Almost all commercial property owners are severely underinsured for
environmental risks. Very few property owners have any appreciation of the
far-reaching effects of pollution/fungi/mold/bacteria insurance coverage
limitations or how often these limitations can bar insurance recoveries from
very common loss events. The result of this situation is an increasing number
of uncovered insurance claims arising from water intrusion in the built
environment.
To fill the insurance coverage gaps, commercial properties need specially
modified environmental impairment liability (EIL) insurance coverage to address
the effects of pollution/fungi/mold/bacteria exclusions on standard commercial
general liability (CGL) policies and the sublimits of coverage on commercial
property insurance policies.
Environmental insurance policies specifically designed to manage and insure
the indoor environmental risks of commercial property have been available since
2004. The premiums charged for environmental insurance policies are usually a
small fraction of the cost of traditional property and liability insurance
policies. In my experience, informed property owners will usually opt to insure
indoor environmental hazards as soon as they understand the risk and the dearth
of current insurance coverage in their property and liability insurance
policies.
Today, more than 99 percent of the commercial properties that need specially
modified environmental insurance coverage to fill the gaps created by common
exclusions for pollution/fungi/bacteria do not have it. To make this situation
even more interesting, when EIL placements are made to address indoor
contamination events, more than half of the environmental insurance policies
sold contain significant coverage flaws. This is because environmental
insurance policies were not originally designed to insure indoor contamination
loss events.
For example, an EIL policy that only covers the cleanup of soil or
groundwater would not be appropriate to use to insure the indoor environmental
risks of a condominium or shopping mall for example. It is also interesting to
note that the EIL policies that provide good quality coverage for indoor risks
can be less expensive than the insurance policies that only cover soil, surface
water, and ground water contamination.
The most common contaminants in the indoor environment are mold and
bacteria. The proximate cause of mold and bacteria in buildings is water.
Water-related losses in buildings are far more common than fire losses.
Good Things To Know about Indoor Environmental Risks
The time it takes mold to grow on drywall at room temperature |
72 hours, but as little as 36 hours |
The average cost of a mold remediation in a commercial
building—$250,000 |
The common sublimit for mold damages on property insurance
policies—$10,000 |
Is bacteria contamination a "pollutant"? |
Yes, pollution exclusions specifically refer to contaminants. |
Every drop of water in a drain pipe is contaminated with
bacteria. |
Losses containing any amount of bacteria are commonly excluded in the
general liability policy and sometimes severely sublimited on the
property policy. |
How many government-mandated cleanup standards are there for
mold? |
None |
How many builders risk claims come from water intrusion events? |
60 percent |
To fill the risk management void for indoor environmental risks, a
combination of water intrusion loss prevention plans and environmental
insurance is necessary. Without these two essential components, many commercial
property owners are awaiting a big surprise when the claims adjusters on a
water-intrusion-related loss figures out how the fungi/mold/bacteria coverage
restrictions operate in liability and property insurance policies.
There is growing evidence that the claims adjusters are getting better
educated on fungi/mold/bacteria coverage restrictions in property and liability
insurance policies. A fungi/mold/bacteria-related loss will normally not reach
the environmental insurance coverage if the general liability or property
insurance on the building is providing coverage. Over time, the general
liability and property policies are providing less coverage for
fungi/mold/bacteria-related losses, which is increasing claims frequency under
the EIL coverage on commercial buildings.
Mold Claims
At a meeting of the Society of Environmental Insurance Professionals in June
2017, it was revealed by a panel of insurance company executives that mold
claims on EIL policies written on commercial properties such as office
buildings, schools, hotels, and high-rise condominiums have eclipsed all of the
other claims in the traditional market for EIL insurance.
What is surprising in mold being the number one source of claims under EIL
policies is that the vast majority of commercial buildings are currently
uninsured for contamination losses both inside and outside the building. In
almost all cases, the property owners and managers are unaware of the coverage
restrictions in their insurance programs for losses associated with
contamination.
For mold to be the number one source of claims on EIL policies with 99
percent of the commercial building being uninsured, that means mold claims from
less than 1 percent of all commercial properties in the country are responsible
for surpassing all other sources of environmental claims from industrial sites.
