Expert Commentary

How COVID-19 Changed the Commercial Cleaning Business

History repeats itself with great predictability in the insurance business. By using history as a guide, janitorial firms offering deep cleaning, sanitation, and disinfecting services are going to follow in the footsteps of fire and water damage restoration firms in their insurance needs.


Environmental
July 2021

The COVID-19 pandemic has changed the risk management needs of the stakeholders in the commercial cleaning services business, including the customers of those cleaning services. Any firm that provides sanitation or disinfecting services needs a specially tailored contractors pollution liability1 (CPL) policy with an affirmative coverage grant for the biohazards of fungi, bacteria, and viruses as a cause of loss.

Because of universal exclusions for biohazards without specially designed CPL coverage in place, the liability insurance sold to firms providing building sanitation and disinfecting services will be excluding an unavoidable loss exposure in the customer's core business. That is not a good position to be in if you are an insurance underwriter and do not want to pay losses through coverage litigation on things that you thought were excluded. Precedent case law on pollution and contamination exclusions heavily favors the reasonable expectations of the purchaser on what their insurance policies cover. This is especially true when an insurance policy appears to be providing illusory coverage.

Strategies for Avoiding Litigation

Insurance companies that insure firms that provide building sanitation and disinfecting services have three ways to avoid being accused in coverage litigation of selling liability insurance with illusory coverage for an unavoidable risk in the clients' business.

  1. Pay claims as if the exclusions for biohazards did not exist in the policy. Doing so undermines all the anticoncurrent causation exclusions in property insurance policies. The flood exclusion, for example, is an anticoncurrent causation exclusion in a property insurance policy. Insurers need to adjust claims in a fair and consistent manner to avoid allegations of bad faith claims adjusting practices. Undermining all the flood exclusions to pay biohazard claims on a few janitorial firms is not a good trade-off.
  2. Require as a prerequisite to selling general liability insurance the purchase of CPL insurance to cover the excluded biohazard risks in general liability insurance policies.
  3. Exit the general liability line of business on firms that provide biohazard remediation, sanitation, and disinfecting services. This seems draconian since #2 is definitely an option.

All three of the above strategies to deal with biohazard risks are being used by insurance companies to address the risks of fire and water restoration companies.

To avoid selling fundamentally flawed liability insurance coverage to firms providing biohazard sanitation and disinfecting services, the sellers of general liability insurance are already nonrenewing the professional cleaning firms that are offering those services. As a result, there will be significant disruptions of the status quo in the insurance programs of firms in that business. Those disruptions will also affect the customers of the janitorial services firms.

Of the three risk mitigation options for the sellers of general liability insurance, the second option of requiring meaningful CPL coverage to be in place, commensurate with the general liability coverage, would be far less disruptive.

Adjusting Risk Management Strategies

Below, I explain how the stakeholders in commercial cleaning will need to adjust their risk management strategies to compensate for the changes that are taking place in the insurance business for the firms offering building sanitation and disinfecting services.

There is a very predictable sequence of events to new biohazard risks in the insurance and risk management community.

  • First, insurance companies always react to a new contamination risk of significance by hastily excluding the newly identified cause of loss in the insurance policies they sell. The new exclusions for various contaminants are variations of a pollution exclusion in their function.
  • Second, in response to the insurance coverage gaps created by the new exclusions in the standard lines of coverage, specialty insurers will step in over time to fill the coverage void with specialized underwriting and purpose-built environmental insurance policy forms.
  • Third, after both the new exclusions for contamination risks have been introduced and gap-filling environmental insurance coverage has been created, insurance agents and brokers will take years to figure out what happened to the insurance coverage in their customer base and move to fix the coverage gaps with the specialty environmental insurance.
  • In the fourth phase, the stakeholders that hire the firms that have the new excisions in their liability policies get around to requiring the gap-filling specialty environmental insurance in their services procurement contracts. That process can take decades to implement. For example, there are still insurance specifications calling for "comprehensive" general liability insurance with "sudden and accidental" pollution coverage in use today. That Insurance Services Office, Inc., policy form became obsolete more than 3 decades ago.

To Illustrate: Mold

This predictable sequence of events in the insurance business played out as scripted when mold became a new contamination risk of significance at the turn of the 21st century. The "toxic mold" frenzy in the press fueled the production of "Mold Is Gold" seminars for trial lawyers. A $32.5 million judgment against an insurance company that had sold a homeowners insurance policy with a $300,000 limit to insure a home that had a problem with the icemaker water supply line captured the attention of the global insurance marketplace.

Soon thereafter, insurance companies reacted to a rapid increase in mold-related losses by introducing universal anticoncurrent mold and bacteria exclusions and sublimits. The intent of those new exclusions and sublimits was to render the policies useless beyond the sublimits for claims associated in any way with mold or bacteria. In addition to the exclusions and sublimits, the vast majority of commercial insurance providers placed mold remediation contractors and fire and water damage restoration contractors on their prohibited class of business lists. The smart money in the insurance business did not want to be accused of selling illusory liability insurance coverage and, therefore, have their new exclusions for fungi- and bacteria-related losses undermined by the court system in coverage litigation.

