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A User's Guide to Environmental Insurance
From CPCU Environmental Insurance and Risk Management, Chapter 12. Written by David Dybdahl, CPCU, ARM, (608)798-1427 dybdahl@armr.net
Most commercial insurance policies contain pollution exclusions that leave many organizations uninsured against significant loss exposures. To cover these pollution exposures, insurers have developed various types of environmental insurance. The term environmental insurance includes both first-party (property) and third-party (liability) insurance policies whose purpose is to manage pollution-related loss exposures.
The first type of environmental insurance offered in the United States, beginning in 1977, was environmental impairment liability (EIL) insurance, also called pollution liability insurance. The market for environmental insurance remained relatively restricted until the late 1980s and then expanded rapidly. This chapter examines eight basic types of environmental insurance that have evolved from the original EIL policies to meet specific coverage needs. To provide a background for understanding and using the different policies, the chapter discusses the legal basis for environmental liability in the United States, including several federal statutes; describes the difficulties of managing environmental loss exposures; and reviews the limitations on pollution coverage in conventional property and liability policies.
Legal Basis For Environmental Liability
Environmental liability losses can be incurred through torts, contractual obligations, or violations of statutes. The source of liability for environmental losses will most frequently be the actual or alleged release of pollutants, the violation of a law designed to protect human health and the environment from those pollutants, or the enforcement of environmental protection laws that require remediation expense payment.
Torts
Tort liability for pollution can be based on negligence, intentional torts, or strict liability.
Negligence
Negligence is the failure to do what is reasonable under the circumstances to protect third parties from injury or damage. The following are examples of negligent acts that have resulted in actual environmental liability claims:
1. An oil spill from a petroleum refinery contaminated a municipal water supply, which resulted in bodily injury and property damage claims.
2. A contractor working at a manufacturing facility left a valve open on a process line overnight. The next day it was discovered that the contents of a storage tank connected to the line had been released into an adjacent stream, causing property damage, bodily injury, and natural resource damage.
3. A hazardous waste hauler transporting toxic waste to a disposal facility had an auto accident in the downtown section of a city. The hazardous liquid being transported was released into the street. Passersby inhaled the fumes, and the business district of the city was evacuated for two days as cleanup contractors responded to the spill. Claims were filed against the transporter alleging bodily injury, property damage, and business interruption.
Other possible sources of liability for the negligent release of pollutants include hazardous product manufacturing, testing, and transporting; hazardous waste disposal; product failures; inadequate emergency response procedures; and incompetent environmental consulting.
Intentional Torts
The intentional torts most commonly alleged in environmental claims are nuisance and trespass.
Nuisance
A property owner is entitled to the peaceful enjoyment of his or her property. If a neighbor or another third party engages in an activity that interferes with the owner’s right of enjoyment of the property, the owner may bring an action alleging nuisance against the party causing the interference. Potential environmental liability exposures alleging nuisance can involve load noises, noxious odors, bright lights, fog generation, electrical waves, and electromagnetic fields.
Trespass
Unlike nuisance, which requires no transmission of materials from one property to another, trespass involves the physical deposition of pollutants on the property of the claimant alleging injury. The material that is deposited may be a toxic substance, but it does not have to be. Claims have resulted from releases or deposits of water, sand, and clean soil. As long as the deposits are objectionable to the property owner, a trespass claim can be brought against the party responsible for the release. Environmental claims for trespass could result from the release of dust or particulate into the air, the discharge of chemicals into a stream, the runoff of pesticides onto a neighbor’s property, or thermal emissions into a river.
Strict Liability
When manufacturing operations use inherently hazardous materials or processes, courts may impose strict liability, which eliminates the common-law defenses normally available to the defendant in a negligence suit. No degree of care is considered to be adequate for ultrahazardous activities or materials. For example, a remediation contractor working on a job to incinerate nerve gas could face strict liability for ultrahazardous activities if a release of the nerve gas injures a third party, even though the contractor might exercise a very high degree of care in performing the work. Some examples of materials that could create strict liability loss exposures include nuclear materials, explosives, polychlorinated biphenyl (PCB) materials, pesticides, oil, highly toxic chemicals, and hazardous waste.
Contractual Obligations
A general contractor that agrees to hold harmless and indemnify a project owner for all claims that arise during the course of the project may incur an environmental loss under the contract if the proximate cause of the loss is a release of pollutants. For example, a worker who is employed by a subcontractor at the project and is injured as a result of breathing ammonia might sue the project owner, thus activating the general contractor’s contractual liability to the owner.
Environmental Statutes
Environmental statutes contain provisions that can lead to injunctions, fines, and penalties for noncompliance. The statutes also contain provisions for the criminal prosecution of individuals, including corporate officers. Although this latter point is not a subject of insurance, it is an important point to consider when developing environmental risk management programs. For insurance practitioners, the most common and significant risk management implications of these statutes are the cost recovery provisions for cleanup expenses and the proof of financial responsibility requirements.
The “modern era” of environmental legislation began with the passage of the National Environmental Policy Act (NEPA) of 1969. NEPA resulted from the efforts of conservationists to compel the federal government to consider the environmental ramifications of proposals for new highways, dams, and other public projects capable of affecting wildlife or scenic areas. Since the passage of NEPA, environmental laws to protect human health and the environment have proliferated, and the public interest has changed from preserving conservationist values to protecting the environment, primarily surface waters (the Clean Water Act) and the air (the Clean Air Act). As the “environmental movement” caught on, the more ambitious and complex Resource Conservation and Recovery Act (RCRA) of 1976 and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980 soon followed. Both CERCLA and RCRA have had a significant impact on the risk management programs of many organizations.
Many environmental laws do not require fault or negligence on the part of the party charged with responsibility, in effect creating strict liability by statute. One of the common threads that runs through most of these laws is the theory that the person that caused the pollution should be responsible to pay for the cleanup of that pollution in the case of a spill or release. This is commonly referred to as a “let the polluter pay” funding scheme. Various forms of environmental insurance can be used to finance many of these statutory loss exposures.
Federal statutes provide the baseline standards for state and local environmental laws. Local governments are able to establish standards that are more restrictive than the federal standard. This legislative freedom and the public interest in laws protecting the environment lead to a profusion of environmental regulations that vary geographically.
The sections that follow summarize some of the most influential federal environmental laws. Most states actually administer these laws under state statutes that have different names but virtually the same content as the federal laws. For insurance practitioners, the most common and significant implications of these statutes are the cost recovery provisions for cleanup expenses and the proof of financial responsibility requirements under some of the laws.
Clean Water Act (CWA)
The Clean Water Act seeks to improve the quality of surface waters by prohibiting or regulating the discharge of pollutants into navigable waters and restoring them to “fishable” and “swimmable” quality. A number of activities are regulated under the legislation including pollutant discharge into waterways and storm water runoff. The Clean Water Act also mandates a Spill Prevention, Control, and Countermeasure Plan for certain regulated facilities, such as oil-handling facilities.
Clean Air Act (CAA)
The Clean Air Act seeks to improve the quality of ambient air by regulating emissions from both mobile and stationary sources of air pollution. Permits are required to construct or operate sources of air emissions. The terms of the permit vary from one emission source to another and from one pollutant to another. Similarly, restrictions are tighter in areas of poor air quality (such as urban areas) than elsewhere. The zones around cities where ambient air quality fails to meet Clean Air Act requirements are classified as “Nonattainment Areas.” In these areas, regulators can curtail new industrial or commercial development by denying the required air permits.
Motor Carrier Act
The purpose of the Motor Carrier Act of 1980 is to protect the environment from releases of harmful materials during transportation of such materials by motor carriers in interstate or intrastate commerce. The Motor Carrier Act of 1980 established minimum levels of financial responsibility sufficient to cover third-party liability including property damage and environmental restoration for both private and for-hire carriers of hazardous materials. The requirements set forth by the Motor Carrier Act are outlined in Exhibit 11-1.
One insurance mechanism that meets the requirements set forth in Exhibit 11-1 is the MCS 90 Endorsement. This endorsement must be attached to a commercial vehicle liability insurance policy and becomes a promise from the insurer that the insurer will pay any claims or judgments made against the transporter for public liability (bodily injury, property damage, or environmental restoration costs) resulting from operation of the vehicle.
The MCS 90 Endorsement is essentially a surety bond in that it requires the insured to reimburse the insurer for any payments made under the provisions of the MCS 90 that would not have been paid under the insurance policy in the absence of the endorsement. Because commercial auto insurance policies typically exclude most claims for loss caused by the release of pollutants, it is probable that the insured will have to reimburse the insurer for many losses that might be paid by the insurer under the MCS 90 for release of contaminants. To provide true insurance coverage, an additional endorsement (such as ISO endorsement CA 99 48) must be used to modify the pollution exclusion in the commercial auto coverage form to which it is attached.
