Contractors Pollution Liability: Are Your Clients Really Covered?

Have you ever certified contractors pollution coverage based on the fact that your client is insured by a jobsite pollution coverage extension on the general liability policy?

If so, you could be making a big mistake—and not just for your client.

“That’s like certifying that a firm has purchased automobile liability insurance when all they have in place is hired and non-owned auto coverage under the GL policy,” says Dave Dybdahl, president of ARMR.Net, LLC, a specialized wholesale brokerage firm available through Big “I” Markets. “And that’s real spooky from an errors & omissions standpoint.”

Standalone contractors pollution liability insurance—a specific type of environmental insurance invented for contractors—includes an insuring agreement that says it will cover pollution losses, Dybdahl explains. Because the GL policy contains a pollution exclusion, some carriers “sell jobsite pollution coverage extensions and mistakenly call it contractors pollution liability insurance.”

But these coverage extensions and endorsements are essentially “an exception to an exclusion in a GL policy,” Dybdahl says. “They’re missing the necessary insuring agreement for contamination-caused losses, and they’re silent on cleanup costs, which 80% of all pollution claims involve.”

“Those endorsements really aren’t a coverage solution,” agrees Tim Clegg, president of UCPM Environmental Insurance. “They may provide bodily injury or property damage resulting from a pollution event, but most claims for contractors pollution liability are driven by cleanup, transportation or disposal.”

In one real-life claim, a demolition contractor faced a $4-million cleanup because they disposed of contaminated construction materials improperly. “Those are the kinds of things you have no coverage for under a GL policy, even if you pay the $500 for the pollution endorsement,” Clegg points out.

In addition, “mold is typically not covered, or not covered well” under an endorsement to the GL policy, “whereas mold can be named specifically as a pollutant on a pollution liability policy,” Clegg says. And that’s a big deal, considering that in 2016, the No. 1 source of claims under environmental impairment liability policies wasn’t burning landfills or tipped-over chemical trucks—it was mold in commercial buildings like hotels, apartments and schools, according to Dybdahl.

Even a speck of mold can trigger the pollution exclusion in the GL policy, Dybdahl says. But based on his experience as a wholesale broker, he believes agents don’t necessarily appreciate the connection between fungus and bacteria exclusions—“essentially a pollution exclusion on steroids,” he says—and “the frequency of water leaks in the built environment.”

“Alongside this dramatic increase in the uninsured loss exposure, the need for environmental insurance increased at least tenfold in the typical agency’s book of business when fungus and bacteria exclusions were added to the commercial property and liability policies,” Dybdahl explains.

While the typical property insurance sublimit for mold- and bacteria-related damages is $15,000, the average commercial mold loss costs about $250,000, according to Dybdahl’s research. “Global climate change is putting more water in the atmosphere, and that’s leading to increasingly intense rain events, and that leads to more water intrusion losses,” Dybdahl says. “Water on drywall equals mold growth in 72 hours every time.”

“Property and environmental are very much so being impacted by climate change, because when the ocean heats up, we get more hurricane activity and more flooding,” agrees Jayne Cunningham, Environmental Focus Group leader and underwriter, Beazley. “Because we’ve had such a buoyant economy, we’ve seen a lot of renovation, and we find that as soon as someone starts a renovation project, they find mold throughout the property.”

Agents need to be “really, really careful about whether the GL policy provides any coverage” for a mold-related loss, Cunningham agrees. “How does the absolute pollution exclusion apply on those GL policies? They apply differently, depending on the carrier. It’s important to confirm with your carrier that’s providing the GL what sort of environmental coverage is afforded, and same with the property policy.”

No surprise, then, that Clegg has observed growing interest for standalone pollution insurance “across the board” in the contractor segment, but particularly among trade, HVAC, plumbing, excavation, and street and road contractors. “This has become an attractive time for contractors to purchase true coverage,” he says. “A lot of contractors can purchase real standalone coverage for cleanup, bodily injury and property damage—a standalone policy with a separate limit—for as cheap as $1,100.”

Moving forward, expect more of your contractor clients to encounter contractual requirements for full, standalone environmental insurance, Clegg predicts. “Owners, general contractors and risk managers are growing more aware of the risk contractors bring to them from an environmental standpoint,” he explains. “As general contractors begin to understand more about the coverage, they’re demanding quality coverage—not just an endorsement on your GL policy.”

Jacquelyn Connelly is IA senior editor.