May 05, 2016 Articles

Maximizing Insurance Coverage under Environmental Insurance Policies

The pollution legal liability and contractor’s pollution liability policies appear to be successful examples of the insurance industry’s response to emerging risks

by Robin Kelliher

Overview of Environmental Insurance Policies

Before delving into how environmental insurance policies respond in the event of a claim, it will be useful to provide a general overview of the primary products available in the marketplace.

Two basic forms of environmental insurance exist in the market today: site-specific pollution legal liability (PLL) coverage and contractor’s pollution liability (CPL) coverage. There are over 30 insurers that offer these basic forms, as well as some industry-specific versions of each. There are no standardized forms of these coverages. Each insurer has its own, distinct policy or set of policies. As a result, while the basic coverage elements of each are similar, the various coverage grants, definitions, exclusions, and conditions can differ markedly from policy to policy. In many cases, these forms can even be further manuscripted or endorsed on a risk-by-risk basis to either enhance coverage or to limit it.

Site-Specific Pollution Legal Liability (PLL)

A PLL policy is a claims-made insurance policy designed to address both historical (preexisting) or new environmental liabilities and contaminant releases associated with a specific site. Coverage may apply for sudden and accidental as well as gradual releases. It may be called an environmental impairment liability policy (EIL). The policy can provide protection for:

  • third-party bodily injury claims (on- and off-site),
  • third-party property damage claims (on- and off-site),
  • third-party and/or government-mandated cleanup costs (on- and off-site), and
  • legal defense expenses,

arising out of unknown, preexisting, or new pollution conditions on, at, or migrating from or onto the insured property. Property damage includes third parties’ loss of use, business interruption, diminution of value, and natural resource damage. “Unknown” in this context typically means not known to the insured at the time of binding. Depending on the level of engineering information available, there could be limited coverage available for “known” contamination as well, such as third-party “off-site” claims arising from pollution conditions migrating from the insured’s site.

There are also a number of enhancements to basic PLL policies that may be of value to policyholders. For example:

 

  • “Superfund” liability coverage for waste materials sent to third-party disposal sites;

  • contingent pollution transportation coverage for uninsured or underinsured third-party raw materials or waste carriers;

  • business interruption coverage for the policyholder’s locations as a result of a pollution condition;

  • civil fines and penalties for pollution releases (where allowed by law);

  • treated water as a covered product for products pollution liability coverage;

  • odor as a pollution condition; and

  • public relations and crisis management cost coverage as a result of a pollution release.

 

The availability of these enhancements for an individual policy depends on the various insurers’ appetites. The risk to the insurance company at different sites varies tremendously. For example, the extension for products pollution liability is not a commonly available grant.

The following are a few standard coverage limitations on PLL policies:

 

  • limited or no coverage for known, preexisting pollution conditions (including lead and asbestos);

  • bodily injury or property damage for employees;

  • contractual liability coverage;

  • lack of compliance with applicable regulations; and

  • changes in site uses beyond those originally underwritten.

 

This form and its variations (for underground tank only coverage, for example) are frequently used as the base policy forms to comply with various federal, state, or local environmental statutes requiring assurances for cleanup or third-party liability protection, or both. Insurance is one acceptable mechanism for such regulatory financial assurance in most, but not all, jurisdictions. Other mechanisms include letters of credit, bonds, trusts, and corporate guarantees.

Contractor’s Pollution Liability (CPL)

CPL insurance covers contractors for third-party claims for bodily injury, property damage and cleanup cost, and related legal defense expenses resulting from pollution conditions created or exacerbated by their activities or operations performed at third parties’ locations. These policies can be written for the contractor’s overall operations on a “blanket” or “practice-wide” basis, on a project-specific basis, or on a “wrap-up” basis providing protection for the owner, lender, and all contractors and subcontractors for a specific project in a single policy.