The Toxic Substance Control Act (TSCA)
The Toxic Substance Control Act, enacted in 1976, regulates the chemical manufacturing industry and prevents the importation or manufacture of dangerous chemical substances without adequate safeguards to ensure that their use does not harm human health or the environment. The act’s statutory framework also facilitates extensive regulation of individual hazardous substances on a case-by-case basis. Consequently, the act has been used to regulate PCBs and, to a more limited extent, asbestos and radon. The EPA has also contemplated using the act to impose extensive regulations on the use of lead. Under the Toxic Substance Control Act, manufacturers of chemical substances must provide extensive information to the EPA regarding the formulation, use, and risks of each substance they manufacture or import, including any information on known or suspected adverse health or environmental effects.
Resource Conservation and Recovery Act (RCRA)
The Resource Conservation and Recovery Act (RCRA) provides “cradle-to-grave” regulation of hazardous waste. RCRA imposes strict waste management requirements on generators and transporters of hazardous wastes and on hazardous waste treatment, storage, and disposal facilities. RCRA also regulates underground storage tanks, medical wastes, and nonhazardous solid wastes, although the requirements for some of these waste categories are considerably less stringent than those for hazardous wastes.
RCRA was one of the first environmental statutes to adopt proof of financial responsibility requirements for permit holders. Under these provisions, the owners of hazardous waste treatment, storage or treatment facilities, landfills, and underground storage tanks are required to provide evidence that they have the financial resources to clean up any material from the facility that causes environmental damage and to compensate victims for bodily injury and property damage. Permit holders have a number of options available to evidence this proof, including specially endorsed insurance policies, performance bonds, letters of credit, cash in escrow, self-insurer status, or, in some states, any financial arrangement acceptable to the regulators. The amounts of required proof vary by the type of facility and by state regulations. Insurance practitioners in need of advice on compliance with these regulations should consult with the state environmental regulators for the current requirements and acceptable methods of providing the proof of financial responsibility.
RCRA includes a wide variety of wastes within the scope of its regulatory program. The most notable exceptions are waste oil and certain high-volume, low-toxicity wastes (such as various mine wastes and incinerator ash). Waste generators must manage hazardous wastes in accordance with detailed regulations governing containers, labels, record keeping, storage, spill prevention and control, and employee training. On-site storage is limited both with respect to time and quantity. Shipments of hazardous waste require completion of a shipping manifest that tracks the journey from “cradle to grave,” thus ensuring final disposal only at proper facilities.
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or "Superfund")
Because RCRA regulations cover active but not abandoned waste disposal sites, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) was passed in 1980 to facilitate the cleanup of any abandoned or uncontrolled sites containing hazardous substances, including numerous old dump sites.
The average cost of a Superfund cleanup of a site on the National Priority List is approximately $30 million, exclusive of substantial transaction costs. There are approximately 1,300 Superfund sites on the National Priority List and more than 3,500 sites targeted for cleanup under state programs similar to CERCLA. These sites can take more than twenty-five years to remediate if groundwater is involved.
Potentially Responsible Parties (PRPs) are the persons or entities that are legally responsible for the costs of remediating a Superfund site. Parties involved with a Superfund site are referred to as PRPs until liability under the act is established. At that point they become Responsible Parties (RPs). They are responsible for all costs associated with cleaning up the site, including the costs of identifying and evaluating contaminants and developing a plan for remediation. Following the “let the polluter pay” principle, the drafters of the original legislation included all parties who enjoyed an economic benefit from the waste disposal activities or in the ownership of the site.
The list of Potentially Responsible Parties includes the current owners and operators of a site (even if they had no involvement with the original waste disposal activities), prior owners and operators who may or may not have been involved with the site during the disposal of hazardous materials, the generators of the waste materials disposed of at the site, the transporters who hauled waste to it, and anyone who “arranged” for the disposal of materials at the site. Parent corporations may be liable for subsidiaries that are PRPs, depending on the extent of control over their subsidiaries and their involvement in waste disposal practices or decisions. Traditional notions of “piercing the corporate veil” (invalidating the legal protections of the corporate entity and suing the owners individually) will generally be applied during cost recovery efforts by the government. Similarly, corporate successors may also be liable, depending on their involvement and the application of traditional principles of successor liability. Lessees may be liable as “operators” of the site, as may individuals such as corporate officers or shareholders of closely held corporations. Even bankrupt parties may incur liability under CERCLA.
Superfund liability is strict (without regard to fault) and retroactive. This legislated liability is a significant deviation from traditional theories of recovery under common law, which normally require negligence on the part of the defendant for the plaintiff to recover damages. In fact, many of the disposal sites that ultimately became Superfund sites were permitted, legal operations at the time the sites were actively accepting waste.
Superfund liability is also “joint and several,” meaning any liable party may be responsible for the entire amount, regardless of its “fair share,” if, as is usually the case, the harm is indivisible. In allocating liability for the cleanup costs of a particular site, a PRP’s assessment can be based on the volume of waste contributed to the site, not the toxicity of the waste. Therefore the contributor of large volumes of nonhazardous materials to a Superfund site could be responsible for a large part of the cleanup cost even though it contributed only nonhazardous waste to the site.
The EPA investigated over 40,000 potential Superfund sites between 1980 and 1995, but only a small percentage of these sites will be cleaned up under CERCLA. CERCLA authorizes the EPA to clean up sites where there is a release or threatened release of a hazardous substance into the environment. The EPA can either have its own contractors clean up the site or force liable parties to conduct the cleanup. If the EPA conducts the work, it can seek cost recovery from the responsible parties as they are defined in the statute for up to three times the amount of the actual cleanup expenses. As an alternative to EPA contracted cleanups, private parties may conduct a cleanup voluntarily and, under appropriate circumstances, recover their costs from other responsible parties. CERCLA provides an express right of contribution whereby one or a group of PRPs can bring an action that seeks contribution from another PRP. A private CERCLA recovery action may be brought against any liable party regardless of whether the federal government has initiated either cleanup or a cost recovery action of its own. Parties that settle with the government, however, are not liable for contribution.
Superfund is harsh and expensive for liable parties because it operates under a “let the polluter pay” funding scheme that features retroactive, strict liability. The passage of CERCLA and the resulting flood of claims by responsible parties under general liability policies were largely responsible for the proliferation of pollution exclusions in U.S. commercial insurance policies in 1986. The far-reaching cost recovery provisions of CERCLA create a complex array of liability exposures for a broad spectrum of the American economy. Most of the prospective loss exposures associated with Superfund can now be insured though a combination of various forms of environmental insurance.
There are only three defenses to CERCLA: (1) acts of God, (2) acts of war, and (3) acts of an unrelated third party. The third-party defense is narrowly defined and rarely applies. It is largely intended to be limited to such occurrences as the unanticipated acts of vandals.
The third-party defense includes a provision known as the “innocent landowner defense,” an important provision for lenders and those who lease or acquire real property. CERCLA excludes liability for persons who acquire contaminated property, did not know, and had no reason to know, it was contaminated, and did not contribute to the contamination. The purchaser must, at the time of acquisition (which may have occurred many years ago), have undertaken all appropriate inquiry into previous ownership and uses of the property consistent with good commercial and customary practices in an effort to minimize liability.
Oil Pollution Act (OPA)
The Oil Pollution Act (OPA) of 1990 seeks to reduce the risk of spills of petroleum or hazardous materials into United States coastal or navigable waters by mandating technical standards for facilities and vessels operating in or near such waters. OPA also imposes requirements on owners of facilities and vessels to prevent releases and to pay for the costs of releases that are not prevented. Similar in concept to the proof of financial responsibility requirements under RCRA, OPA mandates that each party responsible for a vessel or facility from which oil is discharged (or is threatening to be discharged) into or upon navigable waters, adjoining shorelines, or the exclusive economic zone of the United States is liable for removal costs and damages.
The amounts of required financial responsibility for a single vessel can be in the millions of dollars. Similar to RCRA, the methods that may be used to meet these requirements include specially endorsed insurance, a surety bond, a letter of credit, or qualification as a self-insurer.
APPLICATIONS
Potential Loss Exposure Under CERCLA
Ace Manufacturing Company disposed of its off-specification chemical materials in Joe’s Dump between 1960 and 1970. Joe’s Dump was licensed for this entire period by the state in which it is located under a law applicable to municipal solid waste disposal facilities. Ace had hired Sam’s Sanitary Service to transport the hazardous waste material from Ace to Joe’s Dump. In 1972, Joe sold his land to Wonder Products Incorporated. Wonder still owns the land but discontinued use of the landfill in 1980.
