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What Do Sandwiches and Water Have in Common? Both Can Eliminate Coverage

Myth: If a recycling center doesn't deal with hazardous materials, it doesn't need environmental insurance. Coverage details are easy to fumble if you don’t do your homework.
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In the world of recycling centers, there’s a myth that if you’re not recycling hazardous materials, you don’t need environmental insurance.

But consider the following cases in which pollution exclusions carried far-reaching consequences for insureds. In the state of Wisconsin, the case of Landshire Fast Foods of Milwaukee, Inc. v. Employers Mutual Casualty Company proved something as innocuous as a sandwich can eliminate coverage. When Landshire recalled a batch of wisteria bacteria-contaminated sandwiches and filed a product recall claim, the insurer denied coverage based on the general liability policy’s pollution exclusion—and two judges agreed.

“Pollution exclusions have never been limited to hazardous waste,” says David Dybdahl, president of ARMR.net. “The case law is coming in saying the exclusions actually work to eliminate all coverage if a contaminate is involved in causing a loss.”

In another Wisconsin case, an outbreak of legionnaires disease was traced back to a water fountain in a hospital lobby. The victims sued the hospital, which sued the interior design firm, which sued the plumber—but none of the parties had coverage due to a fungus and bacteria exclusion in their general liability policies.

“Water can be a pollutant if it becomes contaminated with mold or bacteria,” says Dybdahl, who notes the exclusions have been effectively applied on big losses, particularly in cases involving wrongful deaths. “Nobody told the agents. Water in the building environment creates some big coverage issues. Fungi and bacteria eliminate a lot more coverage than anybody’s talking about.”

Coverage details like this are what make recycling centers such a headache to insure—and easy to fumble if you don’t do your homework. Although XL Group underwriter Matt Gartner says many companies are attracted to recycling center insurance because “there’s a lot of money there,” it’s too complicated an industry for dabblers.

The same goes for agents. “A short-term quote this year is not going to give you a long-term relationship,” says Gartner, who serves on the board of NORA, an association that represents recyclers that work with oil, antifreeze and other liquids. “All it’s going to do is commoditize the product.”

That means taking “a very technical approach to the insurance coverage is likely a winner for an agent that’s looking to write new business,” Dybdahl says. “Any wholesaler can provide access to the insurance products”—it’s the value-add that makes a difference in tough commercial lines.

“There are insurance companies that are happy to just take your policy and move on,” Gartner says. Instead, it should be about “building a relationship with a carrier that understands your insured’s needs and tries to provide solutions to those needs.”

Coverage deviations between carriers create opportunities for independent agents. ARMR.net, for example, starts off by analyzing a client’s current coverage in search of material coverage defects that could help an agent win the business. The company also utilizes combined general liability and environmental liability policy forms that provide more efficient limits whenever possible.

“If you’re buying a million-dollar GL policy and a million-dollar environmental policy, you’ve paid for $2 million in total, but can only collect a million on either type of loss,” Dybdahl explains. By contrast, “if you get a combined policy form with a $2 million limit, you could have a $2 million straight GL or environmental loss—and still have $2 million covered.”

In addition to saving costs—Dybdahl also cites savings of 40% over separately purchased policies—combining general and environmental liability under one policy form closes potential gaps between separately purchased policies. “You could conceivably get a GL claims adjuster and an environmental claims adjuster looking at a loss and agreeing there should be coverage—but on the other adjuster’s policy,” Dybdahl explains. “You get both adjusters standing there saying, ‘It’s not my job, man.’”

XL Group strives to add value by keeping the lines of communication open and transparent; hosting three-way meetings with agents or brokers and their clients to make sure the relationship remains beneficial for all three parties.

“You should be seeing what’s available for loss control and claims handling services, but don’t be afraid to ask for more,” Gartner says. “You can say, ‘This is 2014—my insured should have access to your claims department, they should have access to you as an underwriter, they should have access to loss control services. What are you doing to help my insured with defensive driver training or mock DOT audits or other hands-on loss control services, not just directing them to a website?’”

On the flip side, that kind of relationship also enables you to have realistic conversations with your recycling center customers. “It’s still the insurance industry and things do happen—it’s not always going to be balloons and birthday cake and candles,” Gartner says. “I hear it all the time—‘This is what I have insurance for.’ That may be true, but let’s not do it a second time. When you have an underwriting company that works with you hand in hand, it allows you to have frank conversations.”

“If you’re not getting that as a broker, the insurance company is not meeting your needs,” Gartner adds—because that’s the kind of attentive service the recycling center industry expects from you as an independent agent. “When you spend $500,000 on your business, I think it’s prudent to spend more than 15 minutes on your insurance.”

Jacquelyn Connelly is IA senior editor.

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Tuesday, June 2, 2020
Environmental Liability