Agents are living on the edge when they skimp on genuine pollution liability insurance coverage.
Although a certificate of insurance can make a general liability insurance policy appear to be pollution insurance in the eyes of the beholder, coverage for contamination losses under a general liability policy is counterfeit.
It is fairly common to see COIs claiming that an exception to the pollution exclusion in a general liability policy fulfills a requirement in a contract that a party maintains pollution insurance. But it's a bad idea. General liability insurance is not and never has been pollution insurance—and no exception to the pollution exclusion can fix that simple fact.
Issuing COIs that materially misrepresent the actual coverage in the policy is like using counterfeit currency. It works great until you get caught. Trying to pass off either one as genuine is living on the edge. There are major differences between general liability insurance and genuine pollution insurance, and it is important to know the differences before you fall off that edge.
You may notice that I have a prejudice against pollution coverage extensions under general liability policies. As an insurance consultant and a wholesale insurance broker that places environmental insurance policies all day long, I have acquired that prejudice from reviewing hundreds of general liability policies that do not meet the insurance requirements that I enforce.
In a recent continuing education class, a show-of-hands survey indicated that half the agents in attendance affirmed this statement: “I think it is OK to certify that my client has contractors pollution liability insurance if I get a job site pollution coverage extension on the general liability policy."
The correct answer should have been, “Absolutely not." Why?
An analogy would be to certify automobile liability coverage if the insured only has hired and non-owned auto coverage as an exception to the automobile exclusion in the general liability policy. Everyone seems to know not to certify general liability as auto insurance, but an awful lot of insurance agents seem to be confused about the disconnect between general liability and genuine pollution insurance.
It is common to see naive insurance requirements that ask for “pollution liability" but do not clarify what that is. In most cases, the drafters of these insurance requirements are anticipating genuine pollution insurance, not a counterfeit. Therefore, stating on a COI that pollution insurance is being provided by exceptions to an exclusion in the general liability policy could be misleading—or even fraudulent depending on the perspective of the beholder in the face of a loss.
While insurance coverage can be found by exceptions to exclusions, there are often better ways to insure contamination loss exposures. Utilizing a genuine pollution insurance policy to transfer contamination exposures and meet contractual insurance requirements is not difficult and is often overlooked by well-intentioned agents.
Why a Pollution Extension Leaves Clients Exposed
Through expert witnesses and consulting work, I have seen firsthand the mishandling of pollution coverage extensions even though genuine pollution insurance has been readily available for over 30 years. I believe it's because insurance purchasers often think the cost of pollution insurance is too expensive—until they have a contamination or pollution loss.
Loopholes for coverage can be afforded by exceptions to exclusions, but every insurance educator teaches that the exclusions section of an insurance policy is used to exclude certain causes of loss and to help clarify the carrier's intent of coverage. With that uniform background, it is amazing to see how many folks mess up on certifying exceptions to pollution exclusions as genuine pollution insurance.
A typical pollution coverage extension to a general liability policy only provides exceptions to the longest exclusion in a policy. Pollution coverage extensions vary, but, in general, a pollution coverage extension is insufficient in the following areas:
- Does not have its own insuring agreement for losses arising from irritants or contaminants.
- May not provide coverage for cleanup or restoration costs.
- Shares limits with the general liability policy.
- Potential coverage may have a sublimit.
- No affirmative coverage for natural resource damages.
- Excludes pollution losses on the property of the insured.
- Excludes pollution losses if the insured or those on their behalf show up to test, monitor, remove or otherwise interact with pollutants.
- Provides no coverage for biohazards, mold or bacteria.
The insurance coverage in a general liability policy is materially defective to cover environmental loss exposures. For example, general liability policies cover property damage, while most environmental losses involve cleanup costs and natural resource damages. The applicability of defined property damage in a general liability policy to cover those exposures has been subject to decades of litigated coverage disputes.
What Qualifies as Genuine Pollution Insurance?