In 1984, the drinking water supply of a nearby municipality was found to be contaminated. Groundwater investigations determined that Joe’s Dump was the source of the contamination. The cost to clean up, remediate, and reconstruct Joe’s Dump is expected to be $30,000,000. Under CERCLA, the following parties are Potentially Responsible Parties, subject to strict liability for the cleanup expenses:
• Joe’s Dump as an owner/operator
• Ace Manufacturing Company as a waste generator
• Sam’s Sanitary Service as a transporter to the site
• Wonder Products Incorporated as the current owner and a past operator of the site
All responsible parties face joint and several liability for the cleanup expenses. In this case, if Joe’s Dump, Ace Manufacturing, Sam’s Sanitary Service, and other PRPs were out of business at the time of the EPA Superfund cleanup action, Wonder Products could be assessed the entire cleanup expense.
Enforcement of Environmental Laws
For many years, the focus of environmental regulatory activities was compliance in a very technical sense. Under the Clean Air Act, the Clean Water Act, and a host of earlier environmental laws, compliance involved monitoring the outflow from pipes into streams and from smokestacks into the air. The EPA set standards, counted contaminants in parts per million, and enforced statutes with stiff fines that could exceed hundreds of thousands of dollars a day. The process was highly empirical. Technically trained inspectors met with the corporate mechanics that controlled the tools of compliance. Those subjected to enforcement actions were often the compliance personnel and technically trained employees who operated pollution control systems or the equipment that failed to meet the EPA standards. Risk managers were rarely involved in this process.
This enforcement model has changed dramatically in recent years. Now, an evaluation of compliance not only includes a review of the physical facilities, but it also considers management systems and control of the processes that pose a threat to the environment. Such an evaluation reviews the accountability of the board of directors for environmental matters, the assignment of environmental responsibility within senior management ranks, the effective dispersion of responsibility through all levels of the organization, and the day-to-day operation of the system in controlling activities that involve hazardous materials. Accordingly, not only the EPA but also the corporation’s shareholders and employees have come to expect that a corporate environmental risk management program should have certain components.
Such a program begins with a written corporate environmental policy, which is implemented by written procedures and carried out by the executives responsible for the management of day-to-day activities. This formal plan should be adequately funded to ensure that it will be successful. A reporting system provides management and the board of directors with enough information to assure that everything is working as intended. When extraordinary events take place within a corporation, such as a major pollution incident or the corporation’s merger with an organization having serious environmental exposures, additional expectations must be addressed.
APPLICATIONS
Management’s Responsibility for Environmental Compliance
One company’s experience illustrates the current trend for regulators to focus on the responsibility of management in assessing environmental compliance. The company was involved in metal fabrication processes at thirteen plants geographically dispersed in seven states with a total workforce of more than 8,000.
At one of the company’s facilities, regulators were called in when neighbors discovered hydrocarbon solvents in their drinking water. An inspection of the facility found that the normal practice for cleaning up trichloroethylene spills from the shop floor was to hose the material out the door and let it run into storm-water drains. Further inquiry revealed that the company had only one employee assigned to environmental compliance for all thirteen manufacturing facilities.
Fines were assessed against the corporate executives and the corporation for failure to adequately provide for environmental management within the company when the hazards associated with the materials in use were widely known. The chief executive officer of the firm was given a suspended sentence and three years’ probation as a first offender; a result that would not occur today under the current mandatory minimum Federal Sentencing Guidelines for violations of environmental protection laws.
A shareholder suit against the officers and directors for failing to properly manage the firm’s environmental matters quickly followed the environmental enforcement litigation. The shareholder suit alleged that because of the failure of senior management to develop an adequate environmental management protocol, the corporation incurred unnecessary expenses to resolve the ensuing enforcement actions.
The risk manager quickly learned how important an environment risk management program was when she was asked to provide a detailed analysis of the incident and an explanation of what insurance protection the company had for this incident and future events of a similar nature. Of course, the insurance coverage available to help pay for this costly claim was of great interest to the directors and officers of the firm. It is easy to imagine the directors’ and officers’ disappointment when they were informed that the pollution exclusions in the firm’s directors and officers liability policy, general liability policy, and umbrella liability policy effectively eliminated any possibility of an insurance recovery to help offset the expense of the legal actions.
Environmental insurance can be used as a tool to help manage environmental risks, not just insure them. Environmental underwriters are in a position to compare one applicant to another and are therefore able to provide useful advice on the adequacy of the environmental management systems relative to the applicant’s peer group. Thus the underwriting process may give early warnings to an organization that needs to improve its environmental management efforts.
Environmental Risk Management
As the effort to clean up contaminated sites in America gains momentum, risk managers are increasingly faced with the daunting task of effectively managing their firms’ environmental impairment liability exposures. Estimates for the cost of the environmental cleanup effort at all contaminated sites in the United States range between $700 billion to well in excess of $1 trillion, and the work will take over twenty-five years to complete. These figures do not include third-party claims or the future cost of industrial spills or other releases of pollutants in the environment.
There is a common misconception that environmental liability losses affect relatively few industries and a limited number of organizations within a given industry group. With the far-reaching cost recovery provisions of Superfund and similar state cleanup laws, the ultimate cost of environmental remediation and of liability claims will be shouldered by a relatively large number of organizations within the U.S. economy. When the costs of environmental liability are reflected in the increased costs of products and higher insurance premiums, the ultimate price of the cleanup will be paid by society as a whole.
From a risk management standpoint, the severity of environmental damage claims requires that organizations must plan for these risks if they are to survive long enough to pass their increased costs on to their customers. To implement such a plan, managers must develop effective environmental risk management programs that include adequate funding and support from corporate management.
The Environmental Risk Assessment Process
A three-step process can be used to identify environmental loss exposures in the development of an environmental risk management strategy.
1. The first step in the process is to identify what materials are present, the quantities of those materials, and the potentially harmful properties of the materials at the locations in question.
2. The second step is to identify the potential routes those materials could take if they were released from the facility. Air, groundwater, surface water, and sewers are examples of routes that contaminants can follow.
3. The third step is to identify the target populations of living things that could be affected if the identified materials followed the potential routes.
Environmental claims encompass a broad spectrum of potential contaminants. Moreover, material does not need to be hazardous or a waste to create an environmental impairment liability loss exposure. For example, environmental claims have resulted from a large-volume milk spill into a stream and from the removal of water from a river to make snow for a ski hill. Moreover, the standard pollution exclusions that are discussed later in this chapter are not dependent on a material being either hazardous or a waste to fall under the exclusionary language of a “pollutant.” Practitioners developing environmental risk management strategies should expand their thinking beyond “hazardous waste.”
Characteristics of Environmental Loss Exposures
Environmental loss exposures have some unique characteristics that must be considered when developing a plan to manage them. Some of the more prevalent of these characteristics are summarized below.
1. Many environmental loss exposures are difficult to identify because they arise from activities that were conducted many years in the past or may be created by extremely small quantities of hazardous substances that are difficult to detect or measure.
2. Environmental loss exposures tend to elude traditional exposure identification methods. For example, reviewing summaries of historical losses may not reveal any information on potential environmental claims. Physical inspections of facilities do not always reveal possible causes of environmental damage that may be buried underground or otherwise hidden from view.
3. Often, no cause-and-effect relationship is apparent between exposure to a substance and measurable injury because of the long latency period of some injuries or diseases associated with toxic exposures. Similarly, there is often no direct cause-and-effect relationship between a release of pollutants and actual damages. The amount of the loss may be difficult to measure at a particular point in time.
4. Environmental liability claims may result from a perceived, rather than real, exposure to a toxic material or from a fear of future injury due to an actual exposure.
5. Environmental losses are often expensive. The average cost to clean up a Superfund National Priority List site is $30 million. The average cost to clean up a leaking underground storage tank is $150,000. The Exxon Valdez oil spill in Alaska is reported to have cost in excess of $3 billion in cleanup costs and $1 billion in third-party claims.
6. Many environmental remediation laws are funded in accordance with a “let the polluter pay” funding concept. Under these laws, organizations and individuals can be held retroactively liable, without having been at fault, for bodily injury, property damage, cleanup expenses, and natural resource damage. There is also a danger that courts will award multiplied damages, fines, and criminal prosecution under these laws.
7. Advances in technology can change the exposure to loss. As detection equipment is developed that can measure smaller quantities of contaminants, the loss exposure increases. For example, if current state-of-the-art equipment can measure concentrations of contaminants only to ten parts per million, a new machine with detection capabilities of ten parts per billion would change the detection threshold a thousand fold. In a cleanup project in which the goal is to achieve “non-detect” levels of a particular contaminant, a change in measuring technology could dramatically change the costs of the cleanup.
8. The amount of the loss can increase substantially over time as the contamination migrates farther from its source. Imagining a leaking underground storage tank helps one to envision this phenomenon. If the leak is discovered on the first day, the remediation could be as simple as removing the tank and one shovel full of contaminated soil. If, however, the leak is not discovered until after the material has contaminated the groundwater, the remediation could take more than twenty-five years to complete.
