If you’re like most independent agents, very little.

And whether or not you’re planning on ever selling an environmental policy, that could be a big problem for your commercial clients.

“People aren’t thinking about the pollution exclusion on a property policy,” says David Dybdahl, president of ARMR.net. “It’s a very common exclusion. In general liability policies, the longest exclusion in the policy is the pollution exclusion. It takes up a whole page. The auto exclusion takes three paragraphs.”

For most agents and insurance buyers, “pollution exclusion” calls to mind “hazardous waste disposal facility”—and if they aren’t involved with one of those, “they can’t see any reason why environmental insurance would even be relevant to them,” Dybdahl says. But pollution exclusions extend beyond that scope. “The easiest way to think of a pollution exclusion is it can apply to a contaminant—that’s the operative word,” Dybdahl says. “If you have something that could contaminate something, a pollution exclusion could come into play.”

Case in point? In Landshire Fast Foods of Milwaukee v. Employers Mutual Casualty Company, when the food company recalled a batch of listeria bacteria-contaminated sandwiches and filed a product recall claim, the insurer denied coverage based on the policy’s pollution exclusion—and two judges agreed, making bacteria an excluded ISO “pollutant” in the state of Wisconsin. In another Wisconsin case, an outbreak of bacteria-caused legionnaire’s disease was traced back to a water fountain in a hospital lobby. None of the parties associated with the fountain had coverage due to a fungus and bacteria exclusion in their general liability policies.

“Pollution exclusions come in various forms, ranging from a simple one-word exclusion to the total pollution exclusion,” explains insurance coverage attorney Barry Zalma, founder of Zalma Insurance Consultants, who has more than 47 years of practical insurance claims experience. “Courts will take a non-technical, plain-meaning approach to interpreting the exclusion. Insurance companies have the right to limit coverage in any manner they desire.”

Fungus, Mold and Bacteria Exclusions

A fungus, mold and bacteria exclusion mirrors a flood exclusion in a property insurance policy—both fall under the anti-concurrent causation exclusions section of the policy and apply regardless of whether any other cause or event contributes concurrently or in any sequence to the loss.

“That means before, during and after,” Dybdahl says. “So if you get a speck of mold growing in the 36-hour timeframe, that exclusion applies to the whole loss, including everything that was covered before that happened.”

An example of a fungus, mold and bacteria exclusion is a liability insurance policy that uses the following language:

“a. ‘Bodily injury’ or ‘property damage’ which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any ‘fungi’ or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.

“b. Any loss, cost or expenses arising out of the abating, testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of, or responding to, or assessing the effects of, ‘fungi’ or bacteria, by any insured or by any other person or entity.”

It’s a big deal considering water on drywall in 36 hours equals mold growth—“that’s not up for debate,” Dybdahl says. And depending on its classification, the water itself could eliminate coverage:

• Category 1 water: drinking water.
• Category 2 water: formerly known as “grey water.” Contaminated but not with bacteria.
• Category 3 water: formerly known as “black water.” Contaminated with bacteria. For reference, all water in a drain pipe qualifies as Category 3, as do flood water and tidal surges, Dybdahl says.

In the event of a Category 1 or 2 water loss, an insured has 36 hours to dry out the property before mold will set in. But if it’s a leak from Category 3 water, “it’s excluded the second it happens because the bacteria didn’t have to grow—it was already there,” Dybdahl says.

Total/Absolute Pollution Exclusions

Zalma says early CGL policies used limited language to exclude pollution losses, forcing insurers to pay for claims they did not intend to cover. “Thus was born the total or absolute pollution exclusion,” he explains. “Courts still find a way around the total pollution exclusion if, for example, the pollution is limited in scope.”

According to Dybdahl, many agents may not understand the total or absolute pollution exclusion because insurance educators typically concentrate on seven exceptions to absolute pollution exclusions. “But if you get a total pollution exclusion, it takes all the exceptions out,” Dybdahl says. “When I start the CE class, that’s one of the first things I ask: How many people in here know on every account whether you’ve got a total pollution exclusion endorsement or not on that policy?”

An example of an absolute pollution exclusion is a policy that uses the following language:

“We do not pay for bodily injury or property damage: a. arising wholly or partially out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants…at or from any premises where you or any contractor or subcontractor, directly or indirectly under your control, are working or have completed work:

“a) if the pollutant is on the premises in connection with such work, unless the bodily injury or property damages arise from the heat, smoke or fumes of a fire which becomes uncontrollable or breaks out from where it was intended to be; or

“b) if the work in any way involves testing, monitoring, clean-up, containing, treating or removal of pollutants.”

The policy defines “pollutant” to include “any solid, liquid, gaseous, thermal, electrical emission (visible or invisible) or sound emission pollutant, irritant or contaminant.” Because the exclusion no longer includes an exception for sudden and accidental dispersal of pollutants, it qualifies as an absolute pollution exclusion, Zalma says.

“The average insurance agent will need to seek out technical assistance in evaluating the environmental risks in their book of business and matching one of more than 140 different environmental insurance policies available to the needs of each customer,” Dybdahl says.

“What I see is a failure to read the policy as a whole and the pollution exclusion as it applies to the risk and claim,” agrees Zalma, whose book “Insurance Claims: A Comprehensive Guide” addresses the subject (agents can find additional case studies by searching for “pollution” on Zalma’s blog). “The best way for an agent to get educated is to actually read each policy wording in its entirety before providing it to a client.”

Want more information on pollution exclusions? Log in to the Big “I” Virtual University and search for “pollution exclusions,” or submit a question through the VU’s Ask an Expert service.

Jacquelyn Connelly is IA senior editor.