 

  • In some cases, when required by contract or when extenuating circumstances exist, dedicated project-specific CPL policies are pursued either through stand-alone project-specific policies, which cover the contractor only; contractor-controlled insurance programs (CCIPs) (where the prime contractor or contractors will purchase coverage for themselves and all the subcontractors at all tiers); or owner-controlled insurance programs (OCIPs) where the project owner will purchase coverage for itself, the prime contractor, and all subcontractors at all tiers in support of the project. The purpose of an OCIP or CCIP for certain projects is to provide uniformity of coverage and limits for all contractors at all tiers of the project. The alternative of using a CCIP or an OCIP policy would be to simply rely on all the contractors to provide their own insurance for the job. When purchasing an OCIP policy, the owner of the project is listed as the first named insured on the policy, and all contractors and subcontractors at all tiers are listed as additional named insureds to the policy. Project owners find this method preferable because they have control over the insurance program and coverage, reporting, and claims management. Below are a few advantages of OCIPs.

  • Continuity of coverage. All contractors and subcontractors at all tiers have the same coverage that the project owner negotiates with the insurance carrier.

  • Certainty of price (bid exclusive of insurance). Contractors may have to purchase insurance on their own to comply with a contract. An OCIP eliminates that need and thus the likely line item chargeback.

  • Certainty of limits for the project (dedicated limits eliminate the potential for erosion of the contractor’s blanket policies). If the owner relies on the contractor’s policy limits, it is important to remember that those limits may be exhausted by other jobs the contractor is performing.

  • Continuity of term for the life of the project plus maintaining coverage after the project. An OCIP removes the need for the owner to confirm that all contractors have coverage for the life of the project. OCIP policies are written on a multiyear basis to match the project term, including a completed operations period.

  • There can be instances where both the PLL and OCIP overlap in coverage. It is important to have both policies with the same insurance company in order to avoid gaps.

 

Cost-Cap Policies

A third type of environmental insurance coverage is now mostly unavailable: the cost-cap policy. For such a policy, the potential policyholder would present an estimate of the site cleanup costs, which the insurance company would review. Often, the insurance company would retain an environmental consultant for its due diligence. The insurance company would then put a buffer over the estimated cleanup cost—usually 20 percent. The policyholder would then have coverage if the cleanup costs exceeded the buffer.

The insurance industry first stopped writing coverage for smaller insurance projects. The risk of an overrun that would wipe out the premium profit was too great. The industry soon stopped writing cost-cap policies altogether, except for special projects.

Different Types of Claims Filed under Environmental Insurance Policies—circa 2016

Originally, environmental insurance policies were developed to fill the gap created in general liability policies via the various pollution exclusions added over the years. At the beginning, the definition of “pollution conditions” under an environmental insurance policy dovetailed with the definition of “pollutants” in the general liability exclusions. Starting in the mid-1990s, environmental policies were adapted and expanded beyond solely filling a coverage gap to address a myriad of exposures not originally contemplated. Over the years, the definition of “pollution condition” has expanded to include such exposures as bacteria, viruses, facility-borne illness, electromagnetic field, odors, silt, sediment, medical waste, and the presence of mold and Legionella pneumophila. The broadening of pollution conditions has resulted in a change in the makeup of pollution claims within an insurance company’s book. Mold claims, Legionella pneumophila claims, and transportation-related claims have significantly increased over the past few years.

Because most environmental insurance policies now include the presence of mold and Legionella pneumophila within the definition of “pollution conditions,” coverage applies. These claims are not the typical “environmental-type” claims one would expect to see under a pollution policy. There is no environmental law for mold dictating how much cleanup is required for a mold condition; for Legionella pneumophila, the parties must turn to the Centers for Disease Control for remediation guidance. For a product line that relied heavily on environmental law as the standard for dealing with remediation issues, mold and Legionella pneumophila claims have turned the policies around a bit. While climate change per se may not be specifically covered under an environmental insurance policy, the resultant mold damage associated with significant rain events, hurricanes, and warmer-than-usual weather patterns is covered.

Transportation-related claims are also on the rise—especially releases as a result of railcar incidents and trucking.

