December 2015 — Are you doing everything you can to protect your facility in the event of an environmental incident? This article will examine some of the environmental insurance policies that can be purchased for fixed facilities to help manage liability risk.
Pollution Legal Liability Insurance
Environmental insurance for pollution coverage is sold through various underwriting companies, each of which sells its own standard form, generally under an individual product name. Although we will refer to it as pollution legal liability (PLL) insurance, its other customized product names include pollution legal liability SELECT, pollution and remediation legal liability (PARLL), environmental impairment liability (EIL), and property transfer liability insurance.
PLL insurance is available to fill the gap made by the total pollution exclusions in the CGL and other insurance policies. Under these exclusions, almost anything can be defined as a pollutant, including fuel, oil, or gas leaking from a pipe. If you think your operations could cause any kind of pollutant-related loss, you should do a risk management analysis and investigate the cost of PLL insurance.
In addition, before purchasing a property, prospective property owners should evaluate the environmental conditions and potentially hazardous operations of that property and surrounding properties. Even if property contamination is caused by a third party, that party may not be identifiable or financially able to address the problem. PLL policies offer coverage not only for pollution conditions on the insured property, but also for pollutants that migrate on site from third-party sources causing contamination on, within, or under the covered location, as well.
PLL policies are only provided on a claims-made basis. Coverage is generally written on a pay-on-behalf-of basis, meaning that the insurer pays for the loss on behalf of the insured, and the insured pays only the deductible or self-insured retention.
PLL policies generally offer coverage for the following range of exposures, depending on the specific environmental risks at the scheduled site.
- Claims for on-site cleanup of unknown pre-existing conditions triggered by discovery or a third-party claim. Example: After coverage is bound, the insured developer, while digging the foundation of a new building, finds drums leaking chemicals.
- Claims for on-site cleanup of new conditions triggered by discovery or a third-party claim. Example: After the inception of a policy, the insured property owner discovers a discharge of solvents being released from an on-site dry cleaning operation.
- Third-party claims for personal property damage caused by on-site pollution. Example: PCB contamination of third-party property is detected at the insured site due to its release from a transformer.
- Third-party claims for bodily injury caused by on-site pollution. Example: Tenants allege sick building syndrome and file a suit for injuries based on exposure to pollution conditions in the insured building.
- Third-party claims for cleanup costs off site, resulting from pre-existing conditions. Example: Chemicals from a photographic developing operation flow through a floor drain off site where corroded pipes allow contamination of off-site groundwater. This off-site impact was unknown at the time the policy was issued.
- Third-party claims for cleanup costs off site resulting from new conditions. Example: Same as above, but the discharge occurs after the inception of the policy.
- Third-party claims for property damage off site resulting from on-site conditions. Example: Neighboring businesses are evacuated when pollution conditions from the insured location contaminate their sites.
- Third-party claims for off-site bodily injury resulting from on-site conditions. Example: Nearby residents are treated for inhalation of toxic fumes emanating from the insured site.
- Third-party claims for off-site bodily injury, property damage, or cleanup costs resulting from conditions originating at a nonowned location. Example: Insured disposes waste at a landfill and that waste leaches from the landfill and contaminates the drinking water of the surrounding community.
- Third-party claims for on-site cleanup costs on, within, or under a nonowned location and resulting from pollution conditions originating from a nonowned location. Example: Insured disposes waste at a landfill. The federal government, under Superfund, requires that all contributors to the landfill pay to remediate it.
- Claims resulting from an interruption of the insured’s business due to pollution conditions. Example: The insured’s building is evacuated and declared uninhabitable due to a contaminated drinking water source from a third-party location, interrupting the insured’s business and causing loss of revenues. This type of exposure would normally be covered under a property policy, were it not for the pollution exclusion.
- Third-party claims for cleanup costs resulting from the transportation of product or waste. Example: The insured hires a common carrier to transport product or waste. The product or waste spills onto the highway, and the insured must pay to clean up the spill.
Underground Storage Tank Insurance
Federal regulations have established financial responsibility guidelines to ensure that owners and operators of underground storage tank systems can respond financially to losses that result from the release of petroleum products or other hazardous materials from tanks. Depending on the owner, the monthly output, and the number of tanks owned, financial responsibility ranges from a minimum of $500,000 per occurrence to $1,000,000 per occurrence, with a minimum aggregate of $1,000,000 and a maximum aggregate of $2,000,000. This financial responsibility includes payment for corrective action, third-party bodily injury, and third-party property damage from non-sudden, sudden, and accidental releases of hazardous materials from an underground storage tank system. If owners purchase insurance to meet these financial responsibility requirements, the policy must provide coverage for defense costs outside the liability limits provided by the policy.
Affordable private insurance for underground storage tanks is readily available in the marketplace. The coverage meets federal and state liability requirements and, depending on the insurer, offers additional enhancements. Like PLL policies, underground storage tank policies are generally written on a pay-on-behalf-of basis. They provide coverage for releases emanating from covered tanks causing third-party bodily injury, third-party property damage, on- and off-site cleanup costs, and defense costs.
Asbestos-in-place insurance has been available since 1991 and is designed to provide liability protection to property owners who have decided to leave asbestos in place under an approved operations and maintenance program. This type of insurance provides protection for asbestos events excluded from standard CGL insurance.
The policy protects owners with an approved operations and maintenance program against third-party bodily injury and property damage claims resulting from a release of asbestos or an asbestos incident at the insured location. Coverage includes protection against liability arising out of completed abatement jobs that may not have removed all of the asbestos-containing materials, and against liability resulting from in-place management of asbestos-containing materials that remain in their structures. These policies are offered on an occurrence basis and can be written for either a single location or a portfolio of properties.
Lead Liability Protection for Property Owners
Of concern to property owners and managers is the high dollar value of liability settlements for claims of tenants exposed to lead-based paint. Particularly in cases where children are involved, awards can exceed $1,000,000. There is little movement in the insurance industry to write coverage that protects property owners and managers against losses arising out of third-party claims of bodily injury caused by the release of lead managed-in-place at scheduled locations (similar to asbestos-in-place insurance). For some time, such a product was made available to HUD properties only.
Unlike exposure to asbestos, lead-based paint contamination can be determined within as little as 24 hours of exposure. Because of the immediate potential for claims, rather than a long latency period, the environmental insurance community does not offer adequate coverage for this risk. Although a few small excess and surplus lines companies purport to offer certain lead policies, the provisions are typically so restrictive as to be of little value.
In some cases, property owners may look to their CGL policies for coverage for lead-based paint claims, although many CGL policies contain lead-based paint exclusions. If a CGL policy does not contain such an exclusion, depending on the state, some courts have found that lead-based paint does not meet the definition of a pollutant and, therefore, that lead-based paint claims are not subject to the pollution exclusion. Other courts have disagreed, upholding the denial of CGL coverage. Because the availability of this insurance is subject to interpretation, property owners and managers may be left uninsured for this risk until an insurer decides to write specific insurance for lead-based paint exposures.
This article is adapted from BOMI International’s course Law and Risk Management, part of the RPA designation program. More information regarding this course or the new High-Performance certificate courses is available by calling 1-800-235-2664. Visit BOMI International’s website, www.bomi.org.