Overcoming the Difficulties in Managing Environmental Exposures
Because most risk managers are not environmental scientists or lawyers, environmental exposure identification presents a special challenge.
The difficulty of identifying environmental exposures can sometimes be overcome by the effective use of internal and external resources. Environmental compliance personnel within the firm are often familiar with the laws that apply to the operations of the firm. Legal counsel is another source of expertise with respect to the regulatory risks that an organization must address. Operational personnel who work with hazardous materials on a daily basis are usually familiar with those that are toxic and the risks associated with their use. Environmental consultants can also be used to assist in the identification of environmental exposures, through independent audits or as part of an internal/external environmental audit team. Employees of the United States EPA or the particular state’s EPA can also provide useful information.
To effectively manage environmental loss exposures, the risk manager should attempt to distinguish between exposures resulting from prior activities and those that could result from ongoing and future operations. Obviously, a lesser number of risk management options are available if the activity that created the exposure has already been conducted. For example, a firm that has been designated a responsible party in a Superfund cleanup action cannot prevent that loss from occurring.
Risk managers can, however, formulate effective strategies for dealing with the environmental liability exposures associated with past activities of the entity. Here is where exposure identification continues to be important in the overall risk management program. Risk managers should attempt to identify the “skeletons in the closet” and address as many of the environmental exposures as possible before having to answer to a regulatory body, citizens’ action committee, class action suit, or third-party claim.
If an environmental problem can be identified and corrected, the risk manager may have the opportunity to prevent all or part of a liability loss from occurring. For example, leaking barrels of toxic waste material may have already caused contamination that requires a cleanup, but perhaps their prompt removal will prevent contamination of groundwater and possible third-party bodily injury claims.
Covering Environmental Exposures Under Conventional Insurance Policies
Most organizations carry several types of liability insurance. However, general liability policies, commercial auto policies, and most other types of commercial liability policies exclude some or all claims for injury or damage resulting from pollution, including the cost of cleaning up released pollutants. These exclusions have been discussed in prior chapters of this text. Commercial property insurance policies often provide coverage for cleanup of pollutants on the insured’s premises if the loss is caused by an insured peril. However, this cleanup coverage is usually subject to a low sublimit that would provide little relief for a substantial pollution incident.
Organizations that wish to insure their environmental loss exposures must understand how each of their property and liability insurance policies will respond to possible pollution-related losses. If an organization’s basic policy forms exclude important environmental exposures, the organization might be able to obtain coverage for some of the excluded exposures by buying coverage endorsements to these policies. In some cases, these endorsements may provide coverage that is sufficient to meet an insured’s particular needs. For many firms, the coverage is too limited, and the only way for such firms to obtain appropriate coverage is to obtain separate environmental insurance policies.
Insurance practitioners or risk managers designing environmental insurance programs should compare the coverage provided by the firm’s conventional property and liability policies—including any available pollution coverage endorsements with the coverage that could be obtained under the appropriate forms of environmental insurance. Insurance buyers are often surprised to see the coverage gaps for environmental claims that even an endorsed CGL policy can leave.
The remainder of this chapter describes the various types of insurance that have been designed specifically to cover environmental loss exposures.
Types Of Environmental Insurance
The current marketplace includes only a handful of insurers capable of writing a full range of environmental coverages and supporting those policies with claims and loss control services. Each insurer typically creates its own policy forms and creates names for its coverages in accordance with its marketing objectives. Thus, two insurers may use different names to describe essentially the same coverage.
To add to the complexity, different policy forms can be significantly modified by endorsement or combined to provide packages of different types of environmental insurance that share a common policy limit. Some environmental coverages are available only as part of specialty insurance packages. For example, a specific environmental coverage may only be available to golf courses or doctors’ offices. Instead of trying to describe all of the various environmental policies in existence, the remainder of this chapter examines eight major types of environmental insurance policies:
1. Site-specific EIL policies
2. Contractors EIL policies
3. Environmental professional E&O liability policies
4. Asbestos and lead abatement contractors general liability policies
5. Environmental remediation policies
6. Remediation stop-loss policies
7. Underground storage tank compliance policies
8. Combination policies
These eight types of policies are intended as a generic listing of the various types of environmental insurance policies. In the marketplace, the actual policies are usually titled somewhat differently.
Site-Specific EIL Policies
Environmental impairment liability (EIL) insurance originated in the late 1970s to fill the coverage gaps in the CGL policy. Site-specific EIL policies cover third-party claims arising from either sudden or gradual releases of pollutants from insured locations. EIL coverage enhancements allow policyholders to purchase protection against the costs of on-site cleanup, claims arising from releases from third-party disposal sites, and claims arising from pre-existing pollution at insured sites. Factories, waste disposal sites, golf courses, farms, municipalities, warehouses, and oil refineries are just a short list of the types of risks that purchase EIL insurance coverage.
Insuring Agreement
The typical insuring agreement in a site-specific EIL policy obligates the insurer to pay on behalf of the insured a loss, in excess of any deductible, for bodily injury, property damage, cleanup costs, and defense expenses. The loss must result from pollution conditions that exist beyond the boundaries of the site(s) listed within the policy declarations. However, on-site cleanup is commonly added by endorsement to the policy form.
The policy definitions of “bodily injury” and “property damage” are the same as those in other liability insurance policies, with two notable qualifications. The first is that for the environmental coverage to apply, the bodily injury or property damage must result from pollutants emanating from an insured site. The second qualification is that some of the policy forms require physical injury or actual exposure to pollutants in order to trigger coverage for bodily injury claims. These requirements could substantially restrict coverage under the EIL policy for claims alleging “cancer phobia” or a similar fear of future disease or injury. Because some EIL policies do not contain these restrictions, each policy must be analyzed to determine the extent of coverage provided.
The definition of the term “loss” often includes the cost to defend against pollution claims within the scope of the policy. The term “cleanup costs” may appear as a separate coverage term, or it may be included within the definition of “property damage.” The policies sold by different insurers may contain differing definitions of “cleanup costs.” Most of the definitions include, as a minimum, the expenses the insured incurs in the removal or remediation of soil, surface water, groundwater, or other contamination in responding to a covered pollution liability loss.
EIL policies respond to loss arising from “pollution conditions.” The definition of “pollution conditions” follows the definition of “pollutants” in ISO pollution exclusions found in general liability, auto liability, and other liability insurance policies. A typical definition of “pollution conditions” in an EIL policy reads as follows: “Pollution conditions means the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water.”
The definition of “pollution conditions,” like the definition of “pollutants” in the pollution exclusions in the CGL and other policies, does not include the words “hazardous waste” or “hazardous material.” The definition is much broader than hazardous waste, which is an important point to remember when analyzing potential coverage gaps between EIL policies and the insured’s other liability policies.
Claims-Made Coverage
EIL policies provide coverage on a claims-made basis. In most respects, the policies operate like other forms of claims-made insurance, except that EIL forms have three noteworthy characteristics not shared by other liability policies: (1) there is no retroactive date, although these are sometimes added to the policy, (2) they have a relatively short extended reporting period, and (3) all claims arising from a pollution incident (release) are treated as a single loss with one deductible and one per loss limit.
For a claim to be covered in a typical claims-made policy, the injury or damage must occur on or after the retroactive date, and the claim must be reported to the insurer during the policy period or during the extended discovery period. EIL policies, in contrast, often do not contain a retroactive date. In effect, a claims-made policy without a retroactive date provides unlimited prior acts coverage, a valuable feature for covering environmental impairment exposures that are often unknown to the insured.
When the prior use or the current conditions at the site make the risk unacceptable, the underwriter can impose a retroactive date on an EIL policy to limit the time period for coverage of prior acts. Adding a retroactive date allows the underwriter to provide EIL coverage prospectively without being overly concerned about the prior use of the site. Once the insured and the underwriter have developed more information about the site, the underwriter might be willing to remove the retroactive date from the policy.
Like other claims-made policies, EIL polices contain extended reporting period provisions that obligate the insurer to provide an extended reporting period for a specified additional premium upon the termination of the insurance. Coverage is provided only for claims that result from pollution releases that occurred (in total or in part) before the termination of the EIL policy. The time allowed for the reporting of such claims under the extended reporting period is typically one to three years, in contrast to the option for an unlimited extended reporting period under the ISO claims-made CGL coverage form. Most underwriters are willing to add a longer extended reporting period by endorsement for an additional premium.
The third difference between an EIL policy and other claims-made forms is the way that multiple claims are treated. Several separate claims can arise from a single pollution incident. There may also be a delay in the discovery of damages after the incident that could result in a delay in the reporting of claims. To address these issues, EIL policies commonly treat all claims arising out of the same pollution incident as a single loss, subject to one limit of liability and one deductible. This approach prevents the stacking of policy limits from successive claims-made policies over multiple years. The insured benefits by avoiding the application of multiple deductibles to the same loss.
