A couple of litigated insurance coverage cases involving bacteria and contaminated water on farms in Wisconsin are going to be game changers for insurance agents and brokers across the United States.
With the clear precedent case law articulated by a state supreme court, it is now readily apparent that:
Genuine environmental insurance is needed by virtually all commercial insurance buyers that can be associated with a pollution/contamination/mold/bacteria/or Category 3 water loss, including small businesses and family farms.
Coverage extensions to general liability policies for losses associated with contamination can be laced with technical problems and amount to "useless" insurance.
Pollution exclusions are clear and unambiguous when contamination is used as the trigger word for the exclusion to come into play on a loss.
Wisconsin Supreme Court Ruling
On December 30, 2014, the Wisconsin Supreme Court in Wilson Mut. Ins. Co. v. Falk, 857 N.W.2d 156 (Wis. 2014), determined that bacteria contamination in drinking water wells as a result of spreading manure on a field is an excluded cause of loss under the common pollution exclusion used in liability insurance policies. On the same day, in Preisler v. General Cas. Ins. Co., 857 N.W.2d 136 (Wis. 2014), the court ruled that nitrates in groundwater, also from land farming waste, is an excluded cause of loss under the Insurance Services Office, Inc. (ISO)-based pollution exclusion.
This excerpt from the 64-page Wisconsin Supreme Court ruling on the Wilson Mut. case is enlightening on how ISO-based pollution exclusions should operate:
We hold that the pollution exclusion clause in Wilson Mutual's General Farm Coverage Liability policy issued to the Falks unambiguously excludes coverage for well contamination caused by the seepage of cow manure.
First, we conclude that cow manure falls unambiguously within the policy's definition of "pollutants" when it enters a well.
Second, we conclude the Farm Chemicals Limited Liability Endorsement likewise excludes coverage for "physical injury to property" resulting from pollutants.
Although these litigated insurance coverage cases were in Wisconsin, and insurance law is state specific, national insurance industry trade associations filed friend of the court briefs in the Wilson Mut. case and brought out their big guns to influence the decision. More states can be expected to follow the precedent on pollution exclusions as set forth in these two well-thought-out Wisconsin cases.
Of particular significance in these decisions by a state supreme court is that:
They override some of the nonsense case law that has been established in the past as courts are asked to reach way outside of the normal custom and practice in the insurance business to find coverage for losses arising from pollution events under an insurance policy that has an "absolute" or "total" pollution exclusion in it. As an example of stretching common sense, in the Wilson Mut. case at the appellate court level, a judge decided manure was not a waste when used as a fertilizer. Manure therefore was a product that was "liquid gold" to a farmer and was therefore not a pollutant. Living in "America's Dairyland," I have firsthand knowledge of where manure comes from, and I cannot get my head around manure not being waste. The Wisconsin Supreme Court straightened out that nonsense about pollution exclusions in the Wilson Mut. case.
The Wilson Mut. case also established that pollution exclusions in insurance policies are, in effect, "contamination" exclusions. If you are looking for the operative word in a pollution exclusion, pay attention to the word "contamination." If something causes a loss due to contamination, well-informed claims adjusters will pull the trigger on the pollution exclusion. In practice, claims adjusters tend to become more informed about contamination exclusions in direct correlation to the size of the claim.
Apparently out of frustration in having insurance coverage litigation over a pollution exclusion on a family farm before the court in the first place, the Wisconsin Supreme Court fired a warning shot over the bow of insurance agents/brokers who leave their clients uninformed about pollution exclusions. The Preisler decision contains this footnote.
One could wonder what conversation transpired between the insurance agent and the Kuettels yielding insurance policies that do not cover harm caused in the course of their chosen business. However, the actions of the insurers and their agents are not before us.
Reading this in context, it appears the Wisconsin Supreme Court is telling insurance agents to get their act together in advising their clients that pollution exclusions exclude pollution losses. I read this footnote as a warning to insurance agents: "If we catch you not informing your customers about pollution exclusions, we are going to take it out of your hide." Why else would the footnote be there?
Little do the justices appreciate how hard it is for insurance agents and brokers to advise their clients about pollution exclusions when lawyers and judges historically find insurance coverage for pollution claims in the face of clear pollution exclusions to the contrary.