Common Reasons for Coverage Declinations

The majority of environmental claim denials fall into four buckets:

 

1.         late notice (under claims-made-and-reported policies)
2.         prior knowledge/known conditions
3.         pre-tender costs
4.         failure to obtain the carrier’s prior consent to incur costs

Late notice. As mentioned before, site pollution legal liability policies are written on a claims-made-and-reported basis. This means that all claims received during the policy period have to be reported before policy expiration. Claims made and reported is unforgiving. It does not matter if the risk manager did not know about the claim and that is why it was reported late; it does not matter that no one expected the costs to exceed the deductible. The insurance companies as a general rule do not provide coverage for late claims, and the courts normally support the late notice denial. Ultimately, one can argue that the insurance company was not prejudiced by the late notice, or that it is a renewal policy with the same insurance company, so the insurance company should cover the claim.

It is frustrating for the policyholder that it could have avoided this denial by open communication within its corporate structure. A risk manager should canvass each location or division of the insured at least a month before policy expiration to ask questions about what has happened at the location. Did a manager receive a written demand alleging liability? A demand does not merely mean a lawsuit. A demand can be an email or, in some instances, even an oral allegation. The company must know of every release of any pollutants. Any pollution condition discovered during the policy period must be reported during the policy period. Claims-made-and-reported language requires an insured to report demands and claims in order to protect its rights to recover under the policy. Nothing is more difficult to explain to a board of directors than a claim that was denied because someone failed to report it during the policy period.

Prior knowledge / known conditions exclusion. Each environmental insurance company has an exclusion that reads something like this:

Arising from a pollution condition that took place, in whole or in part, prior to the policy period, where the pollution condition was known by or reported to a “responsible insured” and not disclosed to us, in writing, prior to the policy period.

The policy might define “responsible insured” or “responsible person” as an officer or director of an insured, or any employee or manager responsible for environmental affairs, control, or compliance at the location.

A denial based on this exclusion is particularly painful when the insured has renewed coverage with the same insurance company over a number of years. The insured usually responds “that’s not fair—I’ve been an insured of the insurance company for many years” or “I renewed with the same carrier to maintain continuity of coverage—to avoid something like this from happening.” Such defenses are usually useless, unless the insurance company decides to make an ex gratia payment.

Fact patterns for denial of coverage can read as follows:

 

  • There was a release of petroleum last year. We cleaned it up—costs were under our $100,000 deductible. We certainly didn’t know that groundwater was affected or that the neighbor would be suing us.
  • We had some complaints of mold from the tenant—the maintenance manager sprayed some bleach and there was an incident report. A year later we received this lawsuit in which the tenant is alleging that her children are sick from mold.

 

For the first fact pattern, insurance company claim adjusters will use publicly available databases to research spill reports for the site. Insurance companies often file open public records act requests to obtain historical information, to see for example if there might be a notice of violation in the file for a prior release. If there is something in public domain, claim adjusters will find it.

If the insurance company raised “prior knowledge/known conditions” as a basis for denial, the policyholder must turn to its broker’s underwriting file to see what was disclosed during the placement of the policy. Was there any reference to a prior release in the application? It is not unusual for the chief financial officer, controller, or risk manager to complete the application and to be completely unaware of a prior release because “it was handled at the field level.” Again, this goes to the importance of communication within the insured’s corporate structure. Well before completing the application, the insured must canvass each location and manager to ask questions about environmental releases at the site.

The second fact pattern highlights the importance of putting the insurance carrier on notice of every pollution condition—no matter how insignificant it may seem at the time. There are numerous lawsuits in which the statement of facts lay out a pattern of exposure to mold in a plaintiff’s apartment over several years and complaints by the plaintiff to the superintendent at the apartment complex on multiple occasions (typically at least one time prior to the policy inception). The environmental carrier may provide a defense—until the carrier determines that the superintendent knew about the mold condition, which was not disclosed in the application. The insurance company will base its denial on the prior knowledge/known conditions exclusion.