APPLICATIONS
Application of EIL Limit and Deductible
Ace Manufacturing Company discovered through an inventory reconciliation that approximately 1,000 gallons of plating bath solution from its chrome plating operations could not be accounted for. Further investigation revealed that over a three-year period the materials in the plating bath had seeped from a drainpipe into an adjacent stream. Ace immediately reported the situation to the appropriate governmental agency and completed a cleanup of the stream. Ace had a claims-made EIL policy at the time of the loss. The EIL policy paid for the cost of cleaning up the stream, subject to the policy deductible.
Two years after the cleanup had been completed, a group of fishermen brought a class action suit against Ace alleging that they had been exposed, through the consumption of fish, to harmful levels of heavy metals released by Ace into the stream. The EIL policy that paid for the cleanup will also respond to the fishermen’s class action. However, any damages for which Ace becomes liable because of the class action will be considered part of the same loss as the earlier cleanup because the pollutants were attributable to the same release. Thus, the amount of insurance available for the class action will be the limit of liability less the cleanup costs paid earlier, and Ace will not have to pay another deductible amount for the second claim.
In this situation, it would also be common for all subsequent EIL policies issued by the same or different underwriters to contain an endorsement that would exclude all losses arising from the previous release of plating materials into the stream.
Exclusions
Site-specific EIL policies typically contain all or most of the exclusions discussed below.
Known Pre-Existing Conditions Exclusion
To provide a reasonable degree of protection for the insurer without eliminating coverage for all pre-existing conditions, EIL policies commonly exclude only those pre-existing conditions that are known to an individual or a group of designated persons in the insured organization. The exclusion usually limits the list of employees who must have knowledge of pre-existing pollution conditions to (1) those directly responsible for environmental affairs and (2) senior managers. To trigger the exclusion, the specified employees must have known or reasonably foreseen that the pre-existing condition would give rise to a claim under the policy.
The purpose of this exclusion is to eliminate coverage in situations when the purchaser of the policy knew of an impending claim that would be covered under the policy. The purpose is not to eliminate coverage if the insured might have anticipated that an event could take place that could lead to a claim under the policy.
Exclusion of Deliberate Noncompliance With Environmental Laws
EIL policies exclude environmental losses that are caused by the insured’s intentional, willful, or deliberate noncompliance with any current environmental statute or regulation.
Punitive Damages Exclusion
EIL policies commonly exclude punitive, multiplied, and exemplary damages and environmental fines and penalties. Insuring such costs is considered to be contrary to public policy in many jurisdictions because it would relieve guilty parties of a portion of the burden imposed by law for their culpable acts. In those states where the law allows insuring punitive or exemplary damages, the exclusion can be modified to cover such damages.
Alienated Premises Exclusion
EIL policies commonly exclude coverage for an insured location that the insured has sold or leased to others, or of which the insured has otherwise relinquished operational control. Underwriters have felt this exclusion to be necessary because they expect the insured to exercise operational control over insured sites. This exclusion can be modified to provide coverage for sites that the insured leases to others or to provide ongoing coverage for properties that the insured has sold.
Nuclear Liability Exclusion
EIL policies have nuclear exclusions comparable to the broad form nuclear liability exclusion that is attached to the CGL policy. In general, the nuclear exclusion eliminates coverage for high-level nuclear materials. Low-level nuclear materials can be covered under the EIL policy, with the exception of materials that are covered under liability policies underwritten by the nuclear insurance pools.
Acid Rain Exclusion
Most EIL policies exclude claims arising from acid rain. Acid rain is caused in part by sulfur dioxide emissions from large industrial and commercial boilers that are fired by fossil fuels. Because the damage caused by acid rain can be widespread and can occur at considerable distances from the source of emissions, underwriters are reluctant to delete this exclusion from EIL policies unless the insured does not operate the type of equipment that can cause acid rain.
War Exclusion
EIL policies typically exclude liability resulting from war in any form.
Contractual Liability Exclusion
Unlike CGL policies, many EIL policies do not cover liability assumed under an “insured contract.” The contractual liability exclusion in an EIL policy typically eliminates coverage for all liability assumed under contracts, other than liability that the insured would have incurred in the absence of the contract.
Exclusion of Damage to the Insured Site
The purpose of an EIL policy is to insure third-party claims for bodily injury and property damage arising from the release of pollutants and to provide for the cleanup of the pollutants. To reinforce that purpose, EIL policies have traditionally contained exclusions that eliminate coverage for releases of contaminants that do not migrate beyond the boundaries of the insured site. It is also common for EIL policies to specifically exclude on-site cleanup expenses. However, this practice is changing, and EIL policies that cover first-party exposures (on-site cleanup) are now available. On-site cleanup coverage is particularly important when groundwater beneath the insured’s property is contaminated by a release emanating from the site.
Products and Completed Operations Exclusion
Site-specific EIL policies commonly exclude the insured’s liability for products and completed operations. The reason for this exclusion is that standard CGL policies generally cover the insured’s liability for products and completed operations unless the insured’s products are used at a waste disposal site or the completed operations involve remediation of contamination at any owned or nonowned site. Products pollution liability coverage is available in a stand-alone policy that is often issued without a pollution exclusion. Contractors can purchase environmental liability coverage for completed operations, including remediation of contaminated sites.
Workers Compensation and Employers Liability Exclusions
EIL policies contain workers compensation and employers liability exclusions that are similar to those found in the CGL coverage form.
Transportation Exposures Exclusion
Site-specific EIL policies ordinarily exclude liability arising out of the ownership, maintenance, operation, use, loading, or unloading of any automobile, aircraft, watercraft, or railcar. Exposures to environmental impairment liability arising out of the transportation of pollutants are insurable under separate policies. This coverage is also available in some EIL policies.
Limits of Liability and Deductibles
As noted earlier, EIL policies are typically subject to a per loss limit of liability, which is the most that the insurer will pay for bodily injury, property damage, cleanup costs, and defense expenses resulting from each release of pollutants. EIL policies also contain an aggregate limit of liability.
The inclusion of defense expenses within EIL policy limits is an important difference from the CGL policy, which pays defense costs in addition to the applicable limit of liability until the limit is used up by the payment of damages. Defense expenses in an environmental damage claim can be substantial because of the normal requirement for technical experts and testing of materials. These costs should be considered when selecting limits of liability. For example, installing one groundwater monitoring well can cost $10,000. If a claim is made against an insured for contamination of an aquifer, the groundwater investigation used to determine the condition of the resource can easily cost in excess of $100,000. These costs, along with attorney fees and other defense costs, reduce the amount of insurance recoverable for settlements or judgments against the insured.
Selecting appropriate limits for an EIL policy is comparable to selecting limits for any other type of insurance. The process begins with an identification of exposures. This is followed by an effort to quantify the loss potential associated with the exposures identified. Quantification of the loss potential requires a systematic approach but is not beyond the capability of many risk managers. If assistance is required, plant environmental personnel, outside consultants, underwriters, or insurance producers may be able to offer additional expertise in assigning numerical ranges to the identified exposures.
Substantial limits of liability are available today from the markets that write environmental insurance. Limits of $100 million per loss are available from a single insurer, and the total market capacity is in excess of $400 million per loss.
Contractors EIL Policies
Contractors EIL policies were introduced to the U.S. market in 1987. These policies were developed to address the environmental insurance needs of contractors that were performing environmental remediation services on contaminated sites. The contractors EIL policy has its roots in the site-specific EIL policy discussed above. In fact, the original contractors policies actually used a lengthy endorsement to a site-specific EIL policy to create the contractors’ version of EIL coverage.
Many of the policy terms and conditions in contractors EIL policies are similar to those found in site-specific EIL policies. Both provide coverage for bodily injury, property damage, cleanup costs, and defense costs. However, many of the features of the site-specific EIL policy had to be modified substantially to address contractors’ insurance needs. The site-specific EIL policy is written on a designated premises basis, whereas the contractors policy is designed to cover a contractor’s operations and activities at project sites and to cover the contractor’s completed operations and contractual liability exposures.
Environmental services vendors often buy contractors EIL policies. However, a wide range of contractors, from general contractors to construction managers, now purchase this coverage because of the far-reaching pollution exclusion in the CGL policy. Any contractor that works on a waste disposal or storage site, that handles or stores any materials that could be contaminants or pollutants, or that could unexpectedly come into contact with materials on a job that could cause pollution or contamination, may wish to obtain a contractors EIL policy to fill the gaps in coverage created by the pollution exclusion in the CGL policy.
