Has the emergence of mold as an insurance issue caused risk managers to lose sight of "other" environmental exposures associated with residential work? Jeff Slivka provides a list of other risk management concerns.
Over the past few years much has been said about residential contractors and the environmental exposures associated with that type of construction. Recently, however, most of that discussion has been centered on the hottest topic in virtually every industry—mold. Yes, right now mold is a big issue, however, it appears that we have lost sight of some of the "other" environmental exposures associated with residential work. Therefore, I have written this article to act as a reminder that mold is not the only culprit associated with environmental liability for residential contractors, developers, and land owners.
Examples of Recent Claims
First, we'll start with some real life examples that have occurred within the residential construction arena over the past 5 years.
- Toxic Vapor Inhalation—A residential contractor was reconditioning a tile floor in a building undergoing extensive renovations. Several workers in the building filed bodily injury claims totaling $25,000 against the contractor. The workers had inhaled toxic vapors from the sealants used in the reconditioning process.
- Costly Claim—A residential contractor used solvent to remove paint from a residential structure and improperly disposed of the materials on-site. A group of residents filed a $10 million toxic vapor inhalation suit against the contractor, citing bodily injury, trespass of pollutants, and adverse effects to their quality of life.
- Deadly Fumes—A residential contractor disposed of sealants and solvents containing toluene in a covered, enclosed dumpster after performing routine finish work. Acting like a confined space, the dumpster trapped the toluene fumes. These fumes depleted the oxygen levels in the dumpster. After climbing into the dumpster for unknown reasons, two 10-year-old children were overcome by fumes and died. The contractor faced a claim in excess of $2 million for inadequate disposal of the waste toluene.
- That Sinking Feeling—A residential contractor developed a subdivison. Small sinkholes began to appear in the development, soon giving up all kinds of debris. Residents feared that the debris could extend underneath some of the homes. Homeowners filed a lawsuit against the contractor/developer. Because the contractor could not identify the owner of the debris, they were forced to clean it up at a cost exceeding $1 million.
- Raw Sewage Contaminates Wells—A residential contractor was subject to defense costs exceeding $25,000, in addition to property damage and bodily injury claims exceeding $400,000 from a residential community. During sewage installation, a subcontractor improperly tied in piping. This caused raw sewage to migrate into the underlying groundwater and contaminate residential wells.
- Contaminated Soil—A residential contractor unknowingly spread petroleum-contaminated soil across a project site during fill operations for a housing project. The contractor was named in a lawsuit for exacerbating the extent of contamination. After lengthy deliberations, the contractor spent $250,000 in cleanup costs and his defense.
- Lead Poisoning—A contractor renovated the interior of a residential house built in the 1950s. The renovation involved paint removal from interior walls, window trim and door jambs. During the course of renovation, the contractor used plastic barrier to seal the areas he was working in. The homeowners continued to occupy the house during renovations. Additionally, the wife was 6 months pregnant. Renovation was finished prior to the birth of the baby; however, upon birth, the child tested positive for blood lead poisoning. Upon investigating the source of the lead, the couple sued the contractor for bodily injury as well as potential loss of future wage potential (due to a possible decreased IQ level for the baby) in the amount of $500,000.
Potential Environmental Liability Exposures for Residential Contractors
Residential construction firms are exposed to many environmental liabilities due to their day-to-day operations. Specifically, they face the following risks that are the focus of this discussion.
- Fumes, emissions and spills from chemicals applied during construction (e.g., finishers, sealants, adhesives, solvents, curing compounds, etc.)
- Heating, ventilation, air conditioning (HVAC) construction or maintenance errors, causing release of airborne bacteria, mold, or carbon monoxide build-up, in addition to mold resulting from water intrusion or moisture encapsulation
- Incidental exposure from asbestos-containing building materials
- Disturbance of naturally-occurring asbestos
- Disturbance of lead-containing paint
- Lubricant oils and other fluids from field equipment
- Release of oils/fuels as a result of vandalism
- Disturbance of preexisting contamination during site preparation/excavation work (e.g., residual lead or petroleum contamination from fuels)
- Spills and releases from application of asphalt
- Releases from mobile fuel tanks
- Impacting underground utility lines and other underground structures (and associated loss of business exposure)
- Fluid discharge from large equipment
Owned Premises Exposures
(e.g., batch plants, maintenance shops, quarries, newly acquired properties, etc.)
- Leaking underground/aboveground storage tanks
- Residual contamination from minor spills of oils, fuels, lubricants, etc., and poor housekeeping
- Surface contamination from fuels and lubricants stored improperly (without secondary containment)
- Improper disposal of waste materials (e.g., sealants, finishers, etc.)
- Unidentified, preexisting contamination from past owners of premises in addition to mold growth in buildings
- Inadvertent transport and subsequent disposal of unknown contaminated soil
- Spills of asphaltic cement during transport
- Resulting pollution from collisions with various structures (e.g., pole-mounted transformers, aboveground tanks, etc.)
- Fuel/oil spills/leaks from vandalism
- Inappropriate disposal of hazardous waste materials or other products
- Misdelivery of unidentified contaminated fill
- Retroactive liability under Superfund for past disposal practices (i.e., construction debris in a landfill that is now on the Superfund list)
Note: This list is not a comprehensive inventory of every environmental exposure found at with such organizations, but an indication of the exposures that are often encountered.
Environmental Liability Insurance
More and more, residential construction firms and developers are contemplating the purchase of environmental liability insurance. The environmental liability insurance market today is a $1.5 billion annual premium industry which as grown over 20 percent for the past 5 years. Leading environmental insurers in the United States include AIG, Kemper, ECS/XL Capital, Zurich, Gulf, and Chubb. These insurers, and a few others, are providing significant environmental coverage at cost-effective rates. Specifically, contractors pollution liability (CPL) coverage has expanded to the point that occurrence forms are now available. The CPL form is the basic coverage for contractors performing operations at third-party sites. It provides coverage for third-party bodily injury, property damage, and clean up costs. CPL coverage is available at limits up to $100 million or more.
Numerous contractors have used various CPL policies to insure risks that they have because of their exposures. A few recent examples include the following.
- A residential contractor is concerned about the increased attention "toxic" mold has been receiving over the several months. They pursue CPL coverage and find it available for such work and exposures. The contractor ends up purchasing a claims-made CPL policy for $5,000,000 per loss/$5,000,000 aggregate limit of liability. The coverage, albeit claims made, provides coverage for mold claims up to the maximum limit of liability. In this case, mold awareness and prevention programs developed by the contractor proved to be a key element in insurance companies finding them to be an acceptable risk.
- A contractor concerned with simple asset protection looks to the environmental insurance marketplace to determine what type of risk transfer options are available. The contractor is a general contractor on residential construction projects. The contractor, faced with earlier environmental claims, found out the hard way that its general liability excluded pollution type claims. A CPL occurrence form was purchased for $10,000,000 per loss/$10,000,000 aggregate limits and not only provided coverage for operations, but for transportation and disposal liability as well.
The one thing that we all have to keep in mind is that even though environmental liability insurance is a good way to finance a loss, it is always best to manage the exposure prior to loss. A highly publicized environmental disaster can have a catastrophic impact on an organization reputation, and eventual bottom line destruction. While the insurance may eventually pay for the loss, provided proper limits of insurance were purchased, nothing will pay to restore an organization's reputation.