After a couple of years in research and development, in response to the new need for specialized environmental coverage, multiple insurers in the environmental insurance market developed policy forms combining general liability and CPL insurance that were purposely designed for the contractors providing mold and bacteria remediation services. There is no gap in coverage between the general liability and CPL under this package policy design. It is a superior coverage design to separately purchased general liability and CPL policies, but it is not available for janitorial services firms today.

The presence of CPL coverage on virtually all fire and water damage restoration contractors partially fills the coverage gaps in the general liability policy created by fungi and bacteria exclusions. However, with a CPL policy in place, those general liability insurers can stay on the risks without worrying too much about the ramifications of selling insurance with illusory coverage that excludes an unavoidable risk in the core business of the insured.

In an example of the extreme time delays in the third phase of the biohazard risk response sequence, 15 years after the elimination of general liability insurance coverage for losses arising from mold or bacteria or any loss originating from a jobsite where fungi or bacteria are being cleaned up, insurance agents and brokers still sell general liability policies with coverage gaps that cannot be filled completely with any CPL policy. The handful of remnant insurers that did not put fire and water restoration firms on their prohibited class of business lists ended up after a few insurance renewal cycles with 60 percent of the market.

Finding Insurance Protection for Cleaning Businesses

Following the experience of firms in the fire and water restoration business, the predictable sequence of events in the insurance programs of firms in the janitorial, sanitation, and disinfecting business has already been put into motion at an accelerated pace in response to the COVID-19 pandemic. Insurance companies are adding communicable disease exclusions and/or are nonrenewing the general liability insurance on cleaning firms that provide sanitation and disinfecting services.

One big difference between fire and water restoration firms and janitorial services firms is the insurance companies that sell general liability insurance to janitorial firms do not usually have the luxury of a companion CPL policy to shore up the new exclusions for communicable disease and virus that were imposed in the first stage of the COVID-19 response by the insurance industry.

Today, virtually all janitorial firms are being sold general liability insurance policies that exclude losses associated with the biohazards of fungi (mold), bacteria, communicable diseases, and viruses. An insurance policy excluding virtually all forms of biohazard loss exposure will be useless insurance for an insurance buyer facing a bodily injury or property damage claim arising from one of those causes of loss. This is not an entirely new state of affairs. Cleaning contractors have had a loss exposure to biohazard risks as long as cleaning firms have been offering disinfecting services. COVID-19 just got the underwriters to put the biohazard risk of janitorial services firms under the microscope for the first time.

The insurance coverage glitches for biohazards for the stakeholders in commercial buildings can be patched up relatively simply with specially modified environmental insurance policies. Specialized environmental insurance with an affirmative coverage for virus and other biohazard disinfecting services policies became available to qualified cleaning services vendors within weeks of the March 10, 2020, federally imposed travel ban due to COVID-19.

Phase one and two in the predictable sequence of events to newly excluded environmental loss exposures is already well underway for firms in the sanitation and disinfecting service business. The risk management solution for janitorial firms in this business is simple in design: these companies need to be insured for their loss exposure to biohazards under a specially modified CPL insurance policy. That coverage is available at premiums as low as $3,000 on cleaning firms that meet the underwriting guidelines for training and experience.

As of this writing, building owners have ready access to environmental insurance for biohazard loss exposures arising from fungi, mold, and bacteria. However, the insurance market for building owners for losses associated with a communicable disease or a virus is much more restricted. Qualified contractors can obtain that coverage, but property owners cannot unless they get covered as an additional insured under the CPL policies purchased by the contractor.

With contractors having access to broader insurance coverage than building owners can purchase today, the partial risk management solution for building owners is simple. Building owners can access cost-free liability insurance for biohazard losses arising from faulty sanitation and disinfecting services simply by requiring functional CPL insurance with an affirmative coverage grant for biohazards and to be designated as an additional insured under that CPL policy. The only problem is with this risk transfer strategy is janitorial firms do not routinely purchase CPL insurance, and some janitorial firms will not be able to qualify for CPL insurance with an affirmative coverage grant for biohazards. By adding a requirement for modified CPL insurance into the services contracts of cleaning firms, building owners and managers reap the benefits of insurance they likely cannot purchase for themselves. Plus, requiring CPL insurance helps vet the qualifications of the firms offering disinfecting services. Is an uninsured firm uninsurable?

Conclusion

History on biohazards is in the process of repeating itself in the insurance business. Eventually, the stakeholders in commercial properties will react to biohazard exclusions and adapt insurance programs and insurance requirements in contracts accordingly. Early indications are that COVID-19 has accelerated the pace of change in the insurance needs of firms in the commercial cleaning business and the owners of commercial property.


1 Contractors environmental liability and contractors pollution liability insurance are referring to the same type of insurance.


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