In the Preisler case, the court focused its attention on the insurance agents'/brokers' role in advising their customers about the effects of pollution exclusions on the policies being sold. Nothing was mentioned about the insurance underwriter's contributing role in the confusion over pollution exclusions. Underwriters routinely dance around with amendments to pollution exclusions that, in effect, delete parts of the pollution exclusion for certain fact situations. The fundamental problem with those coverage "enhancements" is that it is impossible for the insurance agent/broker with no training in the subject matter to advise his or her clients on how the exceptions to the pollution exclusion may come into play. Superimpose insurance coverage case law that randomly decides that manure is not a waste, for example, and it makes insurance agents'/brokers' role in advising their customers on the effects of pollution exclusions exceedingly difficult. Pollution exclusions that do not clearly exclude all sources of contamination claims simply add to the confusion on the need for genuine environmental insurance.
In contrast to the Preisler case, in the Wilson Mut. case, one justice zeroed in on the insurance company as being a culprit for selling "useless" insurance for environmental risks. In writing the dissenting opinion, this justice basically wanted to throw the pollution exclusion out and rewrite the insurance contract to make the insurance policy sold to a farmer insure a farmer for the inherent risks in farming (read: stick it to the insurance company for selling illusory insurance for environmental risks). Courts can rewrite the insurance policy when an ambiguous exclusion flies in the face of what a reasonable person would expect to be covered for under the insurance policy he or she was sold. One of the key decisions in the Wilson Mut. case was that the pollution exclusion was clear and unambiguous; therefore, the insurance policy could not be reconstructed to match the insurance buyer's expectations.
The justice in the Wilson Mut. case wrote the following in reference to the farm chemicals limited liability endorsement, which contained an exception to the pollution exclusion in theory to expand some coverage for losses associated with farm chemicals, plus added a pollution exclusion within the endorsement: "On its face, this exclusion can be read to negate all coverage provided by the endorsement, rendering the endorsement useless."
A Wisconsin Supreme Court justice commenting that an exception to a pollution exclusion is useless insurance is certainly interesting, especially with another justice apparently ready to take insurance agents to the bank for letting their clients be ignorantly uninsured for pollution claims. Insurance underwriters do not get professional errors and omissions claims made against them; insurance agents and brokers do. The insurance agents and brokers in Wisconsin are being set up by their supreme court to take the hit under their professional liability insurance for selling useless pollution insurance, leaving their clients uninformed about pollution exclusions, and, implicitly, failing to inform their clients on the need for environmental insurance. If that is what is going on in Wisconsin at the supreme court level, there is no reason to believe it will not happen in the other 49 states.
Both of these Wisconsin cases on pollution exclusions involved family farming operations and contaminated water. It is a persistent and dangerous myth with insurance agents and brokers—and therefore their customers who depend on them for advice—that somehow pollution exclusions only apply to hazardous waste or industrial polluters. The myth persists, in spite of the fact that pollution exclusions in continuous use since 1970 have never been limited to hazardous waste. The Wilson Mut. case regarding bacteria contamination arising from the day-to-day operations of a family farm should dispel that errant thinking that pollution exclusions only apply to industrial insurance. Pollution exclusions in modern use are essentially contamination exclusions and extend far beyond industrial sites. Pollution exclusions can even apply to water losses inside and outside of buildings—even something as simple as a leaking drain pipe. (See "Revealing the Dark Secrets of Category 3 Water Exclusions" (September 2013) in IRMI.com Expert Commentary.)
Classifying bacteria contamination as a "pollutant" in ISO-based insurance policies affects a wide range of insurance buyers, from farms to school cafeterias, from plumbers to hospitals. Bacteria are found everywhere on the globe, usually in moist conditions, and can cause illness or death. With bacteria as a "pollutant," the need for environmental insurance has clearly been driven into a wide range of Main Street businesses and, of course, the family farm.
The only reliable way to fill the insurance gaps created by pollution exclusions in property and liability insurance policies is and always has been through the purchase of a separate environmental insurance policy. A wide range of environmental insurance policies have been designed since 1980 to fill the gaps in insurance coverage created by pollution exclusions.
