A new enhancement that provides coverage for emergency response costs has been offered on a variety of environmental insurance policies, including site-specific pollution liability forms and contractors' pollution liability policies for contractors performing environmental or non-environmental work at insured sites. While provisions like this purport to offer more coverage and should be beneficial for insured parties, a number of issues with emergency response cost enhancements must be considered when evaluating the benefits afforded by these coverage extensions.
As with other environmental insurance policies and endorsements, there are no standard forms for emergency response costs coverage grants. In fact, there is not even agreement on the meaning of an emergency response. Therefore, insureds (and brokers) are cautioned to read policies carefully and be certain they understand how these provisions are intended to work as well as recognize the possible issues that may be encountered in asserting a claim under the emergency response cost coverage in their environmental insurance policies.
While these provisions are being touted as new to policies, there have been emergency response cost provisions in environmental insurance policies since 2006 or earlier. The emergency response cost language has stepped out of the shadows and is being recognized as a feature that differentiates one insurer's products from another in a competitive marketplace. Cleanup costs for emergency events are also being incurred and submitted to insurers under emergency response cost provisions. In addition, some questions have arisen regarding how insurance claims units have responded to these claims.
It is important for insureds to understand: (1) what situations qualify as emergencies under environmental insurance policies, (2) what costs qualify as emergency response costs, and (3) how the insured needs to interact with the insurer when submitting claims to recover emergency response costs under these policies.
What Are Emergency Response Costs?
While definitions of emergency response costs contained in environmental insurance policies vary, certain elements are common to all of the forms and can be summarized as follows:
Reasonable remediation costs are incurred by the insured;
costs are incurred to clean up pollution conditions;
the pollution conditions are found in soil, surface water, or groundwater; and
some form of prompt action is required.
Differences in Emergency Response Provisions of Various Insurers
Although there are common elements in events where an insured may incur covered emergency response costs from a pollution liability policy, it is important to recognize that differences among the forms may have a bearing on the recovery of such costs when an emergency occurs. Examples of differences that might impact the recovery of cleanup costs include the following.
Imminent Threat of Harm or Damage versus Immediate Action Requirement
Some policies use the description of pollution conditions that "… pose an imminent and substantial threat to human health or the environment" to identify when emergency response costs can be incurred. Other insurers have less stringent requirements providing that the pollution conditions giving rise to emergency response costs must "… necessitate immediate action."
While appearing subtle, there is a considerable difference between a condition that poses an imminent and substantial threat to human health and the environment and one that merely necessitates immediate action. For example, a spill on a paved surface at a large insured property may not pose an imminent and substantial threat to human health and the environment if it is allowed to run off into soil. However, the insured (and insurer) may save substantial costs in implementing the cleanup of this spill if the insured is allowed to take immediate action to control and remedy this condition despite a lack of threat of imminent and substantial harm.
Temporal Limitation for Incurring Emergency Response Costs
Some insurers require that remediation costs be incurred within 72 hours following the discovery of the pollution condition giving rise to emergency response costs. Other insurers require that such costs be incurred within 72 hours of the commencement of a pollution condition or otherwise as approved by the company. Still other markets require that costs be incurred within 96 hours of the commencement of pollution conditions, while some policies contain no temporal requirement.
The imposition of a temporal limit on incurring expenses can result in problems for insureds if they continue to incur costs beyond the specified time limits without the approval of the insurers. There are cases where reimbursement of remediation expenses has been denied in total where the insured continued to incur cleanup costs beyond a specified time limit even though the insurers were aware that the remediation activities were under way.
Policies that require that emergency response costs be incurred within a specified time period following the commencement of the pollution conditions create the additional burden of proof as to when the pollution conditions giving rise to such costs began. This requirement can effectively limit the availability of emergency response costs to sudden and accidental pollution events.
Need for the Insurer's Consent
Some environmental insurance policies contain emergency response cost provisions that require costs to be incurred after the insured has obtained the prior written consent of the company. The policies in which these consent provisions appear also typically have requirements that the insured report pollution conditions that necessitate immediate response as soon as possible. One insurance policy also contains a requirement that the insured forward "… all information pertaining to the emergency response costs to the insurer within 10 days of the first commencement of the pollution condition." Some policies do not have specific requirements that the insureds receive the prior written consent of the company but still require the insured to provide notice of pollution conditions giving rise to the need to incur emergency response costs "as soon as practicable."
