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Insuring Indoor Environment Risks in Commercial Property

David Dybdahl | January 19, 2018

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Petri plate containing mold

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.

Table 1. 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.

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1 "Students Seek $55M in Damages, Say Dorms Had Toxic Mold," Associated Press, November 20, 2017.