There is no reason to expect that the insured commercial properties that led to
the increase in mold EIL claims were any riskier than the general population of
commercial buildings. The obvious question then is where did the other 99
percent of mold claims go?
The answer to that question is elusive. I have seen a slight uptick in calls
seeking an expert witness to opine on the availability of mold coverage on
commercial buildings over time, but nothing on par with the call volume I would
expect to see from tens of thousands of uncovered mold/bacteria-related claims.
My best guess on the answer is we are in the lull between an uncovered
fungi/mold/bacteria-related loss and when policyholders that do not declare
bankruptcy ultimately seek other sources of recovery from other responsible
parties. That lull period can easily reach 7 years.
Environmental Insurance
EIL policies are specially designed to fill the gaps in coverage created by
pollution exclusions on standard liability and property policies. As a point of
reference, an EIL policy operates like an automobile insurance policy, which
fills the coverage gap for automobile liability loss exposure created in the
CGL policy by the aircraft, autos, and watercraft exclusion. An automobile
insurance policy also can provide insurance for damage to the insured's
autos in the form of collision and comprehensive coverage. In a similar
fashion, EIL policy can also provide coverage for first-party property damage
in the form of cleanup and restoration costs, plus provide coverage for loss of
rents and extra expenses that result from a covered “pollution” event.
Environmental insurance has been developed to specifically address indoor
contamination loss events. The environmental insurance marketplace going into
2018 is hotly competitive, supply for environmental insurance far exceeds
demand. Many environmental insurance markets will struggle to meet their sales
budgets in 2018.
There is high-quality environmental insurance available to fill the gaps in
coverage created by pollution/fungus/mold bacteria exclusions in both property
and liability insurance policies. Pricing for EIL coverage can be found on
commercial properties for less than 15 percent of the property insurance
premium, subject to minimum premiums of $3,000 per year for the first $1
million of EIL limit on a 3-year policy term. These EIL policies cover
liability to third parties and defense costs, plus the policies can cover
cleanup costs, restoration to the pre-loss condition of the property, business
interruption, loss of rents, and extra expenses.
Some underwriters also provide access to water intrusion loss prevention and
loss minimization plans free of charge to the policyholder. Water intrusion in
a building can quickly lead to mold infestations and bacteria-related losses
that trigger specific exclusion for losses arising from these materials and
wholly inadequate sublimits of coverage. A well-managed water intrusion risk
can reduce the EIL premiums on commercial buildings by more than half.
Increased Exposure
Why the sudden increase in mold and bacteria loss exposure for these types
of properties? Many possible explanations have been offered for the influx of
EIL claims on commercial properties such as a greater number of severe weather
events, poor construction practices, or a dramatic increase in the sale of EIL
insurance policies, but none of these offers an adequate explanation.
My educated guess is the primary cause of the increase in mold claims under
EIL policies is a slight increase in the number of EIL policies being sold to
commercial property owners, but more importantly, insurance claims adjusters
are apparently finally figuring out how fungi, mold, and bacteria exclusions
operate to limit insurance recoveries under standard insurance policies. Claims
do not usually hit environmental policies unless they are denied or severely
sublimited on standard insurance policies such as the commercial property or
CGL policy. With mold claims stealing the title as the number one source of
claims on EIL policies, it suggests that fewer mold claims from water intrusion
events are being paid as water losses on standard liability and property
policies.
Anticoncurrent Causation Language
Exclusions for losses related to fungi, mold, and bacteria were introduced
into virtually all forms of standard property and liability policies back in
2005, specifically in response to the toxic mold scare at the turn of the
century. These exclusions commonly included both mold and bacteria because
bacteria can feed on mold as a food source; the two forms of microbial
contaminants are almost always found together in the built environment.
Many insurance policies exclude losses associated with bacteria twice.
Bacteria contamination has been determined by various courts to qualify as an
excluded "pollutant" in insurance coverage litigation. Therefore,
losses involving bacteria can be excluded by both a specific fungi/bacteria
exclusion and the pollution exclusion on the same policy.