Insuring Agreement
Unlike site-specific EIL policies, contractors EIL policies provide coverage for loss arising from the described operations of the named insured. The obligation of the insurer to pay a “loss” on behalf of the insured has the same meaning in the contractors policy as in the EIL policy, which is to cover claims arising out of a pollution incident for bodily injury, property damage, cleanup costs, and defense expenses.
Contractors EIL policies are available with either a claims-made or an occurrence coverage format. There is a significant difference between the way an EIL policy addresses prior acts and the way they are handled in a claims-made contractors EIL policy. Although most site-specific EIL policy forms do not contain a retroactive date and therefore provide full prior acts coverage, claims-made contractors EIL policies often contain a retroactive date. Prior acts coverage is available in a contractors policy, but it has to be negotiated and added to the policy.
Exclusions
A contractors EIL policy may contain most of the exclusions of site-specific EIL policies that were discussed earlier. However, a contractors EIL policy ordinarily omits certain exclusions of site-specific EIL policies so that the contractors EIL policy will cover completed operations, damage to the insured site, and the cost of remediating the job site for a loss created by the contractor’s operations.
In addition to the exclusions commonly found in site-specific EIL policies, contractors EIL policies often contain exclusions of asbestos abatement operations, radioactive matter (more restrictive than the standard ISO nuclear exclusion), and professional liability. However, these exposures can often be covered by endorsement to the contractors EIL policy. With regard to nuclear materials, the contractors EIL policy can provide coverage for low-level radioactive exposures but not for risks associated with high-level materials used for weapons or fuel rods in nuclear power reactors.
Environmental Professional E&O Liability Policies
The “Cleanup America” effort of the 1980s created a large environmental consulting industry in the 1990s that has continued into the present decade. Environmental engineers and consultants face many of the same environmental exposures as site owners, with the exception of legislated liabilities for prior acts involving the disposal of hazardous wastes (the major risk of PRPs under Superfund). Environmental service vendors may also incur PRP liability for prospective work at a Superfund site either as an “arranger” for deposit of materials at a designated facility or as an “operator” of a site as those terms are defined in the act. Cleanup contractors have lobbied for a change in Superfund on this issue, arguing that they are there to help solve the problem and should not be considered to be a “polluter” under liability provisions of CERCLA. To date, these changes have not been incorporated into the legislation.
In addition to Superfund liability, environmental service vendors can face potential liability from negligent professional errors, acts, or omissions. Claims against such vendors may include allegations that they have failed to identify contaminants, that their characterization of the site contains errors, that their design for remediation of contamination is faulty, that they have made mistakes in analysis of samples, or that they have otherwise failed to perform in accordance with the standards of their profession.
At the same time that environmental consultants were experiencing rapid growth in their business sector during the 1980s, the insurance industry was adding pollution exclusions to all commercial liability insurance policies, including those for professional liability. Consequently, many environmental consultants had to operate without pollution insurance coverage until specialized environmental consultants professional errors and omissions policies were introduced in 1989.
Unlike contractors EIL insurance, which was introduced and gained market acceptance as a monoline, gap-filling coverage for the pollution exclusion in contractors’ CGL policies, an environmental professional E&O policy that responded only to pollution claims was quickly eclipsed by a blanket E&O policy that covered all of the traditional E&O exposures of the engineer or consultant, including claims for environmental damages.
Today, a wide spectrum of the engineering industry purchases these blanket E&O policies. At one point in time, E&O policies that excluded environmental losses were less expensive than those that provided coverage for them. However, this pricing differential has become less noticeable over time and many engineering firms buy these policies to cover their entire practice, not just their environmental work. These policies are useful to any professional services firm that does environmental work or whose work could lead to a pollution loss.
Insuring Agreement
The early environmental E&O policy forms amended the insuring agreement of the contractors EIL policy form to cover “negligent professional errors, acts or omissions in the performance of the Insured’s professional services.” Many of the early policies provided coverage only for personal injury (similar to bodily injury, but including libel and slander in the definition), property damage, cleanup costs, and defense expenses. The insuring agreements of these policies were more restrictive than the broader insuring agreements in traditional engineers professional liability policies that responded to “claims arising out of professional services.” “Claims,” in the traditional E&O policies, could encompass considerably more than personal injury, property damage, cleanup costs, and defense expenses. Therefore, environmental engineers found it expedient to purchase two professional E&O policies, one to cover environmental claims and one to cover non-environmental claims on a broader basis.
Contemporary environmental professional E&O liability policies now contain insuring agreements that resemble the coverage grants of traditional engineers professional liability policies, without a pollution exclusion. A wide range of professional environmental services vendors purchase these policies, including environmental engineers, testing labs, tank testers, and environmental consultants. Environmental professional E&O liability policies, like most other professional liability policies, are written on a claims-made basis, usually subject to a retroactive date and a substantial deductible.
Exclusions
Exclusions in environmental professional E&O liability insurance policies differ by insurer. The insured-versus-insured exclusion and the contractual liability exclusion are common exclusions in engineers professional liability policies that have found their way into environmental professional E&O policies. The insured-versus-insured exclusion eliminates coverage for claims in which one insured sues another insured for damages arising out of a professional error, act, or omission. Most professional liability underwriters believe that such suits are a business risk that should be assumed by the affiliated entities and therefore not be insured. The contractual liability exclusion addresses a similar business risk issue. Other exclusions found in environmental professional E&O insurance include nuclear risks, warranties and guarantees, and fiduciary liability.
Care must be exercised in evaluating the coverage needs of the insured when dealing with environmental professional E&O insurance. Most underwriters of this type of insurance have latitude in their ability to endorse their policies to address the needs of the insured professionals. Coverage can be negotiated for the vast majority of the exclusions in one of these policies.
Asbestos and Lead Abatement Contractors General Liability Policies
In the mid-1980s, the combined effects of legislation, increased public awareness of asbestos risks, and a strong real estate market created a demand for asbestos abatement services. During the same time period, insurance companies were trying to limit their exposure to asbestos products liability and environmental damage claims by adding stronger pollution and asbestos exclusions to all commercial liability insurance policies. Consequently, a demand for liability insurance covering asbestos abatement arose at a time when the availability of liability insurance, in general, and environmental liability insurance, in particular, was restricted.
Nonetheless, the law of supply and demand in a free market economy resulted in the introduction of asbestos abatement contractors general liability policies. Early policy forms were written on a claims-made basis and were very restrictive in terms of the coverage provided. By 1990, the market for this coverage had switched to occurrence-based policy forms, which are used almost universally for asbestos abatement liability insurance today. The pricing of coverage has also been adjusted to reflect a good loss history in this class of business. The policies are written for one-year terms or longer periods if required by the project owner.
As concern over lead paint has grown, many asbestos abatement insurers have expanded their policy forms to include lead paint exposures as well. The asbestos (or lead) abatement contractors general liability insurance policy is essentially a CGL policy that contains an amendment to the pollution exclusion deleting asbestos (or lead) from the policy definition of “pollutants.” Thus, unlike the contractors EIL policy, which is a “gap-filler” for the pollution exclusion in the CGL policy of the contractor, an asbestos (or lead) abatement contractors general liability form covers a contractors general liability and asbestos (or lead) abatement liability insurance needs in a single policy.
An asbestos (or lead) abatement contractors general liability policy often contains other exclusions in addition to those of the standard CGL policy. For example, many policies exclude liability assumed under any contract for injury to any employee of the insured. The standard CGL policy covers such liability as long as it is assumed under an insured contract as defined in the policy. Because such claims are excluded under the employers liability coverage of the standard workers compensation policy, they may represent a coverage gap for asbestos or lead abatement contractors, who should seek either to have the exclusion eliminated from their general liability policy or to have the contractual assumption eliminated from their contracts with customers.
Other important differences from the standard CGL form include changes in the limits of liability, deductibles, and defense cost provisions. The asbestos or lead abatement contractors policy forms usually include defense costs within the general aggregate limit. Deductibles are typically higher than those found in most contractors’ CGL forms.
The market for asbestos or lead abatement contractors insurance is changing rapidly, and underwriters compete with each other through the use of manuscript coverage forms, as well as on price. No standard forms exist in the market except for the CGL, which is the basic building block for the policy. Care must be taken in evaluating the coverage provided by these policies because modifications to the policy can delete standard CGL provisions in the process.
Environmental Remediation Policies
First-party environmental insurance was originally developed to address the needs of lenders who were concerned that their borrowers might default on loans if a borrower was faced with unexpected environmental cleanup expenses on the secured property. Early versions of the coverage forms were often referred to as property transfer environmental insurance. They are now more commonly called environmental remediation policies, although the titles of policy forms vary. Such policies can be written to provide remediation coverage on virtually any class of property that may be contaminated.
Insuring Agreement
Environmental remediation insurance policy forms are designed to pay on behalf of or to indemnify the insured for remediation costs or expenses caused by environmental damage at a covered location. To be insured, the environmental damage must be discovered and reported during the policy period. The coverage is intended to insure cleanup costs incurred at the insured location on a first-party basis. In addition, third-party EIL coverage is routinely included within environmental remediation policies to insure the traditional third-party EIL loss exposures.