The possible consequences of not providing notice to the insurer where required or not receiving the insurer's approval prior to incurring emergency response costs could be the denial of reimbursement for some or all costs of remediation based on the failure of the insured to comply with the provisions of the policy.
On-Site versus Off-Site Conditions
Some policies provide coverage only for on-site pollution or pollution conditions resulting from transportation activities. Other insurers will pay emergency response costs resulting only from pollution conditions on, under, or migrating from the insured property. Other policies do not specify any particular requirement for the location or source of the pollution condition.
Since remediation costs may be incurred on an emergency basis for any pollution condition that is otherwise insured by the environmental insurance policy, the restriction of coverage for emergency response costs to a limited subset of pollution events may seriously undermine the scope of the coverage in a site-specific or contractor's pollution liability policy. Where restrictions are identified, the insured should insist on coverage that does not limit recovery of emergency response costs to a specified subset of possible pollution events.
Legal Defense Costs
Some insurers provide legal defense costs as a part of the emergency response cost coverage, while other insurers have no provisions for legal defense costs. Since defense costs can be incurred in negotiating cleanup standards with regulators, the granting of coverage for such costs as part of an emergency situation is appropriate.
Coverage Grant for Emergency Response Costs
In several environmental insurance policies, the emergency response costs are set out as a separate grant of coverage. In other policies, these provisions are part of the definition of "cleanup costs," and the coverage flows through all insuring agreements that include cleanup costs. In one policy reviewed, the emergency response costs are provided as an exception to an exclusion titled insured's internal expenses, which are defined as expenses "incurred by the insured for services performed by its salaried staff and any employees." This coverage provision must be evaluated carefully to determine whether the protection of the emergency response cost is meaningful to the insured for likely immediate action or imminent threat situations.
Sublimit for Emergency Response Costs
Some policies provide modest sublimits (as low as $250,000) for emergency response costs. Others have no sublimit and provide the full per occurrence and aggregate limits of the policies for emergency response costs.
Assure Coverage When Emergency Response Costs Are Incurred
It is clear that not all environmental insurance policies providing coverage for emergency response costs are created equal. The current policies offering this coverage contain provisions that are not clear and could set traps for insureds that expect reimbursement for any and all costs incurred to address emergency situations. To maximize the chance for a full recovery of emergency response costs, it is recommended that the following steps be taken:
If possible, ask the insurer to provide emergency response costs with an affirmative grant of coverage that is not included within another coverage part or as an exception to an exclusion. Many environmental insurance forms are written with a separate coverage part for emergency response costs. Other policies may be written with the coverage afforded through an endorsement that provides an independent grant of coverage. If a separate coverage grant is not possible, make sure the language is clear and that the intended coverage cannot be defeated by a technical provision of the coverage section in which the emergency response costs are afforded.
If the policy specifies a time limit for incurring emergency response costs, negotiate as long a period as possible. In addition, make sure there will be no difficulty determining when the allowable time period begins. It is preferable to use the discovery of the pollution condition rather than the commencement of the pollution condition for this purpose.
Endeavor to remove the requirement for notice and approval of the insurer for the insured to incur emergency response costs. Even if you are successful in removing the approval requirement, attempt to provide immediate notice of the pollution condition and inform the insurer that emergency response costs are being incurred.
Attempt to remove any references to the place where pollution conditions must occur in order for the insured to incur emergency response costs. It should not matter whether pollution conditions are on, under, or emanating from an insured's property or a result of transportation activities.
If possible, include legal defense costs in the grant of coverage for emergency response costs since there may be a need to legally determine the extent of cleanup required.
It's a good idea to remove any sublimit provisions that apply to emergency response costs. Another option is to obtain a sublimit provision large enough to cover the costs that might reasonably be incurred within the allowable time period.
Make certain that you provide adequate information to the insurer when emergency response costs are incurred so the claim can be converted to one that is qualified under other coverage parts that pay for remediation expenses without a time limit or other restriction on the period when such costs can be incurred.
Emergency response cost coverage can be a useful enhancement to a site-specific environmental liability policy or a contractor's pollution liability policy. To maximize the benefit to the insured, take steps to determine that the policy is properly drafted to afford the maximum coverage with the least uncertainty regarding how an emergency is qualified, when and how the pollution condition giving rise to emergency expense costs is identified, the period during which costs may be incurred, and the notice/approval required. When optimal coverage terms have been obtained (or in the event they cannot be obtained), make certain that all provisions of the policy are followed at the time of an emergency to ensure that the actions of the insured do not void or limit coverage.
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