During this COVID-19 crisis, I have been asked whether environmental insurance policies insure losses arising from the coronavirus. In this article, I expand the question to "Do environmental insurance policies cover losses arising from biological contaminants?"
The answer is that a few environmental policies today do an exceptionally good job of insuring biological contaminants. However, most environmental insurance policies sold in 2019 and 2020 did not adequately cover biological contamination risks.
Common Coverage Defects for Biological Contaminants
Coverage defects for biological contaminants in environmental insurance policies arise in seven distinct areas.
The definition of a "pollutant" in the environmental insurance policy needs to specifically include the biological contaminants that need to be covered. The most commonly used Insurance Services Office, Inc. (ISO), definition of what a "pollutant" is does not encompass biological contaminants very well. This is why insurance companies had to introduce separate far-reaching exclusions for fungi and bacteria to get out of paying "toxic mold" losses on property and liability insurance policies at the turn of the century. The relationship between viruses and pollution exclusions mirrors the precedent set with fungi/mold/bacteria as biological contaminants 20 years ago. There was a reason separate exclusions for fungi and bacteria were introduced; pollution exclusions were not sufficient to eliminate the coverage in the policy for losses arising from fungi and bacteria. Environmental insurance policies use the same core ISO definition of what a pollutant is. Therefore, for the same reason fungi and bacteria needed to be addressed separately as an exclusion in standard insurance policies, they need to be specifically covered as "pollutants" in the environmental insurance policies.
The environmental insurance policy may contain specific exclusions for losses arising from or related to fungi/mold/bacteria/virus.
The environmental insurance policy may cover only a specific species of fungi, mold, bacteria, or virus when the standard property and liability insurance policies exclude any type or amount of these materials.
There may be a specific exclusion for losses caused by a communicable disease.
A commonly used definition of "cleanup costs" limits the coverage to cleanup actions required under environmental laws. It helps to know there are no environmental laws pertaining to the cleanup of biological substances to understand why this provision is a problem.
The cleanup coverage may only apply to outdoor pollution events affecting soil and water, whereas biological contamination is almost always an indoor loss exposure.
Contractors environmental insurance policies commonly have exclusions for damage to the building the contractors are working on or in, which effectively eliminates 90 percent of the biological contamination loss content in the policy.
Most of these potential coverage defects in environmental insurance for losses associated with biological contamination can be attributed to a single factor—environmental insurance policies were never designed for indoor use. The core environmental insurance policy designs from the 1980s predated the emergence of specific exclusions for fungi/mold/bacteria with their anticoncurrent causation provisions in both property and liability policies. As a result, most of the environmental liability insurance policies sold today are not suitable to insure biological contaminants as a covered pollutant or to insure indoor environmental risks. However, some environmental insurance policies have been designed specifically for this purpose and have been available for over a decade.
Environmental Insurance Coverage Defects for Biological Contamination
It is interesting to note that, over the past 20 years, environmental insurance policies that correct for these seven common coverage defects have been readily available at the same premiums as or even lower premiums than the environmental insurance policies that contain all seven defects. In my opinion, for fungi, bacteria, or viruses to be insured in the environmental insurance policy, all three need to be referenced as defined pollutants in the definitions section of the policy. Including microbial matter as a defined pollutant in an environmental insurance policy would encompass all types of fungi/molds/bacteria/viruses with fewer words and work just as well.
But, be on the lookout for this coverage glitch: one extremely popular environmental insurance policy defines microbial matter in the policy form to only be fungi, much to the surprise of most insurance brokers, including me. The definition as written in the insurance policy would override more traditional uses of the term microbial matter, thus limiting the environmental insurance policy only to losses arising from the release or escape of fungi (which does include mold) but not the other forms of microbial matter (bacteria and viruses). That particular insurance company will normally add in coverage for bacteria, but the broker needs to be alert enough to ask for the coverage enhancement. That policy is also silent on virus as a defined "pollutant."
Some environmental policies specifically insure all forms of fungi/mold within the definition of a pollutant but then list only one form of bacteria as a covered pollutant. The most common form of limited bacteria coverage is to restrict the coverage in the environmental insurance policy to only cover Legionella bacteria as a defined pollutant. Legionnaire's disease has led to wrongful death lawsuits that are totally uninsured due to the universal fungi/bacteria exclusions in property and liability insurance policies today. It is good to have environmental insurance for Legionella bacteria, but it is not sufficient coverage when all species or amounts of bacteria are either severely sublimited or completely excluded causes of loss in the standard property and liability insurance policies.
Limiting the coverage in an environmental insurance policy to only one form of biological material is an insurance coverage roulette game for the insurance buyer and broker. For example, there are estimated to be well over a million species of bacteria; insuring one species of bacteria leaves more than a million other kinds of bacteria uninsured. In Wisconsin, it was sandwiches contaminated with Listeria bacteria that established the case law in 2002 that made all forms of bacterial contamination excluded "pollutants" in virtually every liability and property insurance policy sold in the state. The litigated product recall coverage case regarding the sandwiches predated the introduction of broad-spectrum separate exclusions for all types and quantities of fungi and bacteria.
In states that have established through insurance coverage case law that bacteria is an excluded pollutant within the traditional ISO definition of a "pollutant" (California, Indiana, and Wisconsin), insurance buyers and brokers are playing roulette with two bullets in the six-shooter gun when faced with a claim arising from bacteria. In those states, if the broad-spectrum fungi/bacteria exclusions that were slammed into property and liability insurance policies by ISO in 2005 don't exclude the loss, the standard pollution sublimits and exclusions in property and liability insurance policies likely will.
