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Emerging Exposures: Behind the Potential, E&O Danger Lurks

Marijuana, mold, drones—why turn a blind eye to a new risk when it could be so lucrative for your business?  Before agreeing to write that policy, make sure you're not walking straight into an errors & omissions disaster.
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When a shiny new exposure enters the scene, every player in the insurance industry wants to gobble it up. Why turn a blind eye to a new risk when it could be so lucrative for your business?

To avoid walking straight into an errors & omissions disaster, according to the latest quarterly installment of the Agency Risk Management Essentials webinar series from Swiss Re Corporate Solutions and Big “I” Professional Liability.

Last week’s session, Emerging Exposures: Marijuana, Mold and More, addressed several emerging exposures, the impact they could have on the insurance industry, and why your agency needs to proceed with caution. Here are three to keep your eye on.

Marijuana. Given the potential volume of business in this burgeoning market, “this could seem like an attractive line for many of our agent insureds,” said Matt Davis, vice president and claims manager at Swiss Re Corporate Solutions in Overland Park, Kansas. “But from an E&O claims standpoint, we see as many pitfalls as opportunities for agents who are thinking of taking the plunge—and beyond that, we see pitfalls for your customers who are looking to you to advise them.”

Although recreational or medical marijuana is currently legal in 29 U.S. states and Washington, D.C., “it’s still against federal law in every one of those states, and the current Administration says it may actually crack down further on production and sales,” Davis pointed out. “If that happens, will they be content just to go after the actual sellers and growers? Or might they go after all the players that made money on this business, including the people that placed insurance on that business?”

Those unknowns are why banks have decided not to touch the marijuana industry, “at least not for now,” Davis said—and why many major insurance carriers have recently followed suit in refusing the business, including Lloyd’s of London.

That leaves smaller, niche carriers or those in the excess & surplus lines market, “and you’ve got to be asking, what are they rated? Are they even rated? All those questions lead to other questions about whether there’s potential for insolvency,” Davis explained. “How do you replace that coverage if you have a shrinking pool of carriers? And have you communicated all those risks to your customer in writing?”

Even if you can find a solid carrier willing to take on the risk, coverage is another issue to grapple with—“especially when you’re dabbling in a new area,” cautioned Davis, who encouraged agents to ask whether the policies they procure for a marijuana business cover:

  • Crops they’re growing?
  • Stock that’s not in the dispensary yet, but in a warehouse?
  • Product liability?
  • Vehicles used to transport the stock, both owned and non-owned?
  • Workers compensation for employees?
  • Business interruption coverage?
  • Coverage for movement of product through states where marijuana is illegal?

It’s not just marijuana growers and dispensaries, either—you also have to worry about clients that don’t handle marijuana directly, but act as third-party vendors, Davis explained: “What if they provide trucking? What if they provide warehouse space? What if it’s a company in a strip mall that leases to the dispensary?”

If any of your clients could be even tangentially involved in the business of marijuana, make sure you ask the question and respond accordingly. “Have you revealed to the carriers that those entities are now doing business with one that produces a product that violates federal law?” Davis pointed out. “If that carrier comes back with an illegality exclusion, guess who’s going to be left holding the bag when there’s no coverage for that major loss?”

Hint: It’s you. “If it can’t be insured, have a discussion suggesting they talk to their attorneys to see if the exposure can be addressed through contracts or hold harmless undertakings with their customers,” suggested Steve Rockey, principal of Rockey Stratton law firm in Seattle. “The bottom line here is you need to make disclosures, and you need to do it in writing. Document the recommendations you make.”

Mold. Swiss Re gets three or four mold-related E&O claims and five or six pollution-related E&O claims a year. But in the wake of Hurricanes Harvey and Irma, expect those numbers to increase—wet conditions are ideal breeding grounds for mold and fungus.

According to Davis, Harvey alone dropped 33 trillion gallons of water on the southern U.S. in total, and in a single day hit Houston with more than 50 inches of rain—the most significant one-day rain event for the continental U.S. in history. “That’s going to take a little bit of time to dry out,” Davis said. “While that’s happening, mold will be growing—and mold claims with it.”

What’s the problem? “With mold, it’s usually simple—it was excluded from the policy our insured placed for their customer,” Davis explained. But even when it’s not excluded, “the other problem is there’s often a very specific short reporting requirement for mold, because remediation is an issue for the carrier. If you get it reported but you don’t get it reported timely, the carrier might still exclude coverage.”

And remember: Pollution claims don’t just result from big chemical plants and oil refineries. Davis recalled one real-life E&O claim in which a barbecue restaurant’s outdoor smoker dripped grease into a city’s sewer system. The city made the restaurant clean it up, and when the restaurant turned to their CGL carrier to cover the costs, “the carrier took the position that barbecue grease is a pollutant that triggers the pollution exclusion,” Davis explained.

Although most commercial and personal lines ISO forms exclude all claims involving fungi, wet and dry rot, and bacteria, specialty coverages are available to close gaps for insureds that may face a hidden environmental exposure.

“The exposure that can implicate a pollution exclusion arises in ways that are not often easily foreseen,” Rockey reminded listeners. “Advise your customers that the pollution exclusion is there in the standard policies, and make the customer aware of unaddressed exposures if that’s the kind of business they’re in. And it can’t just be oral—have it stated in writing that coverage was recommended and declined.”

Finally, if you suspect a client may have a pollution-related issue, get your E&O carrier involved right away. “We commonly see agents who think pollution problems are small and they can solve it themselves without getting counsel involved,” Rockey said. “But the problem turns out to be much bigger than they thought”—and that can hurt your defense in the event of an E&O claim.

Drones. “There continues to be a perception that drones are just little Christmas toys,” Davis said. But between delivery, journalism, photography, disaster management, mapping, structural safety inspections, agriculture, wildlife monitoring, law enforcement, border security, construction and more, plenty of commercial industries have their eye on drones as a way to streamline operations.

“If you have any commercial clients at all, it’s not a question of whether your customers will need drone coverage from you,” Davis said. “It’s a question of when, in what amounts and on what policy forms?”

The ISO CGL policy excludes all aircraft exposures, period—which means it doesn’t cover any bodily injury or property damage resulting from drones. ISO has issued some endorsements, and some specialty carriers are already writing extensive drone-specific policies for businesses that plan to use them. But Rockey encouraged agents to ask all carriers whether they would cover a commercial drone exposure not only on a property policy, but a liability policy as well.

According to Rockey, a typical can of green beans weighs about one pound. A $500 hobby drone weighs five or six pounds and usually hovers 400 feet off the ground with four to six spinning blades. Top-end commercial drones, meanwhile, can weigh more than 20 pounds. “You see these things hovering over crowds at public events. What could possibly go wrong? The aircraft exclusion in the general liability policy is what could go wrong,” he said.

Sightings of drones flying too close to other aircraft, buildings or people are becoming increasingly common—and “what’s the effect of failure to register the drone with the Federal Aviation Administration, or lack of a drone license for the operator?” Rockey pointed out. “Like all cases, it will depend on the policy language and the facts. This is an area where the forms are still evolving.”

Get more details about marijuana, mold and drones—plus information about two more emerging exposures—in the webinar recording, available to Big “I” members who log in to the E&O Happens website. For more information on emerging exposures, check out the Big “I” Virtual Risk Consultant.

Jacquelyn Connelly is IA senior editor.

Tuesday, June 2, 2020
E&O Loss Control