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Financing Environmental Loss with Environmental Insurance

Jeff Slivka | October 1, 2006

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As the previous articles in this column on environmental risk management focus on risk control techniques, I thought it ignorant of me to avoid the "other" side of the risk management process—risk financing alternatives, in this case, environmental insurance specifically. As this is what I do on a day-to-day basis, I never thought about offering an introduction to the various environmental insurance products available to the many different exposures in the many different industries throughout the country.

When you start counting the many different policy forms utilized by the approximately 22 insurers offering environmental or pollution insurance, the number of forms and endorsements quickly get into the triple figures. What compounds the issue is the fact that every one of these forms differ from insurer to insurer. In one form, "pollution conditions" means something very different than in another form. One may exclude naturally occurring substances, the other may not.

Identifying these issues and understanding the impact they have on coverage is paramount when purchasing environmental insurance; however, there is not enough time to explain the many differences in this column or in this format. This article is provided to offer a broad overview of the coverage available for the many different risk/exposures and the many different industry types.

Even though there are many different forms available to finance environmental loss, they can be grouped into the six categories described below.

1. Contractors Pollution Liability (CPL)

Coverage Application

Contractor's Pollution Legal Liability (CPL) is intended to provide pollution liability coverage for any type of contracting operations. Whether for environmental companies performing environmental or remedial contracting or nonenvironmental contractors, such as general contractors and artisan contractors performing typical construction, CPL is a viable and cost-effective alternative to help finance a company's environmental liability losses. All contractors face environmental liability in four major areas: job site operations, transportation of waste/materials, disposal activities and owned/leased properties. CPL can be structured to address each of these areas of environmental risk.

Policy Forms

The typical CPL policy provides coverage for third-party bodily injury, property damage, cleanup costs, and defense costs which arise from covered operations performed by or on behalf of the contractor or named insured. Furthermore, CPL provides coverage to the named insured for vicarious pollution liability from subcontractors. CPL is offered with both occurrence and claims-made "triggers"; however, certain types of operations may restrict the use of the occurrence trigger. For example, when mold coverage is requested on high hazard operations, such as residential construction, CPL can be structured with an occurrence trigger on all pollution liability except mold. The mold liability coverage will be provided with a claims-made trigger. This allows a contractor currently insured with CPL to retain the occurrence trigger on all other pollution liability except mold. CPL can be written on both practice/blanket and project-specific policies.

A derivative of the CPL is the "combined form." Whether it be combined with professional liability (PL) for general contractors, construction managers, or specialty trades, or combined with Commercial General Liability (CGL) and PL for environmental firms, the combined approach is a cost-effective way to roll all three coverages into one program—not sacrificing one for the other because of price. The downside is the dilution of limits, especially when CGL is included.

2. Pollution Legal Liability (PLL)

Coverage Application

Pollution Legal Liability (PLL) is intended to provide pollution liability coverage for environmental risks associated with the ownership/lease of property or operating a facility or site. PLL has applicability to virtually every industry that owns, leases, acquires or divests real estate. Where PLL was once used solely as an alternative for federally regulated facilities to post financial assurance under the various federal statutes, today its applicability is far more widespread. In addition to treators/storers/disposers/generators of hazardous waste/materials, industries such as the following are purchasing PLL coverage to finance environmental loss.

Agriculture Energy Manufacturing
Biotechnology Financial Institutions Mining
Brownfields Fuel Distribution Pharmaceuticals
Commercial Real Estate Habitational Real Estate Property Development
Construction Healthcare Almost any organization that owns or rents real estate
Education Hotel/casino Sports/Entertainment Transportation

Policy Forms

PLL provides coverage for pollution conditions or events on, at, under, or emanating from a covered location(s). Coverage is afforded for third-party bodily injury, property damage, cleanup costs and defense costs. A unique feature of many PLL policies is their ability to offer various and different coverage parts under one policy. Such coverage parts include, but are not limited to:

  • New pollution conditions
  • Existing pollution conditions
  • On-site clean up coverage
  • Transportation coverage
  • Non Owned Disposal Site (NODS) coverage
  • Business interruption
  • Builders soft cost
  • Mold liability coverage
  • Products—pollution liability

Another important aspect of coverage offered under PLL that should be understood is, if a known environmental condition exists at a site, the policy may be structured to provide some type of environmental coverage for that existing contamination. Coverage is based on the type and extent of the site's existing contamination.