Today, there is a hotly competitive environmental insurance marketplace with over 40 top-rated insurance companies trying to sell over 100 different environmental insurance products. The insurance companies' biggest constraint to growth in their environmental coverage line is the absence of an educated salesforce that can articulate to their customers how pollution exclusions operate and why environmental insurance is needed. To help solve this problem, the Society of Environmental Insurance Professionals (SEIP) is a not-for-profit 501(C)(3) educational organization dedicated to expanding the use of environmental insurance through education and communication.
There are significant knowledge barriers for insurance agents/brokers trying to utilize environmental insurance products in their customer base. Gaining access to the insurance products through wholesale insurance brokers is actually very simple. Gaining access to the in-depth knowledge about environmental risks and insurance that is required to function effectively in the environmental insurance coverage line is difficult for retail and wholesale insurance intermediaries alike to acquire. As a result, there is a high percentage of needlessly uninsured commercial insurance consumers, plus an extraordinarily high defect rate in environmental insurance placements that are actually being made.
For example, over 90 percent of fire and water damage restoration contractors are sold general liability insurance with fundamental coverage flaws for job sites that involve the cleanup of fungus and bacteria, which most of these firms perform on a daily basis. The coverage defect rate on the liability insurance sold to plumbers is even higher due to the interface of pollution exclusions and fungi/bacteria exclusion endorsements.
Changes in the Environmental Insurance Marketplace
Much has changed in the environmental insurance business over the past 10 years. The cost of environmental insurance is no longer the barrier it once was. The cost of a good quality contractors environmental liability (CEL) policy on a plumber dipped to below $2,500 in 2011. Today, there are $1,000 CEL policies available, although these ultra-low-cost policies usually have glitchy coverage for fungi/bacteria. A sad fact is, even at these historically low prices, the vast majority of plumbers are uninsured for any loss involving a speck of mold or bacteria.
With bacteria as an excluded "pollutant" by established case law in at least Wisconsin, Minnesota, California, and Indiana, and by specific exclusions for these contaminants, commercial building owners—including apartments and condos—now need coverage for mold/bacteria loss exposures including cleanup costs and loss of rents. A best-in-class environmental impairment liability (EIL) policy can be obtained for as little as $3,500 on a commercial building, and that premium can cover more than one building on a property schedule. If the commercial properties have a good water intrusion loss prevention plan in place, EIL insurance can cost as little as $300 per building for a $1 million policy limit, subject to the $3,500 minimum premium. These water intrusion loss prevention plans from underwriter-preapproved water damage restoration contractors are available at no cost to insurance applicants and have the ability to reduce the environmental insurance rates for commercial property owners up to 70 percent.
Recently, a genuine environmental insurance policy specifically designed for farms with defined coverage for manure and odors as defined "pollutants" was introduced at a $3,500 minimum premium price point.
Along with dramatic reductions in cost, environmental insurance has become technically complex, which is a major factor in the defect rates of actual insurance placements. There are no insurance industry standards for the coverages provided in any environmental insurance policy. To make matters worse, environmental insurance policies are being used today for purposes that they were never designed to handle.
For example, the core environmental insurance coverage designs were created decades before separate exclusions for fungi/bacteria with their onerous anti-concurrent causation provisions were even coverage issues in standard property and liability insurance policies. As a result, unless close attention is paid to matching the environmental insurance policy to the coverage needs of a particular customer, it is entirely possible to sell an environmental insurance policy to a customer that inadvertently excludes everything the customer is likely to present a claim for.
With the cost barriers largely solved, there is no need for farmers, plumbers, hotels, shopping centers, and other Main Street businesses to roll the dice every day on how a pollution exclusion in an insurance policy may operate on something as routine as a water loss in a particular fact situation. Good quality environmental insurance is available at premiums that are more affordable than most insurance agents and brokers realize.
The knowledge resources necessary to function in environmental risk management exist in the specialist environmental insurance brokerage space and are being developed by the SEIP. It is clear from the precedent set by the Wisconsin Supreme Court that ignoring the effects of pollution exclusions and the existence of customized environmental insurance policies is not an option for insurance agents, brokers, and their customers.
For more information on environmental risk and insurance, visit www.armr.net. To get more information on participating in the SEIP, contact the director at [email protected].
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