Insuring environmental cleanup costs presents a problem for the insurer in defining what is a covered loss. Environmental cleanups are usually triggered by the discovery of contamination in excess of baseline levels that are set forth in various environmental protection laws. Contamination levels above that level may need to be remediated. To set the baseline for a cleanup action, environmental remediation insurance policies typically define “remediation expenses” as expenses incurred for the investigation, removal, or treatment of pollution conditions only to the extent required by specified environmental regulations such as CERCLA, RCRA, the Toxic Substances Control Act, the Clean Water Act, and the Clean Air Act. Thus, coverage under the policy is triggered when the insured discovers levels of contamination that the environmental laws or regulations require the insured to remediate.
To address the insurable interests of the buyer, seller, and lender in a property transfer transaction, environmental remediation insurance policies have broad definitions of who is an insured. The additional insureds must be named in the policy for the coverage to apply to their interests.
Exclusions
The exclusions of environmental remediation policies vary considerably from policy to policy. Nearly all policies exclude loss resulting from known pre-existing conditions, intentional or illegal acts, liability assumed by contract, products and completed operations, asbestos, lead-based paint, off-site transportation, bodily injury to an employee of the insured, and workers compensation obligations. As is true in all forms of environmental insurance, many of the potential loss exposures that could be covered under the insuring agreement of the policy are initially excluded to force the applicant to disclose those exposures to the underwriter. Once the underwriter has received this additional information, the exclusions can often be removed or modified, usually for an additional premium charge.
Other Provisions
Environmental remediation policies are usually issued on a claims-made basis with varying options for extended reporting periods. Policy periods of up to ten years are common in this line of coverage. However, environmental remediation policies usually have no provision for extended reporting periods. The policies are written with deductibles that vary depending on the underwriter’s comfort level with the risk. Regardless of the number of the same or related pollution releases from a covered location, only one deductible and one per-loss limit will apply.
Remediation Stop-Loss Policies
Remediation stop-loss environmental policies (also known as cost cap policies) were designed to insure remediation costs that exceed the projected or anticipated costs in performing an environmental cleanup of a specific location. Such policies provide only first-party coverage. However, third-party coverage is often provided as part of an overall insurance package by adding an EIL coverage form to the transaction.
Remediation stop-loss coverage is very useful in facilitating the sale of contaminated property. Usually there will be a wide range of estimated cleanup costs associated with the remediation of a contaminated property. A wide discrepancy often exists between the low and high estimates of cleanup costs, creating a problem for buyers and sellers of property in establishing the sale price. Potential buyers tend to discount the sale price by the maximum potential remediation cost, and, of course, the seller favors the low cost estimate. Because environmental laws impose joint and several liability for cleanup costs on all parties in the chain of title, potential purchasers are extremely cautious about taking title to contaminated property. For similar reasons, sellers want to transfer properties to parties that have the resources not only to remediate the property but also to protect the seller from any possible future costs related to environmental liability associated with the property. Remediation stop-loss policies are used to close the gap between the seller’s and the buyer’s perceptions of the expected remediation costs.
Remediation stop-loss policies typically agree to pay on behalf of the named insured the expenses (in excess of the deductible) that the insured incurs in completing an approved remedial action work plan at a specified location. A claim under the policy is defined as “written notice to the insured that the remediation costs incurred at the project have exceeded the costs contained within the scope of work.” The description of the “scope of work,” which is different in each policy, is usually expressed in an endorsement to the policy.
Remediation stop-loss policies typically contain relatively few exclusions because they are written on a first-party coverage basis. Like other types of environmental insurance, these policies are manuscript forms without standard terms or conditions. Some of the more common exclusions found in the remediation stop-loss policies are intentional acts or misrepresentations, bodily injury, contractual liability, and war.
In underwriting these policies, the underwriter reviews the applicant’s proposed remediation work plan to establish the reasonableness of the cost estimates. The underwriter also evaluates the quality and reliability of the consultants and contractors performing the work, the types of contaminants present, and the cleanup technologies being used at the work site. A sizable deductible is used as a pricing tool to eliminate loss amounts that have a high probability of occurring.
APPLICATIONS
Using Remediation Stop-Loss Coverage
Midland Grain Growers Cooperative would like to sell a grain elevator to Able Elevator Company. The appraised value of the elevator is $3 million, and the buyer and seller agree that this is a fair market value for the property. However, the land that the elevator is located on is contaminated with chemicals used in the past to fumigate the grain in storage. The seller’s estimate for the expected cost to remediate the land is $1 million. The work plan for this remediation plan was submitted to and approved by the environmental regulators.
Able Elevator Company was concerned about purchasing this contaminated property, so Able hired an environmental consultant to evaluate the cost estimates for the approved work plan. Able’s consultant concluded that the remediation action could cost as much as $6 million but that there is only a 10 percent chance that the costs will exceed $1 million.
Assuming the information on expected costs is correct, how much should Able pay for the grain elevator? According to its expert’s estimate, an appropriate selling price for this property might be $1.5 million. This sum is equal to the fair market value of the property if it were clean, less the expected cost of remediation in accordance with the approved work plan, calculated as follows:
Appraised value $3,000,000
Less remediation expenses
Original work plan (1,000,000)
Expected cost of revised work plan
($5,000,000 additional cost × 10% probability) (500,000)
Adjusted sales price $1,500,000
In reality, this transaction might never take place. Estimates of environmental remediation expenses are seldom as precise as those cited in this example, and if the cleanup costs an additional $5 million, Able would be responsible for all of the additional expenses, not just 10 percent of them. To encourage Able to purchase this property and not incur any risk for excess cleanup costs, the seller might agree to indemnify Able for costs in excess of the discounted sales price. This option might be unacceptable to Midland Grain Growers because that indemnity would show up on its balance sheet as a contingent liability (perhaps forever).
Another alternative would be for the seller to discount the agreed sales price by the worst-case loss estimate of $6 million. In other words, Midland Grain Growers would give Able the title to the property and $3 million in cash just to take the property off Midlands’ hands. Midland Grain Growers would undoubtedly reject this alternative.
A more viable approach to the transaction would be to use a remediation stop-loss insurance policy with a limit equal to the worst-case loss estimate of $6 million. The underwriter would set the deductible at an affordable amount above the expected remediation costs of $1 million.
Underground Storage Tank Compliance Policies
RCRA created financial responsibility regulations that apply to the owners and operators of underground storage tanks. When such tanks are used for storage of fuels (home heating oil is excluded in most states) or hazardous materials, the RCRA regulations require the owners or operators to demonstrate their ability to pay claims resulting from the release of such materials from the tank. One method by which financial responsibility can be demonstrated is through the purchase of insurance.
The RCRA financial responsibility regulations resulted in the development of a special type of environmental impairment insurance often referred to as underground storage tank (UST) compliance policies. These policies, which vary by insurer, have as their core coverage a site-specific EIL policy. Special policy provisions, usually added by endorsement, modify the policy form to comply with the financial responsibility regulations. These special provisions include an additional limit for defense costs, usually equal to 25 percent of the policy limit. In contrast, an ordinary EIL policy includes defense costs within the limit of liability. The UST compliance policy also adds a sixty-day notice of nonrenewal and an automatic extended reporting period provision. These two provisions assure regulators that UST policies comply with the minimum proof of financial responsibility requirements of RCRA or the applicable state regulations.
RCRA requires the owners or operators of underground storage tanks to provide evidence of financial responsibility for specified limits. For most tank owners, the required limit of insurance is $1 million per claim. Larger retailers of petroleum products may be required to provide evidence of $2 million of financial responsibility per claim.
Although the current regulations do not require evidence of financial responsibility of owners or operators of aboveground storage tanks, a number of insurers also insure aboveground tanks on the same policies used for underground tanks. Another point of potential differentiation on compliance policies is that some policies may only cover releases from the UST and underground piping itself, which is all the regulations apply to. Other compliance policies also cover releases from the piping, pumps, valves, and other equipment directly attached to the insured tank. Because leakage from the attached equipment poses a significant loss exposure, the second version of coverage is obviously more desirable.
Most UST compliance policies do not provide the full scope of coverage granted by full EIL policies. One restriction of coverage in a UST compliance policy is that it does not insure all releases of contaminants from the insured site. Most UST compliance policies only respond to a “corrective action,” as that term is defined in RCRA, and not to other environmental damage claims. This distinction is important for any insured that may face environmental liability claims based on legal grounds other than RCRA. For example, a warehouse storing environmentally damaging materials would not have coverage for those materials under a UST compliance policy on the gasoline tank used to fuel their fleet.
