposed to such events, which can lead an organization to consider the purchase
of CPL coverage to finance against loss.
Even with the above buying motivators, it is estimated that there are only
approximately 25,000 +/- buyers of CPL in the construction industry today. That
is approximately 3–4 percent of the total construction or contracting entities
in the United States today, which ranges from 650,000 to 750,000 depending on
which survey you consider. With the education that has been provided, claims
that the industry has seen and expansion on the insurance products, this
continues to be an under-penetrated insurance product.
Policy Terms
Most insurers will provide a total term (construction period and
ERP/completed operations) of 15–17 years for project policies. Some insurers
may restrict the policy term/completed operations period to 10 years, depending
on the state and project type. Blanket or practice programs are commonly
written on an annual term; however, some markets have begun offering multiyear
programs for smaller contractors, typically $50 million in annual revenue or
less. This trend will continue.
Rate Adjustments
Rates are generally flat to decreasing in the market, and we expect to see
no changes for the upcoming year. Existing business (current purchasers) is
generally flat to a slight reduction (usually 2–5 percent) on renewal if the
firm remains fairly static—no drastic changes in operations, revenue, claims,
etc. Renewals are being bolstered by enhancing coverage for the same
price—adding transportation coverage, nonowned disposal site coverage, and even
environmental coverage for real estate owned by many construction firms.
Rates for new buyers are largely driven by insurer appetite. They are
generally on par with existing business but may increase as a result of some
specific exposures such as residential work or habitational work because of the
exposure to microbial matter. If a market is comfortable with a particular
risk, pricing is usually very competitive. In the event more than one insurer
is interested in a particular risk, coverage enhancements then often become the
deciding factor.
Coverage Considerations
In addition to the basic insuring agreement covering "job site"
activities, there are many coverage considerations that should be discussed,
which may be included as separate coverage parts or can be added via
endorsement to the CPL form.
Microbial Matter
Even though mold continues to be of concern for many insurers, especially
with regard to resulting property damage, many insurers offer mold coverage as
part of their overall CPL program. Depending on the type of business or
work/project types conducted by the firm, it could be provided on an occurrence
or clams-made basis. However, bacteria, specifically Legionella pneumophila, is
found to be less common and typically must be added via endorsement. When
insurers provide coverage for "microbial matter," it's prudent to
ensure it not only provides coverage for mold, fungi, mildew, and the like but
also bacterial and viral matter.
Nonowned Disposal Sites (NODS)
There has been an increase in the purchase of NODS coverage over the past
few years with insurers freely offering the coverage on a blanket basis with
little to no additional charge. Coverage for NODS (or sites that accept waste
from the insured for treatment, disposal, or recycling) includes the
insured's legal liability arising out of disposal or deposition of waste
material at such locations, typically defined by the policy.
Generators (which can include any entity signing the waste manifest as a
"generator," including contractors) of waste may be liable for
assistance in the cleanup of the disposal site in the event the owner cannot
meet its obligations to do so. Most insurers include NODS coverage as a
separate coverage part while fewer add via endorsement today.
Naturally Occurring Hazardous Substances (NOHS)
Naturally occurring hazardous substances (NOHS) such as asbestos, mercury,
silica, arsenic, radon, and pyrite have gained attention over the past few
years for two reasons.
First, more and more contractors have been involved in situations resulting
in lawsuits where they disturbed a mineral containing a NOHS. For example, a
general contractor in Connecticut who was building a "box store"
hired a subcontractor to excavate and remove fill material from the job site.
The subcontractor subsequently used the material as fill at three other project
sites. The material they removed was soil containing remnants of an
asbestos-containing mineral called actinolite. They exposed third parties to
asbestos, and they also exposed their own workforce. It is important to note
that the asbestos in naturally occurring minerals is much less concentrated
than the asbestos utilized years ago as a fire retardant for insulation around
piping and ceiling and floor tiles, but it still poses unique exposures for
intrusive-type work.
Second, some CPL policy forms still exclude NOHS today. There are several
ways exposure to naturally occurring hazards may be excluded. Some are fairly
recognizable as straightforward exclusions. Others are more difficult to find
and may be encountered in the definition of pollutants or pollution conditions.
For example, one insurer applies a specific exclusion for naturally occurring
substances in the exclusions section of the policy that can have a significant
impact on coverage.
This insurance does not apply to claims or losses based upon or arising out
of any naturally occurring substances in their original location and unaltered
form, or altered solely through naturally occurring processes or phenomena.
Another insurer will exclude by definition. In its definition of pollution
conditions, the definition does not include naturally occurring substances,
therefore negating coverage for such exposure:
Pollution Conditions means the emission, discharge, dispersal, release, or
escape of pollutants, provided such are not naturally occurring. The entirety
of any such emission, discharge, release, or escape or any series of
continuous, repeated, or related emissions, discharges, releases, or escapes
shall be deemed to be one pollution condition.
Even though the underwriters may describe their intent is to cover such
claims, such exclusions can have a tremendous impact on coverage when a claim
is presented.
Another NOHS is silica. Much has been said over the past 6 months about the
new Occupational Safety and Health Administration standard for crystalline
silica, bringing much attention back to the substance. Silica exists on almost
every construction project. Most silica exclusions reside in CGL today. Not too
many times will a silica exclusion be found in a CPL policy, although there are
instances. Any intrusive-type contractor or concrete contractor should not have
such an exclusion.
Welding Fumes (Manganism)
A much more discreet exposure is welding rod fumes. Manganism is a
Parkinson-like disease that supposedly results from the inhalation of
"toxic" levels of manganese (Mn). Such exposure can cause
irreversible damage to the central nervous system. Cases of the illness have
been dated back to the late 1800s. Some individuals exposed to very high levels
of manganese for long periods of time in their work can develop mental and
emotional disturbances and slow and clumsy body movements. Workers usually do
not develop symptoms of manganism unless they have been exposed to manganese
for many months or years. Manganism occurs when a significant amount of
manganese is absorbed into the part of the brain that helps control body
movements. Exposure to high levels of airborne manganese, such as in a
manganese foundry or battery plant, welding operations, or pesticide
application, can affect motor skills such as holding one's hand steady,
performing fast hand movements, and maintaining balance. Exposure to high
levels of the metal may also cause respiratory problems and sexual
dysfunction.
From an insurance perspective, the major concern is exposure to employees
and, of course, workers compensation-related claims. However, in those states
that subscribe to third-party-over action claims, many construction firms can
easily find themselves in the middle of such a claim, and the primary issue at
hand will be: Is manganese a pollutant? Most likely, most CGL insurers would
look to decline via the pollution exclusion in the policy. If a contractor is
looking for an alternative to insure against such an exposure, a CPL policy may
be the alternative. As an added benefit, many CPL policies are structured to
provide coverage for pollution-related third-party-over action claims.
Manganism is another issue to watch to determine if this becomes a
significant issue in the construction industry and how CGL insurers will handle
these claims.
Looking Forward
Going forward, CPL claims are expected to rise with smaller (less than $1
million) claims leading the trend due to the broad coverage terms currently
provided by insurers, specifically under the microbial matter—mold, fungi,
bacteria, and Legionella categories of exposure. However, the availability of
CPL will likely remain abundant while continuing to expand in the scope of
coverage. As for premiums, it is anticipated that they will remain stable among
small to midmarket businesses and softer on larger construction firms.