Determining where coverage is being granted for pollution causes of loss is important to establish if the coverage is genuine pollution insurance or not. Genuine pollution policies state that the release or escape of irritants or contaminants is a covered cause of loss in the insuring agreement. General liability policies never have pollution as a covered cause of loss in the insuring agreement.
In the very simplest form, a pollution insurance policy insures against the emissions, discharge, release or escape of irritants or contaminates in the insuring agreement. There are broadly two basic building blocks for pollution coverage: site pollution liability, which insures specific sites; and contractors pollution liability, which insures the operations of a contractor.
The most common pollution liability requests appear in the insurance requirements for contractors. It is also the area where most bogus COIs are issued, certifying contractors pollution liability (CPL) insurance when there is only a general liability policy with a job site pollution coverage extension in place.
Genuine CPL policies were initially created to provide insurance to contractors who were cleaning up areas established by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, informally known as Superfund sites. Today, modified versions of the CPL policy are needed by any contractor who can contaminate something in their operations.
That contamination does not have to be a hazardous material such as oil, harmful chemicals, or heavy metals. For example, CPL is needed for any loss associated with contractors decontaminating coronavirus, mold, bacteria and sediment. CPL policies have been available for decades and have continued to evolve over time to insure anything from a carpet cleaner to the contractors remediating atomic bomb manufacturing facilities.
As a wholesale broker specializing in environmental insurance placements, I place a lot of CPL policies. Many of these placements are on firms typically not associated with needing pollution insurance, including janitorial firms, carpet cleaners, HVAC companies, electricians and excavation contractors.
I have clients who hire thousands of contractors every year under a set of very explicit insurance requirements that include CPL coverage. I end up reviewing hundreds of general liability and CPL policies in insurance audits. The failure to meet the insurance requirements upon an actual audit of the in-force insurance policies is astounding. At least nine in 10 insurance placements fail to meet the insurance specifications. And they each had an insurance certificate that represented that all the needed coverage to meet the insurance requirements was in place.
CPL policies are not standardized, which explains some of the failures. Genuine CPL coverage is available through any environmental insurance market. At last count, there were over 50 different versions of CPL policies available. One recent example of a misplaced CPL policy that I audited was a mold abatement contractor who had purchased CPL insurance coverage that excluded any mold work.
Because the original CPL policy was designed to insure contractors cleaning up Superfund sites, most CPL policies were not designed for indoor use. The loss exposures of a Superfund contractor and a trade contractor are very different; therefore, CPL policies need to be designed to fit the insurance needs of the purchaser.
The good news is all the tools needed to accomplish that have been developed. Even the coverage needed to address the new loss exposures for contractors decontaminating coronavirus have been developed.
While all CPL policies have coverage variations that you need to be careful of, most have the same core coverages:
- An insuring agreement for losses caused by pollution
- Limits of insurance not shared with general liability insurance
- Coverage for bodily injury
- Coverage for property damage
- Coverage for cleanup costs
- Coverage for cleanup required by environmental laws
- Coverage for natural resource damage
- Completed operations
- Coverage for work performed by a subcontractor
Other common coverages include:
- Transportation pollution liability
- Non-owned disposal site liability
- Defense outside of the limits
- Restoration costs
- Affirmative coverage for fungus and bacteria
There are major differences between pollution coverage extensions in a general liability policy and a genuine pollution insurance policy. And unless confirmed to be otherwise, the party requiring pollution liability is expecting a policy with the above features, not a counterfeit.
Insurance agents are living on the edge by verifying pollution insurance on COIs if the only coverage is being provided by a general liability policy that has an endorsement making some exceptions to the pollution exclusion. It can be disastrous if the expectation of insurance coverage depends on the features that could have and should have been provided by a genuine pollution insurance policy.
Any time insurance agents see the term “pollution liability" in an insurance specification, my advice is to stop and seek out a resource who deals with environmental insurance on a day-to-day basis to find genuine pollution insurance.
Dustin Helmenstine is an account executive at American Risk Management Resources Network.