There is no insurance coverage case law that I could find on if a virus falls within the definition of an excluded "pollutant" or not.
There are only two ways to fix the insurance coverage gaps for losses associated with biological contaminants: convince the underwriters of the standard property and liability insurance policies to remove the coverage restrictions for biological contamination-related losses or purchase an environmental insurance policy that actually works for biological contamination.
Where Is Insurance for a Loss Caused by a Coronavirus?
The obvious place to start in the analysis is the ISO definition of a "pollutant," which has been consistently used in property and liability insurance policies since 1973. If the ISO definition of a "pollutant" was not sufficient to eliminate coverage for mold losses without a specific exclusion for mold, it stands to reason that a virus would not fall under the ISO definition of a pollutant either.
But, hold on … insurance coverage for losses associated with a virus is still glitchy even if the pollution exclusion does not apply. In standard property and liability insurance policies, there are a number of hurdles to get over before there would be coverage for losses arising from viruses.
In property insurance policies, it can be difficult to show that there has been a direct physical loss arising from an insured peril for coverage to apply to a loss event associated with a virus.
General liability policies also have coverage glitches for losses caused by a virus. In the insuring agreement in the general liability policy, there needs to be an accident that leads to the loss. Where is the accident with a virus outbreak?
An endorsement that eliminates coverage for communicable diseases would apply to a virus outbreak. There are also specific exclusions for losses arising from a virus that can be endorsed onto both property and liability insurance policies. These became popular after the Ebola outbreak 5 years ago.
Depending on a pollution exclusion to not hold up in court is no way to design insurance coverage. It is a much better idea to be looking at an insuring agreement to evaluate coverage for a cause of loss.
Specially Designed Environmental Insurance Can Provide Coverage
An environmental insurance policy can insure losses arising from fungi/mold/bacteria/viruses or microbial matter as defined pollutants in the policy. In addition to traditional coverage for liability, environmental insurance policies can fill the coverage gaps for decontamination costs, cleanup costs, extra expense, loss of rents, and business interruption arising from the release or escape of pollutants. Thus, making a specially modified environmental insurance policy the only effective and reliable option to cover losses arising from biological contaminants.
However, the environmental insurance policy would need the following coverage provisions to be effective for biological contaminants.
The definition of a pollutant should reference fungi, mold, bacteria, viruses, and/or microbial matter.
Ideally, coverage should be triggered by the presence of fungi, mold, bacteria, viruses, and/or microbial matter and not be limited to the required release or escape of these materials.
The definition of cleanup in the environmental insurance policy needs to incorporate an objective predictable standard and not be restricted to "as required under environmental laws" because there are none for biological contamination.
Environmental insurance that has been designed to specifically insure biological contaminants for commercial properties and the contractors that work on them has been available since 2007. Environmental insurance for fungi/mold as defined pollutants was introduced in 2003. Price breakthroughs in 2014 were enabled by engaging water intrusion emergency response loss control services on commercial properties. The loss control feature has reduced minimum premiums for a good quality environmental insurance policy from top-rated insurance companies to as little as $3,000 for a $1 million policy limit. As a reference point, that $3,000 insurance premium would insure a building twice the size of a typical Fairfield Inn-sized hotel. For property owners with more than one commercial building, it is common to see premiums as low as $800 per location. In another example of affordability, apartments could be insured for as little as $5 per door. But all of this example pricing predates the COVID-19 pandemic and reflects environmental insurance coverage that was not specifically designed for virus contamination. These environmental insurance policies were well designed for fungi and bacteria as causes of loss, however.
In the face of a long-term pandemic, the availability of customized environmental insurance for indoor biological hazards is in a state of flux. The best policy forms to deal with any loss arising from a contaminant or irritant will be an environment insurance policy form of some type. Trying to place one of those policies specifically covering virus as a covered "pollutant" as of this writing is practically impossible. For me as a broker, it is like trying to place windstorm coverage on a property in the middle of a hurricane. The pandemic has revealed the coverage flaws in property and liability insurance for losses arising from microbial substances. Environmental underwriters are at their drawing boards working to develop the next generation of environmental insurance coverages needed to address biological hazards.
COVID-19 is bringing to light that standard property and liability insurance policies do not provide reliable coverage for losses arising from fungi, mold, bacteria, and viruses. In addition to ever-present exclusions for pollution, there are fundamental problems with a covered cause of loss in the insuring agreements in those policies. Was there an accident? Was there a direct physical loss? A much better place to start in developing an insurance coverage strategy for biological contaminants is with a policy that has contamination as a triggering event in the insuring agreement. Those policies only exist in the world of environmental insurance. Some of those environmental insurance policy forms did a good job in covering virus as a "pollutant." The specialized environmental insurance policies covering biological hazards have been readily available in all 50 states for more than 10 years. Less than 1 out of 100 commercial buildings has that coverage in place today, but that situation is not because environmental coverage was unavailable or unaffordable.
Once the dust settles from COVID-19, property owners will once again be able to access new and improved versions of environmental insurance policies. I expect more demand for these customized policies that the flaws in standard property and liability policies for losses arising from contamination revealed in practice.
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