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.
Summary
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.