APPLICATIONS
UST Versus EIL Coverage
The owner of a retail service station that has four underground storage tanks is required to provide proof of financial responsibility for the cleanup of releases from the tanks as well as third-party claims for bodily injury and property damage. A UST compliance policy is used by the owner for this purpose. The policy responds only to corrective actions under RCRA. The policy has a limit of liability of $1 million per claim and a deductible of $5,000 per claim.
While a customer of the station was pumping gas into her car, the hose from one of the pumps ruptured. The gasoline injured the customer and a bystander and also damaged the customer’s car, which had to be repainted as a result of the gasoline spill.
Because the UST policy responds only to corrective actions under RCRA, it would not cover the bodily injury or property damage claims of the customer or the bystander. To cover such claims, the owner would need to purchase an EIL policy (with on-site coverage) that also covers the tanks or purchase a separate EIL policy and a UST compliance policy. Because of the limited pollution coverage provided in a UST policy designed purely for regulatory compliance, it is recommended that the retail service station owner purchase coverage under an EIL form or under a CGL/EIL combination policy as discussed below.
Combination Policies
As the variety of environmental insurance policies grew, it became apparent that insurance buyers that had more than one type of environmental loss exposure could benefit from having a single policy that combined multiple environmental coverages and sometimes nonenvironmental coverages in a single policy.
The demand for combined environmental liability policies began with environmental consulting firms that were also involved in on-site remediation of contamination. Because these firms had both a professional liability exposure and a contracting exposure, they found it necessary to purchase both a contractors EIL policy and a professional E&O liability policy to adequately cover their environmental liability exposures. Once the pattern of combining coverage forms was established, underwriters developed other combinations of coverage to meet the specific needs of various customers.
Prepackaged combination policies are now an important part of the environmental insurance market. Insurers combine a variety of different insurance coverages (both environmental and nonenvironmental), usually for marketing purposes, which makes direct comparisons of the policies difficult.
CGL/EIL Combination Policies
Some insurers offer CGL/EIL combination policies to provide a more complete insurance package for insureds. Nearly all EIL policies are written on a claims-made basis, and most general liability policies are written on an occurrence basis. Accordingly, CGL/EIL combination policies are offered with the EIL coverage on a claims-made basis and the CGL portion on either an occurrence or a claims-made basis. Separate limits can be specified if the insured needs higher limits for the pollution or the general liability exposures. Both coverages are subject to a single aggregate limit and typically a single deductible (when both EIL and CGL claims are involved).
CGL/EIL combination policies may also be endorsed to provide products liability coverage that includes protection against pollution claims related to a release of pollutants caused by a failure of the insured’s product. Some insurers will also provide coverage for pollution risks related to transportation of the insured’s products or waste materials when they are carried on vehicles owned by third parties.
Advantages of Combination Policies
Using combination policies has several advantages. The first is that they provide the coverage needed by the insured to adequately protect it against pollution claims. As was mentioned above for environmental consultants who also do on-site work, the combination of contractors environmental insurance with professional E&O insurance provides the pollution insurance needed by the insured in a single policy that takes the place of two.
Another advantage of combination policies is that they can eliminate coverage disputes that might otherwise occur if the coverages were provided by two different insurers. For example, if a contractor that is excavating soil to remove heavy-metals contamination unexpectedly strikes an underground storage tank, releasing diesel fuel into an area of clean soil, the fault may be that of the contractor that directly caused the release or the engineer who failed to identify the presence of the tank. If the firm that had done the site assessment is also doing the on-site remediation, it may experience a third-party claim that falls in a “gray area” between the contracting and professional aspects of its work. Having both exposures covered by the same insurer eliminates the possibility of two separate insurers both denying coverage for the “gray area” claim. Combination policies also provide a uniform defense for claims because no dispute will arise over which insurer has the duty to defend. Similarly, a CGL/EIL combination policy eliminates the potential for inter-insurer disputes on claims that would otherwise fall in the gray area between separate CGL and EIL policies.
Another advantage to combination policies is cost. A combination policy is typically less expensive than if the two or more coverage forms were purchased separately. For example, a contractors EIL/engineers professional E&O liability combination policy is typically less expensive than would be the case if these coverages were purchased separately. This is primarily because the coverages in a combination policy are subject to a single aggregate limit. Although this makes the policy less costly, it has the drawback of offering only one limit when the purchase of separate policies would provide two limits. However, only one deductible applies in the combination form, whereas the use of separate policies would result in the application of two deductibles.
Application Process for Environmental Insurance
Each insurer has a different application process for environmental insurance. Regardless of the process used to underwrite environmental insurance, the application for insurance ordinarily includes certain warranties that become a part of the policy. The warranties include a statement that the applicant knows of no existing pollution conditions that are likely to lead to a claim against the organization. The warranties also verify the truthfulness of the information submitted to the underwriter. Additional warranties concern disclosure of past claims against the organization and knowledge of violations of environmental laws and regulations. The application is signed by an officer of the organization and attached to the policy when it is issued. Failure to provide honest or accurate information may result in the insurer’s denial of coverage in the event of a loss.
One of the difficulties faced by potential applicants for environmental insurance has been that the information required in the applications is not common to other forms of insurance. Although gross receipts or some other simple accounting measures may be used as the rating base for the policy, much more detailed information on the specific environmental risks is usually required to underwrite the policy. The underwriter can use a number of resources to assist in the application process, including specialized insurance producers and wholesalers and environmental engineers and consultants.
SUMMARY
Liability for pollution incidents can be based on negligence, intentional torts (such as nuisance or trespass), strict liability, or various environmental statutes. These environmental laws have made environmental risk management and insurance much more important than in the past. Although the risk management process can be applied to environmental loss exposures, such exposures have several unique characteristics that must be considered when planning to manage them.
Environmental risk financing is complicated by pollution exclusions in the majority of commercial liability insurance policy forms. Insurers’ actions to eliminate coverage for environmental damage claims from standard insurance policies created the need for various types of environmental insurance designed to fill the resulting coverage gaps.
Site-specific environmental impairment liability (EIL) insurance, also called pollution liability insurance, was the first type of environmental insurance offered in the United States, in 1977. Site-specific EIL policies cover third-party claims arising from either sudden or gradual releases of pollutants from insured locations. Coverage applies to claims for bodily injury, property damage, cleanup costs, and defense expenses. Unless modified to provide on-site coverage, the claim must result from pollution conditions that exist beyond the boundaries of the described location.
Several additional types of environmental insurance evolved from site-specific EIL policies to meet various needs.
Contractors EIL policies fill the gaps in a contractor’s liability coverage that result from the pollution exclusion in the standard CGL policy. Contractors EIL policies provide coverage for pollution liability claims arising out of the described operations (including completed operations and liability assumed under contract) of the named insured at the various sites where the named insured performs operations.
Environmental professional E&O liability policies, when first introduced in 1989, responded only to pollution claims made against the environmental consultants who purchased these policies to fill the pollution coverage gaps in their conventional professional liability policies. The policies quickly evolved to cover all of the insured’s professional E&O exposures, including environmental claims. A wide range of professional environmental services vendors purchase these policies, including environmental engineers, testing labs, tank testers, and environmental consultants.
Asbestos and lead abatement contractors general liability policies are essentially CGL policies that contain an amendment to the pollution exclusion deleting asbestos (or lead) from the definition of “pollutants.” Thus, unlike the contractors EIL policy, which is a “gap-filler” for the pollution exclusion in the contractor’s CGL policy, an asbestos (or lead) abatement contractors general liability policy covers a contractor’s general liability and asbestos (or lead) abatement liability in a single policy.
Environmental remediation policies are an example of first-party environmental coverage. These policies were developed to address the needs of lenders who were concerned that their borrowers might default on loans if a borrower was faced with unexpected environmental cleanup expenses on the secured property. The coverage is intended to insure cleanup costs incurred at the insured location on a first-party basis. Third-party EIL coverage can be added to environmental remediation policies to cover the traditional third-party EIL exposure.
Remediation stop-loss policies, another example of first-party environmental insurance, cover remediation costs that exceed the projected or anticipated costs in performing an environmental cleanup of a specific location. These policies are very useful in facilitating the sale of contaminated property because they close the gap between the seller’s and the buyer’s perceptions of the expected remediation costs for the property.
Underground storage tank (UST) compliance policies provide coverage that satisfies the financial responsibility requirements of RCRA for underground storage tanks containing fuels or hazardous materials.
Environmental insurers write a variety of combination policies. A single combination policy may include two or more types of environmental insurance (such as contractors EIL coverage and environmental professional E&O liability coverage for an environmental consultant that also performs on-site remediation operations), or it may combine environmental coverage and nonenvironmental coverage (such as a CGL/EIL combination policy). Combination policies are advantageous to insureds because they are convenient, eliminate coverage disputes, and often cost less than separate policies.
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