Pre-tender costs. There is nothing in an environmental insurance policy that specifically references “pre-tender costs.” There is no such exclusion. The term “pre-tender costs” refers to any costs incurred by the insured prior to putting the insurance company on notice of the claim. The actual basis for denial within the policy is usually found in a “consent” provision or “voluntary settlement” provision.

Simply stated, the claim clock starts running after the policyholder places the carrier on notice. Costs incurred prior to putting the carrier on notice of a claim are not covered. Those costs are not reimbursed, nor do the costs apply against the deductible. No matter what the reason, carriers will always push back on these “pre-tender” costs, even if the costs would have been covered by the policy and even if the costs are reasonable. Sometimes a policyholder can be creative in arguing that work done prior to putting the carrier on notice should be considered as ongoing remediation. However, success is completely based on the specifics of the claim. Generally speaking, denial of “pre-tender costs” has been tested in the courts, and for the most part, courts have sided with insurers.

Failure to obtain the carrier’s prior consent to incur costs. Environmental claim handling is completely different from claim handling under other policies. Unless they are involved in industrial operations or environmental contracting, insureds do not generally have many environmental claims. When an insured purchases an environmental policy, for the most part, the issue is not frequency; we see severity. Because an insured may have one or two environmental claims every few years, the insured does not have a good understanding of what to do in the event of an environmental claim. Unfortunately, rather than looking at the environmental policy, an insured sometimes just turns to what is familiar, i.e., “what have I done in the past when I’ve had a property claim?” When an insured has a property claim, the insured typically reports the claim to the insurance company, an adjuster may or may not go out, and the insured replaces the property. Invoices for the full replacement cost of the property are sent to the carrier, and the claim is paid. Environmental claims are different.

Environmental insurance policies include conditions that read, for example, as follows:

 

  • No Insured shall incur costs without our prior written consent.
  • No Insured will, except for that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense without our consent.

 

Every single environmental policy includes this type of language.

No such language is found within property policies. As a result, the insured, who may never have had an environmental claim before, is doing its best to deal with an environmental condition at a covered location. The insured reports the claim, a week or so goes by, and the insured starts submitting invoices for remediation work performed after the claim was reported. Some insurance companies are more forgiving than others with the “consent” provisions and will understand that the insured was trying to do the best it could in responding to an environmental situation. Those carriers will evaluate the invoices, confirm that the costs incurred were reasonable and necessary, and then reimburse the insured accordingly. However, some carriers are very strict concerning the consent provision and will not understand that the insured was doing its best in responding to an environmental situation. Those carriers will send a letter stating that because the insured failed to obtain prior written consent, there is no coverage. These same carriers have denied coverage where the insured did get prior written consent to perform remedial activities, but the environmental conditions were worse than expected, resulting in a change in the scope of work. Because the insured failed to get the insurance company’s prior consent for the change in the scope of work, the insurance company denied coverage for the additional costs.

Conclusion

Environmental insurance policies are an example of the failure of the comprehensive general liability policy to remain comprehensive when confronted by new risks. Employment liability, intellectual property liability, and now cyber liability are all risks that the insurance industry wrote out of the comprehensive general liability policy. It is revealing that the insurance industry changed the name of the policy from “comprehensive” general liability policy to “commercial” general liability policy in about 1985. Once the industry has developed enough actuarial data, it can develop niche policies to fill these coverage gaps that it has created.

The environmental policies have been largely successful in providing a backstop that has allowed deals to be made that environmental risks might otherwise have sunk. To judge by the very few cases reported under these policies, they seem to have been successful in avoiding a wave of litigation. The pollution legal liability and contractor’s pollution liability policies appear to be successful examples of the insurance industry’s response to emerging risks.

Keywords: litigation, insurance, coverage, pollution legal liability policy, contractor’s pollution liability policy, contractor-controlled insurance program, owner-controlled insurance program, cost-cap policy

Robin Kelliher is a senior vice president with Willis Towers Watson.

 

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