A derivative of the PLL is the combined PLL and commercial general liability (CGL). This combined form is offered mostly to all types of manufacturers, warehousing, foundries, quarries, paper/pulp operations, wood preserving, and the like. This is a cost effective way to add PLL coverage to an organization overall portfolio of insurance coverages.

3. Storage Tanks USTs/ASTs

Coverage Application

Tank—Pollution Liability (TPL) provides coverage for pollution liability resulting from storage tanks specifically scheduled to the policy. TPL is available to any organization that owns or operates storage tanks.

Policy Forms

TPL provides coverage for third party bodily injury and property damage, as well as corrective action and clean up costs required by applicable federal and state regulations resulting from pollution conditions emanating from scheduled storage tanks. Both above or underground storage tanks can be covered. TPL policies are offered with claims-made triggers.

4. Lender Liability—Pollution Programs

Coverage Application

Lender Liability Pollution (LLP) is intended to provide collateral value protection from loan defaults resulting from pollution events or conditions. LLP is designed to provide pollution coverage for the unique exposures associated with financial institutions, commercial banks and lenders, investors or mortgage bankers.

Policy Forms

LLP will indemnify the lender for financial loss arising from the default of a loan on a covered location caused by a pollution condition or event. It can be structured to pay either the outstanding loan balance or the cost to remediate the contamination, whichever is less. In addition, LLP provides coverage for third party bodily injury, property damage and clean up costs resulting from pollution events or conditions at, on or under the covered location.

5. Products—Pollution Liability

Coverage Application

Products—Pollution Liability (PPL) provides coverage for pollution arising out of products of the named insured. PPL can be used for "hard products," those products that harbor material or waste, such as:

  • Containers
  • Drums Oil/water separators
  • Tanks
  • Hoses
  • Pumps
  • Remediation equipment
  • Valves
  • Pollution control equipment
  • Closed loop dry cleaning systems

In addition, PPL can provide coverage for products which themselves are the pollutants, such as silica, asbestos, fertilizers, insecticides, and pesticides, although the markets interested in such coverage continues to shrink.

Policy Forms

Products—Pollution liability may be written on either a claims-made or occurrence basis. PPL will provide coverage for any goods or products (including containers, materials, parts, or equipment furnished in connection with such goods or products) that are manufactured, sold, handled, distributed or disposed of by the named insured or others trading under the named insured's name. Coverage is provided for the resulting third-party bodily injury, property damage, and remediation expense from pollution as a result of the failure of the product. PPL coverage is offered under three different forms:

  • Monoline PPL policy
  • PPL endorsement to a commercial general liability policy
  • PPL endorsement to pollution legal liability policy when coverage for the insured's locations is provided

PPL can be written on a project-specific basis or blanket/annual basis.

6. Remediation Cost Cap

Coverage Application

Remediation Cost Cap (RCC) is intended to provide coverage for the increased costs of remediation associated with environmental projects. From a commercial property owner to a remediation firm or redevelopment authority, the RCC program can assist by reducing the uncertainty associated with costs to remediate contaminated properties. The cost of remediation or cleanup must be greater than $2 million.

Policy Forms

RCC provides coverage for cost overruns, excess of a self insured retention, associated with the implementation of a Remedial Action Plan (RAP) on a covered project or projects. Coverage is structured upon the scope of work in the RAP and provides protection resulting from:

  • Contamination that is greater than expected
  • Discovery of "new" contamination that was not identified in the RAP
  • Regulatory "re-openers"
  • Regulatory changes in scope-of-work during the policy term

The policy requires reporting of cleanup costs during the policy term within agreed upon time intervals.

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