Fortunately for commercial insurance buyers, it seems no one alerted the
insurance claims adjusters in 2005 to how the new fungi/mold/bacteria
exclusions were designed to operate. As a result, claims involving fungi, mold,
and bacteria continued to be paid as covered ensuing losses from water damages.
Although eliminating all coverage for ensuing damage from an excluded cause is
specifically the purpose of anticoncurrent causation language in an insurance
policy.
Fungi/bacteria exclusions are based on the well-known flood exclusion on
property insurance policies. A flood exclusion has anticoncurrent causation
language that bars insurance coverage for ensuing losses that arise in any
sequence to flood damages. "Any sequence" means any loss incurred
before, during, and after the excluded peril flood.
Applying the same concept to a general liability insurance exclusion for
fungi and bacteria, once a speck of either of these contaminates becomes
involved with a loss, the anticoncurrent causation exclusion takes over the
whole claim. Hence, it is common to see Legionnaire's disease bodily injury
or wrongful death claims routinely denied for general liability coverage
without even a duty to defend the loss.
Essentially, what this means is if a commercial building has a loss, say
from some kind of water intrusion event, and at any point mold or bacteria is
involved in the damages, the entire loss would be governed by the
anticoncurrent causation language in the exclusion. It's important to note
that mold and bacteria are omnipresent (i.e., they are everywhere, all the time
indoors and outdoors), so, technically, the anticoncurrent causation language
is always triggered if the loss involves damages caused by or associated with
fungi/bacteria. This is because the mold and bacteria are already present in
the built environment.
Water Intrusion Losses
Fungi, mold, and bacteria exclusions and sublimits changed the game in
claims adjusting of water losses on standard liability and property policies.
Up to the time of their introduction in 2005, water intrusion losses were
covered up to the limit of the policy for covered causes of loss, just like
fire and windstorm perils. That coverage analysis holds true today, with the
exception that mold and bacteria cannot be involved at all with the loss event.
Starting in 2005, losses involving fungi, mold, and bacteria were either
excluded altogether or significantly sublimited, with limits as low as $10,000
on commercial property insurance policies.
A $10,000 sublimit on a property insurance policy should be alarming to all
commercial property owners and managers. The average cost of a mold remediation
job on a commercial building is $250,000, although seven- and eight-figure mold
losses are not uncommon in high-rise buildings and hotels.
Bodily injury claims for exposure to mold and bacteria under general
liability policies commonly start out in seven figures and sometimes go to
eight. A recent lawsuit involved $55,000,000 in bodily injury claims made by
the students in a college dormitory for exposure to mold in the
dorm.1
Wrongful death claims from Legionnaire's disease, which is caused by
Legionella bacteria, can become a multimillion-dollar claim. Those types of
liability loss exposures are subject to an absolute fungi/bacteria exclusion in
the general liability policy, and in many cases, the same sublimit as
mold-related loss have on the property insurance policy.
Need for EIL Insurance on Commercial Properties
So, why is there such extremely poor market penetration for EIL insurance on
commercial properties? Environmental insurance on commercial properties has
been available for over 30 years. The answer is an ineffective insurance
distribution channel for environmental insurance products in the commercial
property class of business. Most insurance agents and brokers working in
commercial property have not been trained on the effects of pollution or fungi,
mold, and bacteria exclusions on standard property and liability policies.
Therefore, the insurance sales force cannot effectively convey the need for
environmental insurance to their customer base. Without first
establishing a need for EIL insurance, insurance buyers do not
perceive a need to purchase it.
It should be shared with commercial property owners and managers that the
losses that used to be covered as water damages to the full limits on the
policy are no longer being adjusted the way they have been since 1943 when mold
rot and inherent vice exclusions were introduced into the 165 line New York
fire insurance policy. Insurance claims adjusters are starting to pay attention
to the fungi, mold, and bacteria exclusions and pollution exclusions. Today,
the vast majority of commercial property owners and managers are ignorantly and
needlessly uninsured for contamination including fungi/bacteria-related
damages.
Rapidly expanding claims under EIL policies covering commercial properties
shows that environmental insurance designed to cover the indoor air quality and
environmental loss exposures is needed. For 99 percent of commercial properties
to be basically uninsured today for losses associated with
pollution/fungus/mold/bacteria is unexplainable.